Sidecars - Setup
From the pre-incorporation stage, we can provide expertise to companies and investors looking to commence insurance/reinsurance operations in Bermuda.
Jointly, with a locally-appointed legal advisor, Horseshoe provides advice and assistance in most aspects of incorporating the company with the Bermuda Registrar of Companies and registering as an insurer with the Bermuda Monetary Authority.
Typically investors form a fully licensed reinsurance company to participate in a share of underwriting risks written by a re/insurer. The reinsured risk is predominantly property and marine catastrophe and short-tail in nature. The investors rely on the underwriting expertise of the ceding re/insurer, and usually deal only with one company on a quota share basis.
In most cases, the sidecar’s aggregate exposure under the reinsurance agreement is fully collateralized, generally through a reinsurance trust arrangement. Funding of the collateral is provided through a capital structure that may include equity, debt and preferred equity elements. The quota share agreement usually includes such features as override commissions (to compensate the cedant for underwriting services indirectly provided to the sidecar) and profit commissions (under which the cedant shares in the underwriting result of the sidecar).
The size of the sidecar (in terms of capital raised) depends entirely on the aggregate exposure offered to the re/insurer and hence the collateral requirements; in recent years we have seen sidecars with total assets ranging from $100M to over $1B.
In 2009, new insurance legislation has been put in place in Bermuda to allow sidecars to be licensed as Special Purpose Insurers. There are several advantages to licensing the sidecar as an SPI one of which is that the minimum capital and surplus requirement is $1.00.
The following link outlines the various steps in setting up a sidecar in Bermuda. While it is geared towards captives, a similar process applies to insurance companies set up: