New Capital Entering Insurance Market May Fuel Start-Up Class of 2020

Market dislocation resulting from the economic impact of the COVID-19 pandemic is creating opportunities for insurers in some lines of business and attracting capital to the industry, according to a new report from A.M. Best.

The new capital is raising questions about the possibility of an insurance industry start-up "Class of 2020," according to the report, Insurance Capital Raising—Bolstering Existing Firms or Funding Start-Ups?

The commentary suggests that the focus of any start-up insurance companies is likely to be on traditional insurance products and that there may be a greater push for new technology-driven solutions.

The A.M. Best report notes that a number of existing insurers and reinsurers have announced capital raising initiatives to bolster their balance sheets in response to uncertainty over the impact of the COVID-19 pandemic and to take advantage of the hardening market.

Meanwhile, the low-interest rate environment has forced investors—particularly institutional investors—to look for new yield opportunities, A.M. Best said. "The risk and reward calculation posed by the insurance sector in a hardening market may start to look more attractive to existing and new investors, including private equity," the A.M. Best report said.

There is also increasing speculation that new capital is looking to support start-up company formations as a way to benefit from hardening rates and tighter terms and conditions, according to the report.

A.M. Best noted that there are numerous hurdles facing new insurers looking to establish themselves quickly to take advantage of current market conditions. Among them are the need to secure capital, regulatory approvals, licensing, and assembling underwriting teams, as well as gaining market acceptance.

On the other hand, new companies can benefit from clean balance sheets that are unencumbered by legacy claims, A.M. Best said. That's especially relevant as many companies are strengthening reserves for US casualty business. In addition, new companies could benefit from the absence of legacy information technology systems, allowing them to use the latest technology to support collecting, processing, and analyzing data.