It’s easier to mention companies in Insurance which aren’t active in the M&A field at the moment…with this in mind, understandably (and certainly within the last 12 months) the Insurance industry itself has experienced an increase in activity of this class of Insurance.
To explain, a Transactional Risk Insurance Policy (which can be bought both by buyers and sellers alike) typically covers elements in an underlying purchase agreement such as the representations and warranties, tax opinion and contingent risks like an on-going litigation or environmental matters for example.
Clearly here the growing demand for this product is being driven by the want, and sometimes need, for the risks (both lucrative in the short term and strategically important) associated with transactions to be transferred to the insurance market.
Private Equity firms, funds and corporates specialising in mergers and acquisitions use transactional risk insurance to help facilitate the deals in which they’re involved. Interestingly, and not surprisingly, negotiators on both sides use this insurance product as a deal tool to achieve a tactical advantage in negotiations and especially auction scenarios which naturally have the potential to increase the investment rate of return and thus are more likely to satisfy the ever more vigilant Limited Partners.
The vast majority of those entities using Transactional Risk Insurance are based in Europe, the Middle East & Africa but there is a significant rise which is emanating from Asia Pacific and the Americas. As the number of clients requiring this type of insurance rises, so does the opportunity and therefore the appetite in the insurance market. Good news for the clients – as a more competitive market matures this inevitably results in reduced premiums and broader, “catch all” cover.
What next?: Insurers are going to have to differentiate themselves from new entrants with more flexible offerings if they wish to strengthen their books of business to bolster first the top, then the bottom line…