It is worth noting that while the 144A catastrophe bond* market is the most visible component of direct capital markets capacity in the catastrophe risk market, it is not the largest. Other conduits, particularly collateralized reinsurance and sidecar participations are also meaningful as additional sources of risk transfer capacity.
Posts Tagged ‘sidecars’
The run up to July 1 is not traditionally a big renewal period for catastrophe retrocession. It is more about new and opportunistic purchases, as clients look to mitigate the effects of the coming US wind season as best they can. However, it is precisely because of this renewal date’s proximity to the wind season that deals purchased at this time tend to be an important indicator of pricing direction and activity. We have observed that activity within the sector has continued the trend towards rate rises (on both loss-affected programs, and, to a lesser extent, loss-free programs). This activity has been mainly driven by industry loss warranty (ILW) and county weighted industry loss (CWIL) purchases. It must be viewed against a background of significant tornado activity and flooding in parts of the United States and the latest earthquake in New Zealand in June.
Earlier this year, the (re)insurance industry celebrated an abundance of capital. Buybacks and dividends were common, as carriers struggled to find productive uses for their extra cash. Only a few months later, we are in the midst of a financial catastrophe that is wreaking havoc on balance sheets and constraining carrier access to capital. And, the situation could worsen. A major catastrophe event could place substantial demands on (re)insurer capital in a climate where replenishment would be both time-consuming and costly.
Cat Risk Comes Out of Hiding: advances in casualty catastrophe modeling may help protect you from “hidden” portfolio exposures.
Sidecars Have a Specific Role to Play: low overhead and an inherent exit strategy are likely to help these vehicles regain prominence in the next hard market.
FHCF Bonding Capacity Update: new estimates reflect the changes in the economic climate and emphasize the heavy dependence of the FHCF on post-event financing to meet its obligations.
Push Pandemic Out of Insurance: the depth and flexibility of capital markets may provide a robust alternative to traditional reinsurance.
Looking at a Downturn?: fears of a mega-catastrophe and pressure from broader economic conditions should keep underwriters from assuming inadequately priced risk.
Most Popular Keyword: alternative investment
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Clashing Conventions: Measuring and Managing Exposure: by triangulating among workers compensation, convention, and venue databases, the measurement of convention clash risk is becoming a reality.
The popularity of sidecars seems to have ended. The availability of traditional capital and access to insurance-linked securities (ILS) and other alternatives simply has made sidecars less attractive. But, reinsurers know that the market can harden at any time, with one mega-catastrophe creating near-immediate demand for fresh capital. Low overhead and an inherent exit strategy are likely to help these vehicles regain prominence in the next hard market—with investors and reinsurers alike.
The capital models for (re)insurance risks are evolving. Over the past 15 years, alternative sources of capital have become increasingly important, particularly in the capital-constrained environments that follow major catastrophe events. As expected, capital market vehicles such as catastrophe bonds and sidecars have brought additional capacity to risk-bearers when they need it most, alleviating price pressure as a result.*
High-velocity capital was crucial in 2005 and 2006. Hurricanes Katrina, Rita, and Wilma struck with unexpected consequences, and (re)insurers were left with a USD34 billion price tag. Balance sheets were drained, and the hunger for fresh capital was universal. Some replenishment did come from the dedicated capital of traditional reinsurance companies, but for the first time, alternative sources were prominent and accounted for a third of the cash coming into the industry. Sidecars effectively made their large-scale debut at this time, funneling USD13 billion onto carrier balance sheets.
For several years, carriers have enjoyed a period of low insured losses, and access to cash has not been a problem. Traditional sources have been bolstered by the largesse of hedge funds, private equity funds, and even the wealth of high-net worth investors through a variety of insurance-linked securities (ILS). But, credit market turmoil has brought these conditions to an unceremonious close.
For the past 10 years, most Bermuda companies have outperformed the Standard & Poor’s (S&P) 500 in generating shareholder value. The Guy Carpenter Bermuda Reinsurance Composite has shown considerable book value and dividend growth. This financial performance has been driven substantially by Bermuda’s low tax rate, experienced executives and friendly regulatory regime.
Bermuda faces the challenges of prosperity in 2008. The good fortune of low catastrophe losses in 2006 and 2007 has caused balance sheets to swell, but the opportunities to earn the outsized returns desired by investors have nearly vanished. For the coming year, it is almost inevitable that the profit rate of Bermudian companies will decline.