The rapid growth of casualty sidecars is opening a new frontier for Bermuda's insurance-linked securities market. New investors are flocking to long-tail risks, but some analysts are raising deeper questions about whether all of that risk has truly been transferred off insurers' balance sheets.

Casualty vehicles have driven much of recent sidecar growth, with capital since 2024 surpassing $2 billion, according to AM Best. Best estimates the broader combined property-and-casualty sidecar market at $17 billion to $19 billion.

Part of the attraction lies in the long duration of casualty business. Premiums are collected upfront, while claims may not be paid for years, with the reserves generating investment income in the meantime.

AM Best said current interest rates have made casualty float more and more attractive, with returns on par with private credit.

That is drawing a different type of investor from those traditionally associated with catastrophe bonds and other property ILS.

Private credit platforms, insurance-focused private capital, family offices and sovereign wealth funds have backed recent vehicles, according to AM Best.

Bermuda is one of the world's largest centres for both reinsurance and ILS, accounting for over 90 per cent of the global ILS market, according to Bermuda Monetary Authority data. Aon reports that casualty structures have contributed greatly to recent sidecar growth, while Bermuda has been among the markets facilitating it.

Mike Van Slooten, head of market analysis for Aon's Reinsurance Solutions, agrees. He told The Royal Gazette that casualty sidecars are helping to broaden the ILS investor base.

“We’re seeing a different profile of investor coming in because obviously ... you’ve got to be committed for a longer period of time on deals like that,” he said.

“The pool of investors is kind of broadening, and the risk transfer options that are available to our clients are also broadening.”

But casualty risk has very different challenges from the mature property-catastrophe ILS market.

Casualty claims can take years to develop, leaving vehicles exposed to changing loss estimates, social inflation, litigation trends and other factors that can drive the ultimate claims above what investors expect.

Unlike many property-cat structures, casualty sidecars are also generally not fully collateralised, and can even leave the sponsoring re/insurer exposed if losses end up being higher than the vehicle's available capital.

“The question ultimately becomes whether the ceded risk has truly left the balance sheet,” said Emmanuel Modu, managing director at AM Best, in a recent report, Steering Profitability Remains Crucial for Lloyd’s in a Softening Market, part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.

Dan Hofmeister, associate director at AM Best, said the ratings agency was taking a closer look at casualty ILS structures as more companies become involved.

Best is looking at what risks are being ceded, the potential for exposure to return to rated balance sheets, the tail risk associated with the structures and the role of leverage and investment assets.

“We’re doing a lot of deep dives into these structures to make sure we understand the risk associated with those structures,” Mr Hofmeister told the the Gazette ahead of the Rendez-Vous.

He said some of the returns being discussed in the casualty ILS market had particularly caught the ratings agency's attention.

“You see things quoting pretty lofty returns, like high-teen returns,” Mr Hofmeister said.

“There’s not a lot of casualty writers out there making those type of returns. So there has to be something else involved with it, whether it's an asset strategy or a leverage strategy.”

For a credit ratings agency, he said, both asset risk and leverage are important for assessments of financial strength.

The long-tail nature of casualty business can also make it hard to determine where the exposure actually resides.

AM Best said exit mechanisms can give investors liquidity or contractual finality, but do not eliminate the underlying reserve risk. The ratings agency considers the potential capital shortfall over the remaining life of a sidecar when assessing the sponsor’s available capital.

Mr Hofmeister stressed that AM Best’s caution did not mean casualty ILS could not ultimately develop into a complementary source of capital.

He pointed to the evolution of property ILS, which was once seen as a potential threat to traditional reinsurers but eventually started working alongside them.

“A decade or two ago, we were talking about property ILS being this biggest competitor to the reinsurance industry, and ultimately over time, it plays out that they work pretty symbiotically together,” he said.

“That might end up being the case with casualty ILS, but at this point, I think we’re very cautious about it.”