Insurers have been able to raise capital with relative ease, reflecting partly the absence of better investment opportunities elsewhere, according to a report from AM Best.

Hardening insurance rates have made the industry an attractive option for investors, who have suffered paltry returns with global interest rates stuck at historic lows.

“The low interest-rate environment has forced investors, particularly institutional investors, to look further afield for yield opportunities,” the ratings agency said.

“The risk and reward calculation posed by the insurance industry in a hardening market may look more attractive to existing and new investors.

“This suggests 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.”

According to the ratings agency, last year saw a slew of fund raising activities in London and Bermuda from both existing insurance players and start-ups that were looking to bolster balance sheets and to take advantage of perceived improvements in pricing and conditions.

Rates in a number of lines of business continue to harden as the market responds with increased underwriting discipline to adverse claims experience, driven by social inflation in the US, COVID-19-related losses and, in recent years, elevated catastrophe experience.

AM Best says a portion of the additional capital raised last year has already been required to absorb adverse prior-year loss reserve development and upward revisions in pandemic-related loss estimates.

It cautions the extent to which losses related to COVID-19 have been recognised by insurers going into this year remains unclear.

“The impact 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,” AM Best says.

“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.”

AM Best does not expect it to be busy on the mergers and acquisitions front in the near-term. Volatile equity markets have contributed to difficulties in assessing the true value of companies.

Additionally the financial and operational impact of the pandemic is likely to create uncertainty around integration and the prospects for combined businesses for some time.