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Transactional risk insurance demand surges

Demand for transactional risk insurance, which provides coverage to protect parties on either side of a merger or acquisition (M&A) transaction against losses arising from Warranties & Indemnities (W&I) breaches and other risks, has surged with North America emerging as the largest market.

Despite the effects of the coronavirus pandemic, cross border deals continue to be agreed ensuring the transactional risk insurance market remains active and key indicators suggest that US buyers are lined up to make a number of transatlantic deals. Mergers and acquisitions (M&A) in the global insurance industry rose in the first half of 2020 with 201 completed deals worldwide, up from 197 in the second half of 2019, according to Clyde & Co’s “Insurance Growth Report” mid-year update.

Significantly, US buyers are asking for what is termed “hybrid cover” rather than European style warranties & indemnities (“European W&I”) insurance. They require the indemnification coverage to be offered through U.S. style representations and warranties (“U.S. R&W”) insurance.

Comprehensive disclosure remains key to avoiding contention and hybrid coverage requires that at least one of the deal parties have a connection to the US; the deal should be structured using a U.S. style purchase agreement and the seller’s disclosure schedules that accompany the purchase agreement must use U.S. style disclosure. With an increase in demand, it is vital the insurer can provide adequate cover and has knowledge of both European W&I and U.S. R&W insurance, local laws and transaction formats.

Transactional risk insurance can help mitigate deal risk and has been adopted by investors globally, fundamentally changing how M&A deals are done in the middle market. It’s one of the most significant corporate trends of the past decade and common transactional risks relate to ownership of equity and assets, tax liabilities, financial statement accuracy, intellectual property, employee benefits and regulatory compliance proprietary data.

The North American market has seen pricing reductions, larger transactions, and increased limits purchased. In Asia, there has been notable growth in South Korea and China and a sharp market capacity expansion in the Pacific market.

Mark Dutton, Executive Director at W Denis Insurance Brokers Plc, said: "W Denis is well positioned to work closely with buyers and sellers to procure market leading insurance on M&A transactions, across a range of industries. Our extensive network of specialist underwriters have a wide appetite for small and large deals, which W Denis and our specialist partners can address for transactions all over the world."

Richard Bowdidge is the W Denis contact for M&A transactions and can be contacted at richard.bowdidge@wdenis.co.uk and on 00 44 (0)203 713 3976

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