Total policy limits for transactional-risk insurance have increased by 35 percent to $2.3 billion in the 12 months preceding June 2012, reports Marsh, showing that businesses are turning to the insurance market for protection from the risks of mergers and acquisitions.
This trend was reported by Marsh Insight's Transactional Risk Update, released Monday, which monitors the need for products that protect deal participants from due-diligence risks and negotiations that may prevent a transaction from closing.
“Demand for transactional-risk insurance has soared as both buyers and sellers worry about how to protect their positions during a deal,” says Lorraine Lloyd-Thomas, a senior vice president in Marsh's Private Equity and Mergers & Acquisitions (PEMA) Practice. “We are increasingly seeing sellers build transactional-risk insurance into the M&A process in order to exit with minimal post-closing warranty exposure, while at the same time preventing buyers from seeking to reduce the purchase price.”
Lloyd-Thomas says U.S. buyers are “traditionally more risk-averse and are leveraging transactional-risk insurance to counter the risks associated with investing overseas in Europe and Asia.” She adds that transactional-risk insurance will likely become increasingly common in large, complex deals “given the reassurance it provides to all parties involved.”
Sixty percent of global policies placed this year were by corporate vendors, compared to only 40 percent of those placed by private equity holders.
Marsh says, “Corporate clients are continuing to turn to R&W [representations & warranties] insurance on the buy-side as they face limited indemnity positions from private equity sellers.”
Marsh notes that 66 percent of R&W policies were placed by the buyers, while 34 percent were placed by the sellers.
Geographically, limits placed in the first half of 2012 were in Europe, the Middle East and Africa (EMEA) for $1.29 billion; in the Asia Pacific at $109 million and at $897 million in the Americas.
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