o Flatiron Re, sponsored by Arch Capital Group, had more than $200 million.

o Blue Ocean Re–which, like Rockridge, was co-founded by Montpelier and West End Capital–had $300 million.

Among them, that represents $1 billion, Mr. Klein noted.

Giving a broad definition that applies to all four, he said a sidecar is basically a special purpose vehicle in which third-party investors, such as hedge funds or private equity funds, collaborate with an underwriter to provide additional capacity to existing reinsurers for property-catastrophe retrocession or short-tail lines of business.

For all but Blue Ocean, the added capacity is provided to the sponsor reinsurer. Blue Ocean accepts retrocessional business for reinsurers other than Montpelier.

While the four vehicles are all retrocessional, primary insurers are considering reinsurance sidecars also, according to Tom Upton, a managing director for Standard & Poor's in New York.

In general, a sidecar is a “pot of money” assembled by outside investors that is managed by the ceding company. The money raised is put into short-term, high-quality securities, which serve as collateral in the event of any losses. “In effect, it's a self-managed reinsurance company with somebody else's money,” he said.

While no reinsurance sidecars with primary insurer sponsors have been publicly announced, for carriers considering them, “the impetus is the expectation that reinsurance for certain lines of business, particularly property lines, would become very expensive,” according to Mr. Upton. “This was a way of gaining the same kind of protection and hedging some of [their] risks.”

Reinsurers that have set up sidecars are also reacting to rising rates–or more specifically, to the lure of being able to write attractively priced property-cat reinsurance, said S&P Director Steven Ader. But the most favorably priced regions are likely to be those most exposed to disasters, the analyst said, adding that the ability to cede business to a sidecar allows reinsurers to participate in an improving market while mitigating losses from volatile business.

Using the example of retro business, Benfield's Mr. Klein noted that while such business is attractive from a price standpoint, it incurs heavy capital charges from internal risk-based capital models, and also from rating agencies. Setting up a sidecar “gets a capital-intensive portfolio off your main balance sheet,” he said.

A sidecar is “a separate company altogether. It's detached from the balance sheet of the sponsor [original] reinsurer.”

The capital of a sidecar is typically provided by a third party, while underwriting expertise is provided by the sponsor. So the sponsor can still participate in the upside of writing volatile classes–essentially by getting a fee for managing other people's money, the experts said.

However, approaches to sharing in that upside vary, Mr. Klein said. Montpelier, in addition to managing retrocessions of third-party reinsurers to Blue Ocean (and earning a management fee), is also a Blue Ocean shareholder. XL and Arch cede quota shares of their own business to their sidecars. “So they're using this to get some risk off their balance sheet, but also retaining some”–and the corresponding profits, he said.

“These things can be set up and closed down quite quickly,” he said. So for companies such as Arch and XL, it is a way to take advantage of a short-term opportunity that is present for only a year or two while prices are high. “It's much easier than closing down a whole company,” he said.

Since investor commitments in sidecars are short term, they are willing to fully collateralize all potential obligations, Mr. Ader said, noting collateralization can be letters of credit or securities held in trust.

That means sidecars don't need financial strength ratings. “Reinsurers have ratings because [the ratings] are supposed to measure the risk of the reinsurers defaulting,” Mr. Klein said. If reinsurance has been fully collateralized, “the cash is there, ready and waiting to draw down.”

That doesn't mean, however, that rating agencies have a favorable view of companies that cede business to sidecars, according to Mr. Upton. If sidecars “are used to too great an extent,” regardless of whether it's a primary insurer or reinsurer ceding to them, “we'd probably look negatively on that in our analysis,” he said.

Explaining the negative view, he said a sidecar is funded by “short-term money that is coming into the market. It is there today, certainly, but may not be there tomorrow.” He added, however, that sidecars “used in moderation” would be viewed on par with traditional reinsurance by S&P analysts.

For the sponsoring company, another drawback of a sidecar may be the inability to reinstate a limit, Mr. Ader said. Typically, with traditional reinsurance, “you can get coverage twice for a catastrophic event for payment of a reinstatement premium,” but collateralized sidecar vehicles might only provide coverage for one event, he said.

Experts agree that with total capital at only $1 billion, the sidecars won't have any impact on market conditions. Should their development become more popular, though, they could bring discipline to the market.

Recalling the past sins of the industry, Mr. Upton said: “There was always the choice to be made about whether to deploy capital or return it to investors, and because there was a resistance to return capital, managers tended to compromise quality in their underwriting just to deploy it. The fact that these represent short-term capital that can go in and out of the market fairly easily suggests they would tend to dampen tendencies like that.”

Mr. Klein said he expected to see more. “That only three have been consummated was something of a surprise, with most of the capital going into existing companies or start-ups based on a traditional model.”

Robert Cooney, CEO of Max Re, said his company looked at the idea but dismissed it. “I'd never say never, but we don't have enough exposure,” he said, arguing that sidecars made more sense for companies that lost big chunks of equity as a result of 2005 storms. “We're not prepared to lose more than 20 percent of our equity,” he said, noting that others lost more than 60 percent.

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