News Analysis - Before you get into a sidecar, make sure you know who's driving.

(From Reinsurance)

"Yes - I'm giving you my pen and yes, that means you can burn me, but remember, if you do, I'll never do business with you again."

A decade on and the simple analysis and thinly veiled threat of a long-serving Lloyd's broker binder underwriter continues to ring true. I'd just asked him what safeguards he had against our Spanish broking firm writing for income and stuffing a Spanish property reinsurance facility he was leading off for us full of absolute rubbish.

He said that quarterly borderaux were quite handy and that he could occasionally ask for chapter and verse on individual risks if he was worried, but ultimately he knew that he had no real safeguard other than the fact that he knew us well and trusted us not to act against our long-term mutual interests.

The only ultimate sanction of any power he had was the threat of withdrawal of his support when renewal time came along. As it turned out, we tried our best not to burn him - having a binder gave us kudos and leverage in the market and opened up doors to potential customers.

So, why the intro? It hints to the fact that what holds for broker binders also holds true for sidecar financiers. Sidecars are the latest manifestation of the efficient deployment of capital in the reinsurance market.

On the face of it, a sidecar deal works like a marriage made in heaven - a reinsurer is able to leverage the skills of its underwriting team and its position in the market but without having to give away ownership of the firm or unbalance its finances through piling on more debt. Sidecars also protect reinsurers from the damaging consequences of having to pull out of lines of business that they feel their balance sheet can no longer handle.