How the life market can embrace sidecars

Sidecars offer reinsurance carriers a number of clear benefits and nowadays are a common part of any company’s financial structure.

By allowing private investors access to risk capital and sharing the burden of often vast reinsurance quota share treaties and an alternative outlet for investment, it’s a winning formula for both parties, offering funds diversification and carriers an opportunity to free up part of the balance sheet.

While such structures have been widely adopted in the property and casualty and broader non-life sectors, they remain a much smaller part of the life reinsurance market.

Speaking during the Bermuda International Long Term Insurers and Reinsurers’ (BILTIR) annual virtual conference, a group of industry experts gathered to debate how the life sector can embrace sidecars and what benefits they could bring to the market.

Athene Life Re is one of the largest players in the life and annuities reinsurance market, with deal sizes running into the tens of billions of dollars and more.

Since setting up Athene Life Re as a Bermuda-domiciled company six years ago, the firm has grown to become one of the largest entities in the Athene group, and the latter’s executive vice president, head of risk transfer and flow reinsurance Sean Brennan thinks that sidecars provide various opportunities for life companies beyond their traditional strengths.

“From an insurer’s perspective, when I think about what the sidecar provides, it’s a number of different things. It’s the ability to get on-demand capital that sits there, and if you were to otherwise carry equity capital for a while to support these businesses, you’d hurt earnings the same with debt, in terms of capital earnings and returns. So you’d be underachieving,” he said.

“When you have illiquid assets, or investors who are willing to sit on the sidelines for a while and then have their capital drawn on demand within days of the transaction being contemplated, that’s a very compelling opportunity, not just for your inorganic growth, but also for your organic growth.

“If you take the sidecar away, when you’re trying to grow your business, you have organic opportunities only every once in a while, or you have a large block transaction that comes to the market or comes to you exclusively,” he explained.

“If you’re running without that sidecar capital and without that on-demand capital, you either have to hope for fair weather equity valuation and cost of debt, or you carry the sidecar and commit all your organic or equity capital to your organic growth.

“While we think of on-demand capital vehicles such as sidecars as primarily focused on episodic, inorganic growth, they also have the benefit of preserving your equity capital and traditional debt capital for the organic growth that is happening rapidly through the year.”

“I see a strong case for the market to explore those structures in more detail.”

Scott Mitchell, Schroders

Scope for development

Scott Mitchell, head of life insurance-linked securities (ILS) at Schroders, agreed that there was an opportunity for the life market to embrace more fully the use of sidecars, but added that they could be used as much for covering the underlying insurance risks as for straight bulk annuity deals.

“There is scope for sidecar structures to develop more in the life market,” he said.

“We insurers are less focused on bulk annuity deals and more focused on the transfer of the pure insurance risks, the policy lapse, the mortality and morbidity risk, either through pure risk transfer instruments or through embedded value trades.

“When I contemplate how sidecars can be advantageous for the market, I’m thinking less about the transfer of asset or combined asset, longevity risk and more about the transfer of the insurances on a standalone basis,” Mitchell said.

“I see a strong case for the market to explore those structures in more detail to cater for those long-term risks. I’m obviously thinking about longevity, but also mortality trend risks, and critical illness risk.”

Mitchell added that the persistently low interest rate macro environment also made the threat of long-tail risks such as those typically covered by sidecars a more immediate concern, and showed how the structure was “underused” in life reinsurance relative to the non-life sector.

“In this low interest rate environment, where those long-term tail risks become more prominent on the balance sheet, purely because they are discounted less than they used to be, these types of risks are becoming more important for re/insurance to focus on.

“In our view, as a life ILS fund, there is no commodity solution to transfer these risks to the capital markets at the moment. If we look at for example, the longevity market, we have longevity swaps and longevity reinsurance being widely used by reinsurers and the larger insurers, who can underwrite that risk on a long-term basis, and offset the longevity exposures against life blocks of mortality that they have on the balance sheet.

“Those longevity swaps and longevity reinsurance contracts work well for those risk takers, but they don’t work well for the ILS market. The capital markets work for a number of reasons.

“When we look at the non-life market, how that’s developed and how sidecars are used there, and then compare that with the life market, sidecars do seem to be underutilised in our sector,” he concluded.

Image Credit: Shutterstock.com / Kentoh

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