Cyber risk overshadows 2024 M&A activity
Intensifying cyber threats drive interest in transactional risk insurance as a dealmaking condition.
Amid rising cybersecurity risk and intensifying M&A activity, dealmakers are pushing for insurance before any papers are signed.
A recent Gartner survey showed 60% of organizations will use cybersecurity risk as a primary determinant when engaging in M&A activity by 2025.
“There is a growing appetite for transactional risk insurance,” Michael Wakefield said, executive vice president and transactional insurance practice leader at CAC Specialty.
“At a high level, transactional risk insurance allows deal parties to transfer risk relating to an M&A transaction to insurance carriers,” he said. “Representations and Warranties Insurance (RWI), tax, and contingent risk are all types of transactional risk insurance covering breaches of representations and warranties made by the seller in the purchase agreement. When used in an M&A context, tax and contingent risk insurance generally cover known risks identified during diligence.”
Meanwhile, “Cybersecurity issues that arise post-closing can be so severe as to undermine a target company’s value and threaten the entire investment,” Wakefield added.
According to a PwC report, large transactions carried M&A activity the last six months. Between mid-November 2023 and April of this year, 145 insurance transactions worth over $34 billion were announced, compared to 318 transactions totaling $11.2 billion from the previous six month period.
Wakefield said, “RWI is used regularly by deal parties in pretty much all industries and deal sizes, from a few million dollars to well into the billions of dollars in enterprise value.”
“Deal parties have come to appreciate the benefit of transferring risk to insurers,” he continued. “This lets buyers and sellers proceed after the transaction closes without having to navigate conflicts surrounding post-closing indemnity obligations. Instead, they address those with a strong insurer partner.”
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