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Special-purpose vehicle popularity subsides


From here on out, reinsurers' use of sidecars will follow the wind, experts say.

Sidecars are special-purpose vehicles--often capitalized by hedge funds--that provide capacity to existing reinsurers by assuming risk, typically through multiyear quota-share reinsurance contracts. The sidecar assumes a percentage of premiums in return for assuming the risk, which is generally property catastrophe reinsurance.

"They were really formed when there was a capacity constraint after the hurricane losses in was a way to bring in some very focused capital," said Mark Rouck, senior director with Fitch Ratings Ltd. in Chicago.

But amid lower-than-expected catastrophe activity in 2006, sidecars' popularity began to wane.

"You are starting to see some of the more general sidecars being unwound because there is enough capacity in the traditional market to soak up demand," Mr. Rouck said.

"They are certainly not going to go to zero" but there will be less participation in sidecars as the market continues to soften, said Bryon Ehrhart, president and chief executive officer of Aon Re Services in Chicago.

Conversely, "If we have significant events this year, the sidecar capacity will ramp back up," Mr. Ehrhart said.

"Companies would be able to get those things up and running pretty quickly...there is a little bit less of a learning curve," now, said Mr. Rouck.

--By Rupal Parekh