A challenging and not terribly visible type of Risk coverage; a transactional Risk Insurance policy will typically cover elements in an underlying purchase agreement. This can span representations and warranties for example, tax opinion and contingent risks also such as on-going litigation or environmental matters. The scope is of course huge and the Risk can be high hence eye-watering premiums and tight wordings. The cover can be bought by either party which has therefore uncovered a plethora of opportunity for differentiation by insurers throughout the huge uplift in activity from both buyers and sellers in the last 2 years.
The growing demand for this product is being driven by the want, but also the deep need, for the risks associated with a transaction to be transferred into the insurance market. The stakes are high and the figures immense. The likes of private equity firms, real estate funds and corporates who are specialists in the mergers and acquisitions, use transactional Risk Insurance to increase leverage in facilitating the deals in which they are involved. They use the product as a ‘deal tool’ to achieve a tactical advantage in negotiations and auction scenarios and in most cases this has the potential to increase the investment rate of return and thus satisfy the ever more vigilant Limited Partners.
The majority of firms utilising transactional Risk Insurance are based in Europe, the Middle East and Africa but a significant rise has also emanated from Asia Pacific and the Americas. There are major economic and environmental challenges for M&A dealmakers, especially those undergoing inbound purchasing and this type of Insurance cover may be an avenue to reduce the breaking down of those deals. As the number of clients requiring this type of insurance rises, so too does the appetite in the insurance market. One must ask, how far does this increase have to go before overcapacity hits? Perhaps this is too early to ask. This is certainly to the benefit of the client; a more competitive market inevitably results in lower premiums and broader cover. In the natural market cycle, and with increased competition for assets within ever-growing economies can transactional insurance or representations and warranties actually aid the winning of precious deals and still provide comprehensive, appropriate cover? Insurers are further differentiating themselves and their products from new entrants to maintain and strengthen their books of business….perhaps the ascertaining of the deal sizes and ranges within industries would create the most suitable suite of products…. movement which is apparent in many classes.
By: Ruth Carter