What Does Reinsurance Sidecar Mean?
Similar to the practice of reinsurance, ‘reinsurance sidecar’ refers to a company with limited tasks and purpose intended to work in partnership with larger insurance companies. The reason for this partnership is to share both risks and profits. Reinsurance sidecars can purchase a part of an or the total insurance contract from insurance companies, and thus assume some risks and probable future obligations in exchange for sharing in the company’s profits. In case the signed insurance contracts present low claim ratios during the possession of a sidecar, investors will get much higher returns.
Reinsurance Sidecar Explained
Reinsurance sidecars definitely increase the original insurance company’s business because of reducing responsibilities, obligations and liabilities.
These companies work as follows. They set up a so-called ‘sidecar’ which is an insurance investment tool for those investors who do not know much about insurances and the investments related to this. These investors provide the reinsurance company with an appropriate fund used to underwrite a part of or an entire insurance contract from an insurance company in exchange for a percentage of the accumulated insurance premiums. This amount in turn is divided between reinsurers and the original investors who provided them with funds.