CFC Underwriting Ltd, which calls itself an emerging risk pioneer, is showing the industry just how accurate its slogan is, with the launch of a new proposition that the specialist insurance provider can say with conviction is something that no-one else has put forward before.
Designed to insure sellers of small businesses (with the indicative range of enterprise value at between US$250,000 and US$10 million), CFC’s first-to-market “Private Enterprise” policy is a transaction liability product for the untapped micro segment within the mergers and acquisitions space, which the underwriting agency estimates to be worth nearly US$8 billion in gross written premium.
So, why – until now – had the SME M&A market been unserved when it comes to representations and warranties coverage or warranty and indemnity insurance? CFC’s transaction liability head Gus Marshall (pictured) believes there are three principal reasons.
“One is the M&A insurance market or transaction liability insurance market has been so successful,” Marshall told Insurance Business, “in some ways perhaps too successful as a product that there’s been no time to develop any new products because there’s been so much business to write.”
Another reason cited by Marshall is the economic structure or model of monoline managing general agents which he said is limiting MGAs in being able to create a scaled product. In Marshall’s view, his camp – which in April announced the creation of CFC Syndicate 1988 – is uniquely positioned and does not have the same limitation mentioned above.
He noted: “CFC is an MGA, but it’s acting more and more like a diversified insurance company. The syndicate that was launched puts us into a unique straddle position between that of an insurer and that of an MGA. Our success has allowed us to focus on these kinds of new innovations in transaction liability.”
“Way back when we started, SME has always been a key part of our business and we’re slowly evolving into more than just SME,” continued Marshall. “But it has struck us that, yes, we do play at the lower spectrum of deals on our main transaction liability business but we don’t have anything that was pure SME – and this is pure SME, which is a nice fit for us because one of the theses of the success of this product is you need to be able to scale it.
“And that is the third reason why there’s been no product that’s been developed for the micro and SME market for transaction liability; that is, that it is a difficult underwriting process to try and industrialize and scale.”
What CFC did, according to the transaction liability head, was “rethink and unpick” the underwriting process for representations and warranties and reinvent it for an SME policy to make it scalable. Part of what went into the development is CFC’s experience as one of the biggest SME cyber underwriters globally.
“The product design allows people to underwrite quickly, buy it at a cheap price point, and not have to have too much involvement from expensive lawyers and advisors in procuring the product, which are all features of the main market for transaction liability,” highlighted Marshall, who added that the new policy’s evolution is far from over.
“A reality of product development,” he stressed, “is you create a product and it evolves over time – and we fully expect it to evolve because when you think about the SME market, you’re talking about millions of different types of businesses doing different things in different places for different reasons.
“One of the challenges that I had in putting this together was how to create a fairly standardized underwriting process for an economy like the United States which is so sophisticated and diverse with a multitude of different issues. That was the biggest challenge I had.”
Aside from the myriad of SMEs the product will cater to, CFC’s Private Enterprise policy for sellers will also be available in four distinct markets: Australia, the UK, the US, and Canada. And since the agency is ‘making’ the market in this instance, Marshall said they are committed to adapting the proposition to become what the market wants.
“What’s interesting about this product is it’s the same product idea but we had to recreate it for each different market, which is a challenge,” noted Marshall. “We’re excited for each market, because this is just complete whitespace and there is no product available. And I think our clients will probably buy it for different reasons in different markets.
“That underpins the evolutionary aspect of the product; we need to evolve and learn from our brokers and from our clients as this product becomes far more relevant and mainstream, which I think it will because it’s a compelling proposition to offer a lot more certainty to people exiting businesses. It seems almost unfair that this product has been denied to SME owners but available to sophisticated investments for so long.”
With the product now launched, high on Marshall’s agenda is going on an educational journey with all of CFC’s brokers. Because while the product’s wordings are drafted in such a way that they’re easy to understand and are in plain English (as with all CFC offerings), Marshall believes it is crucial to ensure that everyone knows how to produce the business.
“There’s no point having a great product out there when brokers don’t understand how to place it,” he said while setting a couple of targets moving forward. “In terms of priorities for this product, we ideally like to write business in the first year in all territories that we offer it in. That’s a priority.”
Another priority, a broader one, is to keep the ball rolling when it comes to product innovation at CFC.
Marshall told Insurance Business: “This isn’t the final piece in the overall innovation drive that both transaction liability and CFC is going on. Our tagline, as corny as people might think this is, is the truth, and that is ‘a pioneer in emerging risk’. This is a good example, and we want to continue the momentum in new product development.
“It’s been amazing to see how successful the transaction liability market has been, but we also recognize that the current addressable market is a very small part of the broader M&A picture. And we think there’s a huge amount of opportunity in all sorts of different products. So, my priority is to make Private Enterprise a success, and then continue this drive of innovation to continue servicing our brokers and our clients with new ideas, new products, and new solutions.”