Sidecars Are Key for New Capacity: AM Best

Any new capacity entering the catastrophe market in the wake of hardening prices will come in the form of sidecars rather than traditional reinsurance start ups, according to a report issued by A.M. Best on Friday.

“A.M. Best does not expect an influx of new companies, with a “Class of 2011,” said a report titled Reinsurers Anticipate Higher Rates in Wake of Tohoku. “The creation of companies on the scale of 2005, which followed the severe hurricane season in the United States, is unlikely, as start-ups require long-term capital and new management, among other prerequisites.”

According to the report, sidecars will become the “preferred capacity provider should rates increase” because they “exist for a defined risk period and are structured so an initial capital investment is available when required.”

Following Hurricane Katrina in 2005 several new reinsurance start ups, including Flagstone Re, Ariel Re and Validus Re were created take advantage of increased prices. However, A.M. Best that since “sidecars have proven to be efficient vehicles in the past few years” that private equity and hedge fund investors will embrace.

The report points to the creation Alterra Capital Holdings’ New Point IV in April, a sidecar that will focus property catastrophe retro reinsurance.

“A.M. Best is aware of other companies considering the creation of sidecars in anticipation of improved rates,” the report adds.

The report says that the rating agency expects “firm prices” in all reinsurance markets following the first quarter catastrophes. Although it did not estimate potential price increase for the July 1 renewals in the primary North America market, the report added said that rate “increases of up to 50% were common in Chile, New Zealand and Australia during the April 1 renewal season.”

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