A few cracks are showing in the sidecar solution.

After being hailed as a clever way to raise more capital and give companies more capacity, sidecars are suddenly no longer the flawless magical solution everyone had hoped they might be.

Olympus Re was a new kind of company when it was set up in 2001 in Bermuda by White Mountains Insurance Group to take advantage of the post September 11 price hikes. Now known as sidecars, these special purpose vehicles only do business for their parent company, purportedly taking risk off the parent's books and allowing more business to be written.

But in June gaping holes were left open to the wind when losses from the 2005 storms wiped out Olympus Re's capital and White Mountains was forced to bail the company out. White Mountains was supposed to recoup $143m from Olympus Re according to their quota share reinsurance agreement. But despite getting a new round of investors to recapitalise the firm in January (it raised $156m to continue writing business on a limited basis), Olympus would have been left significantly undercapitalised if it had paid this claim in full.

To avoid this, White Mountains agreed to reimburse up to $137m of the losses, adding to a growing storm loss bill (it recently announced a $200m hike in pre-tax losses, bringing its total bill to around $656m) and inviting rating agency scrutiny as a result.

Many of the Class of 2005 post-Katrina Bermuda start-ups have used sidecars in order to write more business. One company that has not used them is Ariel Re, and its chief executive Don Kramer has always been sceptical about their benefit. “These sidecars which you read about are not the magic bullet,” he said. “You are ceding reinsurance to a single purpose entity and when that entity blows, you find yourself naked for the balance of the coverage.”