Insurers are finding that there are fewer M&A deals to write and therefore decreasing insurance rates
The economic fall out from the coronavirus pandemic will likely see a ‘significant capacity crunch’ that is expected to hit the M&A insurance market in 2021.
This is also combined with continued notification of claims from prior years, and the issue is exacerbated further by rates for other more traditional lines of insurance increasing up to double-digit figures.
Meanwhile, M&A insurance rates are currently decreasing as insurers find there are fewer M&A deals to underwrite.
This is according to broker Howden in its ‘2020 EMEA M&A Insurance Claims Report’, which considered the impact of Covid-19 on M&A insurance activity.
It analysed the claims data from warranty and indemnity (W&I) policies placed with Howden on more than 1,000 deals over the past five years.
The report found that premium rates have dropped by approximately 50% over the past five years.
This is including an approximate 10% drop during 2019. Premium rates are no longer reflective of claims rate increases and the broader cover now offered under W&I policies.
Anna Robinson, director and head of claims at Howden M&A and co-author of the report, said: “As the number of notifications has increased, so has the complexity and quantum of claims.
“Without a doubt, well advised clients who present insurers with detailed evidence of a warranty breach and loss calculation experience a smoother claims process, and secure greater pay-outs. Claims brokers have a key role to play in this, with both our clients and insurers comforted by the value we add to the claims experience.”
And Joe O’Brien, co-managing director, at Howden M&A and fellow co-author of the report, said it shows that a pricing correction is likely early in 2021 as several MGAs will struggle to secure the capacity they currently enjoy as insurers weather the storm of M&A and Covid-19 claims.
“In such an environment, advisory focused brokers, with fulsome jurisdictional coverage and expertise across multiple M&A insurance product lines will be the ones who can best meet client requirements,” he said. ”The days of non-UK W&I policies being placed by London-based brokers are numbered, with local presence and legal expertise demanded by European clients, especially post-Brexit.”
Meanwhile claim volumes across EMEA over the past two years are being made at a rate of approximately one in every seven policies, whereas they were made in approximately one in every 11 policies during the previous three years.
And it found that M&A claims were longer tailed than many predicted, for example most insurers expected claims to arise within two years of completion. However, Howden data suggests 5% of claims are made three or four years after policy inception, with that percentage expected to rise going forward.
Large deals have been found to generate more notifications, and Howden’s report stated that there is clear evidence that deals with a value greater than €1bn generate significantly more notifications than those below €1bn in value.
Over the past five years, insurers have been willing to cover deals of this size. Whereas prior to 2015 most insurers focused on mid-market transactions, valued between €50m and €500m, which generate much lower claims volumes.
Mega broker consolidation
Drew Wardrope, co-managing director at Howden M&A, added: “We have continued to support our clients throughout the current crisis and responded to their changing needs, whether through the use of W&I policies to boost returns on distressed sales or by facilitating the release of trapped cash using contingent risk insurance.
“Our company culture is focused on independence and People First, meaning our employees are empowered and will go the extra mile for clients. Against a backdrop of mega-broker consolidation, we continue to attract the best talent in the market and to invest in subject matter experts who can advise clients on how to secure the best possible cover.”
But it said that claims can vary by jurisdiction, however underwriting and pricing does not reflect this trend.
By way of example, the claims rate on Italian deals is approximately four times more than Nordic deals, but they are only priced approximately 1.5 times more.
Lastly, tax warranties are the most commonly breached, accounting for 27% of all breaches. Material contracts and financial statements warranty breaches are the next most common, each constituting 20% of all breaches.