According to a newly released report from Marsh, the world’s leading insurance broker and risk adviser, the use of transactional risk insurance significantly increased in 2018. Policy limits in excess of US$1 billion are now available for single transactions as private equity firms and strategic investors increasingly use insurance to reduce the risks associated with mergers and acquisitions (M&A).
In its latest Transactional Risk Insurance Report , Marsh reports that global demand for transactional risk products increased in 2018. Marsh placed transactional risk insurance on behalf of clients on 1,089 transactions in 2018. This is an increase of 31% compared to 2017. Aggregate limits placed also increased, rising 35% in 2018 to US$36.5 billion, driven by the size (US$262.2 million from US$224.8 million) and number of transactions across large and mid-market deals in which insurance is typically used. The growth of transactional risk insurance placements outpacing global deal activity and growth shows widespread adoption by both private equity (PE) and strategic investors.
Regional findings of the report include:
- North America – In 2018, total transactional risk insurance limits placed by Marsh in the US and Canada grew 53% over 2017 (to US$16.56 billion). Pricing reductions, larger transactions, and increased utilization by corporate/strategic buyers has spurred an increase in limits purchased and the number of transactions covered.
- Latin America – Marsh reports increasing investor interest in transactional risk insurance even though average premium rates are significantly higher than in other regions.
- Europe, the Middle East and Africa (EMEA) – Marsh placed transactional risk insurance on 479 transactions in 2018, an increase of 31%. Marsh reported an increase of 26% in total transactional risk insurance limits placed in EMEA in 2018 to US$15.93 billion. Average premium rates increased despite a significant increase in new capacity.
- Asia – Last year saw notable growth in the use of transactional risk insurance in South Korea and Greater China, especially warranty and indemnity and tax insurance for real estate transactions.
- Pacific – In 2018 there was a significant increase in limits placed over the previous year reflecting a strong growth in deal count (36.4%) and an increase in the number of large transactions using insurance.
Trends in the EMEA region
The use of specific tax policies has substantially increased in the EMEA region. Specific tax policies attract potentially higher premium rates compared with other products, hence presenting an attractive opportunity for insurers. Insurers have hence allocated increased capital to this area and hired and upskilled their teams accordingly. Alongside the more commonly insured real estate tax risks, examples of tax liabilities that have been placed by Marsh JLT Specialty include substantial shareholder exemptions, enterprise investment scheme, and VAT. These are most commonly used to provide bidders with recourse where they are unable to negotiate a more typical contractual indemnity from a seller, due to the competitiveness of a sales process.
Transactional risk insurance is now firmly established in the M&A marketplace as an important tool that can help mitigate deal risk, evidenced by its widespread adoption among PE firms and strategic investors globally. Demand for these solutions is on course to remain high throughout the rest of 2019. Marsh expects the insurance market, now supporting very large limits, to be ready to respond.
The full report can be read here: Tranactional Risk Insurance Report 2019