Perceived improvements in pricing and conditions, together with the desire to bolster balance sheets in the face of uncertainty around Covid-19-related losses, underpinned much of the capital-raising activity seen in 2020, according to AM Best.
Capital constraints in local markets are leading to more business flowing to wholesale markets, such as London and Bermuda.
Private equity, industry capital and public placements all contributed to the capital inflow, said Best, supporting the balance sheets of existing players, alongside some material scaleups and a number of true startups. Listed carriers including Beazley, Hiscox, QBE, Lancashire and Renaissance Re tapped public equity and debt markets, while privately-owned Convex and Fidelis raised capital from new and existing shareholders.
Best said the capital inflow partly reflects the absence of other opportunities for investors, particularly the low interest-rate environment, and the risk and reward calculation posed by the insurance industry in a hardening market may look more attractive to existing and new investors.
The ratings agency noted that Bermudian and London market insurers have been able to raise equity with relative ease, suggesting that investors have confidence in the near-term prospects of the insurance industry, despite claims uncertainty in respect of Covid-19, social inflation and catastrophe exposure.
Third-party capital, for example in the form of collateralised reinsurance vehicles (sidecars) and insurance-linked securities, continues to flow into the market, but the pace has tempered, following a period of high-severity losses and issues surrounding collateral release, said Best.
One area attracting interest as a result of the current hardening market is US casualty business. In recent years, insurers writing US casualty business has been hit by an increase in both the frequency of attritional claims and a rise in the severity of large losses, largely reflecting the issues with social inflation and rising jury awards in the US, said Best. In particular, directors and officers, errors and omissions, excess casualty and healthcare liability lines have been particularly affected; and as a result these lines have been pruned, with the subsequent squeeze on capacity supporting material rate improvements.
Best said: “Capital constraints in local markets are leading to more business flowing to wholesale markets, such as London. As a result, insurers are seeing attractive opportunities to deploy capital, particularly in specialty excess and surplus markets and more recently in reinsurance. This was demonstrated by the strong growth recorded by existing London market insurers in 2020, with results announcements detailing double-digit rate increases for some lines of business.”
The impact of all of this could have a dampening effect on price increases, said Best, although it noted that a portion of the additional capital raised in 2020 has already been required to absorb adverse prior-year loss reserve development and upward revisions in Covid-19-related loss estimates. “The [effect that the] economic consequences of the pandemic will have on demand for insurance is highly uncertain and will largely depend on the length and depth of the economic downturn. As economies shrink, so does the value of insurable risk. But when businesses come under financial pressure, their appetite to retain risk may also reduce – increasing demand for insurance cover,” said Best.
Best also noted that there has been a concern that some risks, even where there have been material rate increases, are still not adequately priced. “The persistent squeeze on capacity means rates have continued to rise in these lines and there does now appear to be growing confidence around price adequacy,” it said.
Best explained that economic volatility caused by Covid-19 may constrain M&A activity in the short term, but in the longer term, consolidation pressures are likely as some insurers come under increased financial pressure. However, Best said it expects to see further portfolio transfers in the forms of disposals of non-core businesses to strategic buyers, financial buyers and runoff specialists.