Huge increases in premiums scupper deal-making chances

Rising insurance costs have stalled major mergers and acquisitions (M&As).

An M&A expert at broker Marsh said the hard insurance market slowed deals and stopped private equity houses using in-house estimates of insurance costs.

UK private equity and M&A practice chief operating officer Marc Bennett-Coles said insurance costs affected M&As in two ways, both of which impact on the underlying profit of the company involved.

"It makes a difference when a company is bought out of a parent company, so it has an internal premium allocation that doesn't necessarily reflect how much its premium would be in the open market," he said.

"The other circumstance is when those companies, who placed their insurance when the market was relatively soft 12 or 18 months ago, at renewal face huge increases in premium."

Bennett-Coles said the pharmaceutical industry was particularly hard hit.

"There was one deal in pharmaceuticals, where the company was paying $160,000 (£99, 486) in an internal llocation," he said.

"In the insurance market they wanted $1.6m (£994,861).

"This had a huge impact and delayed the deal considerably.

"The second one was even more extreme, in the chemical derivatives market.

"The company had enjoyed a soft premium of €5m (£3.2m), but it went up to ¤15m (£9.8m) in the harder market.

"This meant that the deal took eight months to do, which is considerably longer than we would usually take to do such a deal."

"It's making people much more cautious about how they structure deals and make them happen."

Bennett-Coles said use of business risk teams had increased in a bid to improve loss records and mitigate premium increases.

But he said private equity houses had not become completely accustomed to the jump in insurance costs.

"Instead of working on in-house prices of insurance in that sector, they're saying they want us to go into the market and confidentially find out what the price might be," he said.