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Importance of Alignment in Designing Life Insurers’ Reinsurance Sidecars: Insights from RGA

When it comes to creating a reinsurance sidecar structure for a life insurance company, it is crucial to ensure strong alignment among all parties involved. It is also important to evaluate the trade-offs between a sidecar strategy and engaging with traditional reinsurers, as advised by RGA (Reinsurance Group of America).

In the past year, Reinsurance Group of America (RGA) was backed by several third-party investors during its launch.

As the inaugural life reinsurance sidecar for RGA, the company has valuable insights to share. Executives from the Global Financial Solutions team at RGA have discussed the pros and cons of life reinsurance sidecars, highlighting the challenges and trade-offs that need to be carefully assessed and addressed.

Adam Pyke, VP of Asset-Intensive at Global Financial Solutions, Libby Corcillo, VP of Business Development at Global Financial Solutions, and Brendan Akos, Executive Director and Transaction Manager at Global Financial Solutions, have outlined key considerations for potential life reinsurance sidecar initiatives.

They emphasize that currently, reinsurance sidecars in the life sector are akin to “shiny new cars on the road,” offering opportunities to drive growth and cultivate valuable partnerships for market participants.

However, the executives caution that sidecars can present challenges, with the risk of conflicting objectives among multiple parties potentially hindering successful implementation.

“Ensuring alignment among stakeholders requires meticulous design of all sidecar features to guarantee smooth operations,” they remarked. “The associated resource allocation demands a firm organizational commitment to the strategy; otherwise, navigating fundraising hurdles may prove insurmountable.”

Therefore, it is essential to evaluate the sidecar project against the option of engaging in reinsurance transactions with an external company, which may offer a smoother and simpler solution for some, while others may find the sidecar to be the more suitable choice.

In many instances, life reinsurance sidecar strategies have been initiated to assist in risk reduction while expanding assets under management (AUM) to safeguard fee income.

Apart from de-risking, other motivations for pursuing the sidecar route in life insurance include raising capital for growth, accessing favorable offshore capital and tax treatments, reducing balance sheet volatility, and collaborating with specialized asset managers.

“Typically, an asset manager seeking a mandate for the sidecar’s assets will acquire a stake in the sidecar to reinforce alignment of interests. In addition to accessing this AUM, the potential for attractive, stable returns over a specified period can appeal to various types of sidecar investors,” highlighted the RGA executives.

Deliberate attention to design features is crucial when launching a life reinsurance sidecar, as emphasized by the RGA executives.

Harmonizing decisions on the features of a sidecar vehicle is vital, considering that stakeholders may have divergent motivations for participation.

Sponsors aim to maximize the economic value of the venture through fees and ceding commissions while freeing up capital, according to the RGA executives.

For investors, the focus may be on deploying capital swiftly and earning a high-risk premium over a defined timeframe, with some also interested in securing lucrative asset management fees.

Regulatory considerations are also paramount to ensure policyholders are not exposed to undue risk.

“With established precedents and a growing emphasis on the sidecar space, these stakeholders will be keen to influence the design. Other stakeholders, including employees, policyholders, advisors, and the parent company, will also seek input on the sidecar design. The distinct objectives of all stakeholders should inform the design and decision-making process,” further explained RGA’s executives.

An understanding of the macroeconomic landscape is crucial, as financial conditions can impact the performance and success of a life reinsurance sidecar project.

When comparing a sidecar to traditional reinsurance opportunities, sponsors must weigh the effort involved and the benefits to determine the most suitable path for each entity.

A sidecar structure may be particularly suitable for companies with substantial balance sheets, sophisticated capital management expertise, and a penchant for capital markets. Such entities should possess the risk capacity to seed the structure, commit to a continuous risk flow, engage closely with investors, and have a management team with the requisite time and expertise for such endeavors.

In conclusion, the RGA executives emphasized, “While sidecars can offer substantial value under appropriate circumstances, the associated costs – whether in terms of time, resources, capital, or other factors – and execution challenges should be carefully and realistically evaluated before proceeding.

“Early prioritization of objectives is crucial in shaping the third-party capital strategy. This will guide the assessment of significant trade-offs in opting for the sidecar versus other alternatives, such as traditional asset-intensive reinsurance.

“Following this approach will ensure the selection of the most suitable vehicle to reach your desired destination.”