Institutional investors in search of better returns are looking to park more of their funds in the insurance industry, according to an AM Best report, citing the recent capital-raising actions made by QBE and other major insurers such as StarStone Insurance.

Despite the business fallout from the pandemic, the industry is looking increasingly attractive for investors who have seen returns impacted significantly by years of ultra-low interest rates.

Rate-hardening in many lines of business, especially in the specialist classes, is expected to accelerate in the months ahead, offering potentially better yields in the current low interest rate environment.

“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 ratings agency says.

“AM Best has observed more business flowing to wholesale markets with favourable trends and potential opportunities particularly apparent in specialty, US excess and surplus lines and reinsurance markets.

“The ease with which companies have raised equity - and the subsequent increase in share prices - likely reflects the absence of other opportunities for investors.”

There are also signs the new capital heading to the industry is also looking to support new start-ups, but getting the challengers off the ground and running to take advantage of the hardening conditions will not be easy.

AM Best says many hurdles remain, such as securing regulatory approvals, licences and finding the right team to run an insurance business.

But newcomers have their advantages. They start with a clean balance sheet and are not hindered by legacy systems.

AM Best says recent new start-ups have not followed a single model and have focused on different areas of the market, with diverse strategies.

“Any new start-ups in 2020 are likely to focus on traditional insurance products, taking advantage of improving market conditions,” AM Best said.

“In addition there may be some new technology start-ups and a greater push on technology-driven solutions which have not yet come to the fore.”