Reinsurance sidecar market resurgent, with over $1bn of capital entering: Aon

The reinsurance sidecar market has continued to expand through the second-quarter of 2024 and broker Aon’s Reinsurance Solutions team estimates that over $1 billion of capital has entered this proportional collateralized reinsurance market in the last year.

The reinsurance sidecar market had shrunk a little in size after some challenging catastrophe loss years, then stabilised through early 2023.

But, the last twelve months has seen this market expand again, as investors look to benefit from the higher return environment in the reinsurance marketplace.

Aon had already reported last week that overall levels of alternative reinsurance, or insurance-linked securities (ILS) capital, had grown further to reach a $110 billion high.

While catastrophe bonds have driven much of the ILS market expansion of late, the reinsurance sidecar market is more opaque and less easy for us to track.

But Aon’s latest analysis on the sidecar market suggests an increasingly healthy level of capital available to support these key quota share based proportional arrangements in 2024.

“The sidecar market continues to expand as investors look to realize returns from the strong underlying expected margins currently being offered across proportional structures,” Aon’s Reinsurance Solutions team explained.

Aon reports that, “The sidecar market has increasingly drawn the interest of investors, with several significant transactions closing in the second quarter, and well over a $1 billion of capital entering the market over the last year.”

This is significant, as the sidecar structure is a key capital and protection tool for insurance and reinsurance companies, so the resurgence in investor appetite for these structures can be a meaningful support for re/insurer expansion as well.

Aon said that, “Opportunistic investors have allocated across a range of strategies as historic reinsurance rate hardening has generated multiple opportunities and encouraged creative structuring.”

Adding that, “Expected returns are highest in property catastrophe portfolios, and investors have gravitated towards partnerships based on alignment, track record and collateral efficiency.”

Aon is also seeing appetite to support portfolios of other non-catastrophe lines of business, although these often differ in structure to the more typical property catastrophe sidecar arrangements.

“Casualty investors consider these factors important as well but are more focused on investment guideline flexibility, leverage and transaction duration as they establish bilateral arrangements where investors can manage the underlying collateral,” Aon’s Reinsurance Solutions reports.

Further explaining that, “Specialty portfolios have also captured the attention of investors as (re)insurers seek growth capital and investors value the diversification benefits combined with reduced volatility (compared with cat-driven investments) offered via specialty portfolios.”

Aon sees the sidecar market as “resurgent” in 2024.

Which bodes well for cedents looking to partner with efficient sources of institutional capital, with the sidecar looking set to cement its role once again, as a key ILS structure that provides aligned capital efficiency and flexibility.