Sidecars, a recent phenomenon, are specialty reinsurance companies designed to provide additional capacity to a specific reinsurance company. Investors, such as hedge funds, invest in a reinsurance company, the sidecar, to reinsure specific risks for a specific reinsurance company. Their use has grown significantly since the major catastrophes (cats) of the past few years.
Investors like sidecars because their capital can be put to work quickly and efficiently, for a very specific set of risks for a specific time frame, often in a tax-advantaged environment. Reinsurers like sidecars because they have considerable additional capacity for their severity risks, typically cat exposures, without having to go into the retrocessional market. Credit risk and other market factors are eliminated. Sidecars are typically located in offshore tax havens such as Bermuda.
Additional information on sidecars can be found here:
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