M&A limits soar amid increased foreign investment

Increased appetite in M&As in new jurisdictions has seen transactional risk insurance limits rise globally by 155% in three years, according to Marsh.

The uncertainty about risks attached to M&As for investors pursuing opportunities in new jurisdictions has led to buyers seeking protection with more cover for warranty and indemnity (WI).

Typical WI rates in Europe fell from a traditional 4% or 5% 10 years ago, to an average premium rate of 1.55% in 2013 in Europe, Middle East and Africa (EMEA). This has been mirrored by a fall in retention levels from 3% or 2% a decade ago in Western Europe, to a typical 1% of the transaction value in EMEA.

Both factors, along with the increasing appetite for new jurisdictions from investors, have been significant drivers in the growth of the M&A insurance market as sellers are able to make clean exits with little to no liability, and buyers are enticed by the WI insurance as a recourse in the case of a warranty breach.

Speaking today at the launch of Marsh’s insight report, M&A Transactional Risk Solutions: Global Growth Special Edition, Lorrain Lloyd-Thomas, senior vice president at Marsh private equity and M&A services practice, said: “The transactional risk insurance market has rapidly evolved from being largely concentrated in Western Europe and the US in 2010 into the global industry it is today.

“The push into new markets over the past 10 years has been huge, with Asia-Pacific the perfect example.”

Marsh’s Asia-Pacific has team placed an increase of 143% on insurance limits since 2010 and experienced the greatest growth of all Marsh’s transactional risk solution teams, while Germany and South Africa also experienced pronounced utilisation of the cover.

The increased demand for transactional risk insurance means insurers must adapt to a highly competitive marketplace which assistant vice president Private Equity and M&A, David Cooper believes will be a learning process as they grapple with pricing.

Cooper said: “Insurers were initially cautious, but it’s a very competitive market.

“It’s going to be a case of experience over time as there is not a long claims history or large quantity of data, although the history is building.”

Lloyd-Thomas said the current market situation will encourage innovation and gives insurers the chance to differentiate themselves, and that the early stages of the market’s maturity means it is .

She said: “New entrants to the market, coupled with falling premiums have fuelled product innovation as insurers look for new ways to differentiate themselves from competitors and sustain their books of business.

“Clients are taking full advantage of this.”