An uptick in M&A activity has increased demand for insurance to cover these transactions 

The UK and Ireland has seen the highest penetration of insurance products to support merger and acquisition (M&A) transactions with premiums at c.$250m (£1.93m) compared to Iberia at c.$110m (£84.95m), Germany with c.$100m (£77.23m) and France and the Nordics, which both record premiums around c.$50m (£38.62m) for warranty and indemnity (W&I) insurance.

There have been three main drivers for this growth trend in Europe – a strong European M&A market, increased awareness of insurance solutions and transactions and that it is now more attractive and easier to purchase insurance propositions to cover M&As.

This is according to Aon’s recent report, Insurance for M&A: A coming of age and an exciting future aheadwhich was published this month.

The research also revealed an uptick in M&As has caused significant growth for cover in the M&A marketplace.

It analysed data from law firm Allen and Overy, finding that 3,200 deals were transacted globally last year using W&I insurance – a policy that first emerged in the 1990s. It found that market value for these peaked at $2.3bn (£1.78bn), which was an increase of 35% since 2014.

The report found that there has been a growth in synthetic policies, with W&I insurance pushing the boundaries of how M&A transactions are structured.

Synthetic warranties are new and could potentially disrupt or replace traditional W&I models, representing a significant change to the way deals are done.

Meanwhile, W&I insurance remains the largest product by premium volume. Buyers and sellers are also looking to tax insurance, litigation and contingency insurance and bespoke products that include environmental or cyber policies.

The report further identifies a growing demand for US-style W&I policies in Europe, driven by US buyers trying to drive US terms and structures into European sale agreements.

Aon Inpoint, which published the aforementioned report, is the management consulting and advisory arm of (re)insurer Aon; it highlighted that the recent challenging economic environment has meant that M&A interest rates have remained low, company balance sheets are stronger and deal activity has risen particularly with private equity firms.

Economy biggest driver

The report stated that the single biggest driver for insurance products in the M&A marketplace is the economy, with much of the megadeal activity being driven by this. However mid-size deals are more resilient in cyclical conditions.

Several other factors have positively influenced the uptake of insurance products including more risk averse buyers, an increasingly seller friendly market, acceptance of products by the M&A community, more capacity and a relatively benign claims environment in comparison to other classes of business.

Meanwhile there has been a downturn in M&A activity in Europe, the Middle East and Africa (EMEA) this year. Alistair Lester, chief executive at Aon M&A and transaction solutions EMEA, said that despite this trend, “it is striking to see the see continued strong demand for insurance solutions in transactions”.

“Buyers, sellers, and legal and professional service firms are fully aware of the value of insurance during the transaction process and this has culminated with improved infrastructure within the insurance market. Insureds now have access to more sophisticated products, a wider choice of providers, larger coverage limits, lower premiums, and services such as capital advisory and consultancy.”

Emerging opportunities

Rohan Dixon, chief executive and president of Aon Inpoint, explained that for an insurer or an MGA, working out how best to capture the opportunities begins with an understanding of the likely evolution of the marketplace.

Aon Inpoint has developed forecasts for the growth of the marketplace in Europe including evolutions in coverage and how local markets will operate.

Dixon said this aims to help insurers identify where opportunities are, how to access them and how they can improve their capabilities and offerings to better serve buyers and sellers in the M&A environment.

But the report warns that claims handlers must keep up with market demands; although only a small number of claims in the UK or European courts have been litigated, it is difficult to judge the full scale of W&I claims.

Challenging the market

Aon has challenged the market to invent more innovative solutions to meet client demand for greater downside protection in the public markets. Aside from ‘Public Offering of Securities’, insurance products have only touched on public M&A and as such there are very few warranties provided. This includes structuring and placing a surety bond as a way of backing a cash confirmation obligation in a UK public takeover.

Moreover, Aon Inpoint predicts that tax insurance will grow in Europe but will not overtake W&I. However larger carriers in Europe can expect growth of 20% in M&A that is related to gross written premiums (GWP) to be derived by tax insurance products by the year 2025.

Lester added: “Aon expects to see increased awareness and uptake of the products as insurers begin to offer broader coverage, serve local European markets and penetrate the small and medium deal size bracket. Tax insurance will be a major growth area, as the value proposition of tax insurance products extends past the M&A deal itself.”

Tax insurance also has the potential to penetrate outside the immediate M&A timeline as international tax becomes more complex to navigate and therefore warrants protection.

Aon Inpoint said that 2019 has seen a significant increase in both market capacity and individual underwriters with appetite for tax risk.

“The M&A community has shown that it values the enabling role that insurance can play and has increasingly challenged the industry to develop ever more innovative solutions to meet the challenges it faces. Insurers that can respond to this need and find creative ways to deploy capital will be well placed to benefit from the opportunities presented,” Lester noted.

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