Transactional risk market set to rebalance on back of M&A activity, says Chubb

Chubb’s new international transactional risk platform will initially focus on EMEA risks but will look to expand further in a market where it believes the current imbalance between supply and demand is set to level out as merger and acquisitions (M&As) rebound.

Chubb launched its global transactional risk unit last month after pulling back from the international market back in 2020 to focus purely on North America. The firm chose to consciously step back from the international market and analyse where and how it could and should participate in the broader transactional risk space.

The insurer has bided its time before returning, but believes the time is now right to re-enter as M&A’s start to pick up and clients begin to demand more global solutions as confidence returns.

The international unit will initially focus on EMEA risks but will add resources over time to potentially expand further, Edward Markovich, executive vice-president of Chubb transactional risk, told Commercial Risk. “If there are viable opportunities for us to use capital in other places, we intend to try to do that,” he said.

Markovich said that warranty and indemnity will be the “bread and butter” transactional risks covered by Chubb internationally, and the unit may well bring its tax expertise to global clients. “We have a specialised tax underwriter working with us in North America, and if there are viable opportunities, we may decide to do that internationally as well. So those are our primary risks,” he said.

The unit’s main target clients will focus on large, strategic investors and well-known private equity firms that operate in the middle market on deals from $50m to $1bn, or even higher.

“That is the sweet spot where we would typically deploy our capital. That is primarily what we do in North America and we expect that to be the same internationally,” said Markovich.

The insurer has appointed Josh Cowen as senior vice-president of international transactional risk to lead the initiative from London. He has nearly 15 years of experience in the transaction risk market and will report to Lance Fraser, senior vice-president of Chubb transactional risk. The overall business will be headed by Markovich.

“Josh’s expertise is important to us. His appointment, and to secure a person of this calibre, highlights our commitment and investment in this space. This will be a global business with one leadership team. I can’t stress enough the importance of that in the success and offerings for our clients,” said Markovich.

He said currently there is “robust” competition in the transactional risk market, with a “fair amount” of capital chasing deals. This growing capacity has come from brand new market entrants as well as those returning after pulling back, such as Chubb, he explained.

Chubb believes that with M&A predicted to pick up, this supply demand imbalance will level out and create a more competitive market for risks.

“We know that the supply is there – now we are looking for the demand side to really pick up. With M&A picking up, the overall environment for this insurance should become a bit more balanced as far as carriers are concerned. I still believe there will be robust competition, but once there are more deals to be had, there won’t be as much competition on every deal,” he said.

“From a macro standpoint, there are a lot of factors over the last couple of years that have led to a downward trend in the broader M&A market, which naturally led to a downward trend in demand for these insurance products. I think the market will come back, and when it does we will be ready to engage and transact,” added Markovich.

The insurer pointed out that there are a number of macro indicators trending in the right direction that look set to drive M&A.

“There is the overall economics, with inflation and the interest rate environment looking to improve to drive the availability to credit, and there is a positive sentiment in the economy. That spurs people to engage in transactions that they otherwise might have hesitated over, and bridges the gaps in valuations between buyers and sellers, which I think has been a big issue over the last few years, with buyers and sellers too far apart. Lastly, in the private equity space there is a lot of dry powder that needs to be deployed. From their vantage, once the macro indicators are trending in the right direction, it should spur more M&A activity and demand for insurance cover,” he said.

Chubb expects cyber risk to become an increasing M&A exposure given the legacy risk in acquiring businesses. It also thinks there needs to be more focus on customer relationships and customer contracts that are causing post deal claims activity, as well as focus on financial statements.

Risk and insurance managers play a pivotal role in liaising with stakeholders involved in M&A transactions, as well as procuring coverage terms from the various insurers in the transactional risk market, said Markovich.

“In my experience, the risk managers would sometimes be asked to review the target company’s insurance coverages. But outside of that, the risk managers are really more focused on how they will integrate the insurance functions going forward and how they make sure the coverage they are getting for the M&A is comprehensive. They are typically not involved in mitigating risk involved in the deal. That is more the negotiating team and lawyers,” he said.

“Risk managers procure the cover mostly, but they work closely with the corporate or business development team that is working on the transaction, to ensure they are in synch with one another. This insurance is somewhat unique in that it is a one-off cover and there are no renewals.” he added.