Broker believes ’M&A insurance is definitely coming of age’ as deals using this cover increased by 25% between Q4 2019 and Q4 2020

This year is set to be a ”record year for M&A insurance”, according to broker BMS Group’s inaugural Redefining M&A insurance for the 2020s report , published this month.

Comparison of perceived and actual claims risks

Comparison of perceived and actual claims risks

Statistics within the report showed that 51% of those operating in the M&A insurance market believe sellers’ financial statements are the biggest concern for clients when considering areas of risk covered by warranty and indemnity (W&I) policies.

The observation that financial statements are a key risk correlates with buyers’ experiences of making W&I claims - this risk was the basis for claims in 32% of cases out of the 48% of buyers responding to the broker’s survey.

In comparison, the areas that clients believe are high risk do not match up to the causes of claims. For example, material contracts were rated as a leading risk by only 10% of clients, yet it was the cause of 20% of M&A insurance claims.

Tan Pawar, managing director and head of private equity, M&A and tax for BMS in London, said: “2020 was an incredibly busy yet turbulent year for M&A and our inaugural report is the first to provide a uniquely user-centric view on the way in which M&A insurance interacts with the wider transactions domain across the globe.

“We believe this is critically important given the many changes in deal volume and transaction processes that have occurred in the last year given the impact of the pandemic.”

M&A cover ‘coming of age’

Transactions using M&A insurance in 2020 v 2019 (quarter breakdowns including Q1 2021)

Transactions using M&A insurance in 2020 v 2019 (quarter breakdowns including Q1 2021)

When looking at the number of transactions using M&A insurance compared to the same period in 2019, Q4 2020 saw a 25% uplift. Q1 in 2021 also saw an increase of 21%.

Further fuelling global growth, around two in three private equity transactions use M&A insurance in the UK. However, the distribution of this insurance in 2020 sits at 21.8%, facing the biggest drop across the world of 1.1% compared to 2019.

Considering pricing, the research results showed that this is still the most important component for end users when selecting an insurer for M&A cover (46%).

Pawar added: “While claims have risen over the past few years, pricing has remained competitive and M&A insurance has become integral to the deal process. M&A insurance is definitely coming of age.

“We believe that 80% of private equity transactions in North America now use M&A insurance, while in Europe and the UK the proportion is now firmly around two in every three deals.”

BMS Group is an independent specialist insurance and reinsurance broker.

Its report aims to provide a holistic viewpoint on the way in which M&A insurance interacts with the wider M&A market in the UK and across the world, as well as to provide insight into behaviour and trends post-pandemic.