Insurance for corporate transactions, known as representation and warranty coverage (R&W), is becoming increasingly common among buyers and sellers engaged in global mergers and acquisitions. According to Marsh, demand for R&W jumped 35% over the past 12 months, even as M&A fell off. “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, senior vice president in the private equity and M&A practice at Marsh.
Some of the increased demand, Lloyd-Thomas says, comes from U.S. buyers and sellers using R&W coverage to counter risks associated with investing in Europe and Asia. U.S. buyers account for 36% of R&W insurance purchased over the past year, with European firms accounting for another 52%.
Even as demand for coverage has grown, rates have held steady. “Over the past seven to eight years, rates fell by half,” Schioppo says. “But now the increased demand is not pushing rates up.” While premiums five years ago came to about 5% to 6% of the coverage amount, they have fallen to about 2% to 3%. One reason, Schioppo suggests, is that more insurers are offering the policies, increasing competition. Seven major companies now offer transactional insurance, including Hartford, Chartis and Concord Specialty Risk.
Markus Bolsinger, a partner at the New York-based law firm Kirkland & Ellis, argues R&W coverage is likely to become routine in M&A deals.