It’s impossible today to select an industry news tab on a digital news platform without seeing at least one headline about a merger or acquisition (M&A). It’s one of the most significant corporate trends of the past decade, which naturally has given birth to a huge surge in demand for transactional risk insurance (also known as M&A insurance).
According to a new report by global insurance brokerage and risk advisory firm, Marsh, use of transactional risk insurance jumped significantly in 2018. The firm placed transactional risk insurance on behalf of clients on 1,089 transactions in 2018, up 31% compared to 2017. Its aggregate limits also increased by 35% in 2018 to US$36.5 billion. Marsh attributes this uptick to the size and number of transactions across large and mid-market deals in which insurance is used.
“We’re seeing continued significant growth in the transactional risk insurance market, especially in North America,” said Craig Schioppo, transactional risk practice leader for Marsh JLT Specialty. “There’s more competition and there are a lot more carriers in the space, which has resulted in some better pricing and better terms for our clients. Naturally, as the market has grown, we’ve also seen a significant increase in claims activity, but we’re seeing decent resolutions which is positive for the product.
“This space has really started to become attractive for carriers in the past two years. In fact, we’ve seen the number of carriers offering transactional risk insurance almost double in that time. Why is it attractive? It’s a growing business. From a traditional carrier standpoint, they have the ability to invest resources and offer transactional risk insurance alongside other lines of insurance to their corporate buyers. They’re able to start getting premium through the door pretty quickly.”
Another reason why carriers like to offer transactional risk insurance is that it’s a relatively low-exposure product from an aggregate risk to balance sheet perspective. Each policy is bespoke and unique to one specific deal, so if there’s a problem, this doesn’t usually spill over into other property and casualty lines.
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One trend that’s absolutely clear in Marsh’s report is that the North American market has had the most significant growth spurt. In 2018, total transactional risk insurance limits placed by Marsh in the US and Canada grew 53% over 2017, to US$16.56 billion. This is largely due to pricing reductions, larger transactions, and increased utilization by corporate and strategic buyers, which has spurred an increase in limits purchased and the number of transactions covered.
“North America has become the largest market for transactional risk insurance on a global basis, whereas four or five years ago, Europe was a much larger market,” commented Craig Warnke, managing director, Marsh JLT Specialty. “In terms of buying patterns, however, European and Asian clients tend to purchase more insurance as a percentage of the transaction size than folks do in North America. That’s partly down to the fact that the coverage is meaningfully cheaper, especially in Europe than it is in North America. A client can purchase 30% coverage on a deal in Europe for the same price it would cost to buy 10% coverage in the US. But that’s because the coverages are different. The policies are lot broader in the US and there’s a lot more exposure in terms of how M&A is done under US law.”
Transactional risk insurance is an attractive alternative for both buyers and sellers to some of the more traditional financial vehicles, such as escrow holdbacks, which were used by dealmakers in the past. The reason for this, quite simply, is that the insurance coverage frees up money, Schioppo explained. The seller is able to realize the proceeds of the deal immediately, rather than waiting for two or three years, and they’re able to limit their exposure. And from a buyer’s perspective, they’re able to get protections they would have struggled to get from a seller years ago.
“Because of the existence of transactional risk insurance, the paradigm for how M&A deals are done in the middle market has fundamentally changed,” Warnke told Insurance Business. “Escrows are great, but buyers simply cannot get them anymore in any meaningful way like they used to five or 10 years ago – and that’s largely because of this insurance. It has turned into a very seller-favorable M&A environment. So, in a competitive option process, if a buyer serves up a purchase agreement that contains a 10% escrow, they likely be laughed out of the process.”