Minimizing M&A Risks

Transactional insurance sees a surge in demand, particularly for midsize transactions, Marsh reports.

two men under an umbrellaInsurance for corporate transactions, known as representation and warranty coverage (R&W), is becoming increasingly common among both buyers and sellers engaged in global mergers and acquisitions. Marsh says demand for R&W insurance has jumped 35% over the past 12 months, even as M&A fell.

“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. “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.” 

Schioppo says that even as demand for transactional coverage has grown significantly, rates held steady. “Over the past seven to eight years, rates fell by half,” he says, “but now, the increased demand is not pushing rates up.” While the premium for R&W insurance five years ago came to about 5% to 6% of the coverage amount, it is now down to about 2% to 3%. One reason, Schioppo suggests, is that the number of companies offering these policies has grown, increasing competition among providers. There are currently seven major companies offering transactional insurance policies, including Hartford, Chartis and Concord Specialty Risk.

Markus Bolsinger, a partner at the New York-based law firm Kirkland & Ellis, argues that R&W coverage is likely to become routine and increasingly in demand in M&A deals going forward.

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