Motives for forming sidecars can be flawed
The proliferation of the use of sidecars by the reinsurance industry in recent years will almost certainly mean the end of batches of new start-ups forming on the back of market cycles. But some sidecars are also being formed for the wrong reasons.
That is the view of Dirk Lohmann, the former chief executive of Converium who is now chairman & managing partner Secquaero Advisors, an ILS investment management business in Switzerland.
“We are very unlikely to see many new reinsurers enter the market as we have in the past,” says Lohmann. “It has changed the industry in that sense. Structures such as sidecars represent a far more efficient alternative to take advantage of any spikes in rates the industry does experience in the future.”
But he also believes many reinsurers are now forming sidecars because of a perceived pressure from stakeholders. He says that to be seen to be ignoring such a rapidly growing and influential force on the industry risks making a company look ponderous and slow moving.
“It is a dilemma for all established players now – should they get involved in this space and, if so, what is the best way to do that?” says Lohmann. “Certainly, it appears that some sidecars have been formed almost to prove they are at the forefront of the industry and to look innovative. Analysts seem to almost be asking why some companies haven’t gone down this route. It has almost become a ‘me too’ thing.”
He also notes, however, that where sidecars are used correctly they can be strategically correct and very lucrative for companies. He notes that companies such as RensissanceRe have been doing this for a long time for very clear reasons and with favourable results.
For more on how Lohmann and others believe the recent rapid influx of capital markets money into the reinsurance sector is changing the sector, look out for the next issue of Intelligent Insurer, which examines the 10 burning questions the industry is struggling to answer about the consequences of this change.
