Major increase in use and scope of transactional risk insurance, says Marsh

The record-breaking merger and acquisition (M&A) environment in 2021 resulted in substantial increases in aggregate limits placed and the number of insured transactions, according to Marsh Specialty’s report, Transactional risk insurance 2021: Year in review. The report reveals that the transactional risk insurance limits placed globally by Marsh Specialty in 2021 totalled $81.1bn, an increase of 73% over the previous year, with these limits spread across more than 3,000 policies and 1,900 transactions, an increase of 69% against 2020 results. Private equity and strategic investors represented roughly 51% and 49% of placed limits, respectively. The report explains that last year was an extraordinary year for M&As across many regions and industries. Global M&A activity set new records in terms of the number of deals and total deal value, which exceeded $5.9trn across 63,000 transactions – an increase of 64% on the previous year. The fourth quarter marked the sixth consecutive quarter with deal values over $1trn. This increase in demand tested the capacity and execution capabilities of the transactional risk insurance market, resulting in occurrences of ‘surge pricing’ due to the high deal volume particularly in the second half of 2021, as underwriters struggled to meet demand for cover at existing capacity levels, says Marsh. Lucy Clarke, president, Marsh Specialty & Global Placement, said: “Rising global demand is testament to how transactional risk insurance is an established deal solution in the M&A marketplace, and is regarded as a critical enabler by both buyers and sellers alike. We expect this demand to continue throughout 2022, as we work with our clients to find innovative solutions to manage their M&A risks and protect their portfolios.” Transactional risk insurance capacity continued to expand in 2021, with almost 40 underwriters (both company markets and managing general agents) offering primary terms for coverage globally, the report states, adding that overall capacity can support limits in excess of $1bn for a single transaction, depending on region and deal parameters. In North America, Marsh placed coverage for 999 transactions in 2021, a 71% increase on the previous year. The North America team placed 1,847 combined primary and excess policies in 2021, amounting to a 78% rise over 2020, representing $37.86bn in limits – nearly doubling the limits placed, year on year. Client demand for transactional risk insurance increased dramatically in North America, and Marsh says the market struggled to meet this demand. The report says that after a slight increase in rates for representations and warranties (R&W) insurance in 2020 in North America, primary layer R&W pricing jumped more than 40% year on year, attributed in part to growth in both the frequency and severity of claims. “However, the principal reason for the magnitude of the 2021 increase was ‘surge pricing’ during the flood of deals in the second half of the year, particularly in the fourth quarter, which was exacerbated by the limited pool of underwriters,” it states. However, total insurer capacity in North America continues to exceed $1bn in limits for any single transaction, and nearly 25 underwriters are presently offering terms on a primary basis. In Europe, the Middle East and Africa (EMEA), there was a significant increase in the use of transactional risk insurance in 2021, driven by the underlying record M&A volumes in the region. Across EMEA, Marsh placed close to 1,000 transactional risk policies for deals with an aggregated enterprise value in excess of $277bn and with total limits in excess of $35.9bn, representing a policy count growth across the region of close to 74%. In 2021, insurers were more selective as to which transactions they quoted and the latter part of the year saw a material increase in pricing, according to the report. It notes that there was a significant increase in the average transaction size in 2021 – the average deal value was $370m, an increase of 64% on 2020. Marsh also says: “Programmes of insurance syndicating capacity from multiple insurers were increasingly more common across EMEA, particularly on private equity, mid-market transactions, where historically insurance has been placed with one insurer. We expect this trend to continue in 2022.” Asia also saw a large increase in M&A activity in 2021, resulting in a capacity shortage in the region’s warranty and indemnity insurance market, which in turn led to a general increase in average rates. Deal count increased from 87 to 127 last year, an increase of 46%, with India, Japan and the Association of Southeast Asian Nations (ASEAN) making up the bulk of that deal activity, Marsh says. Average rates increased generally across Asia from 1.60% to 2.25%, year on year. Average insured deal size also increased sharply from $295m to $360m in 2021. Looking forward to 2022, Marsh says it expects an expansion of overall capacity this year, as well as some downward pressure on pricing following the sharp increases in 2021, as more new entrants move into the market and established insurers grow their existing capabilities.

Major increase in use and scope of transactional risk insurance, says Marsh

Limits increased substantially globally, amid surge pricing in 2021

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