Potential buyers purchase insurance to protect themselves against issues such as a target's misrepresentation of its performance or order book, whereas sellers purchase insurance to ensure a smooth exit.
After years of falling rates due to tough competition, 2021 was the first year that M&A insurance rates rose since the market began more than two decades ago, according to Andrew Johnson, director of M&A at broker Paragon.
According to some in the insurance industry, a lack of due diligence has resulted in an increase in claims, while the boom in mergers and acquisitions has resulted in significantly higher premiums.
"We saw incredible deal volumes from August/September last year, which encouraged insurers to raise rates," said James Swan, a partner at insurance broker McGill and Partners.
According to Rowan Bamford, president of Liberty Global Transactions Solutions, COVID resulted in claims being processed more quickly.
"With the pandemic and issues around doing proper diligence on businesses, perhaps there has been some process cutting," he said, adding that buyers were unable to visit businesses easily due to restrictions, and that competition for deals may have encouraged haste.
According to a recent Liberty report, the time required to complete due diligence was sometimes cut in half.
Adrian Furlonge, partner at Hemsley Wynne Furlonge, stated that on a couple of M&A transactions, the broker received notification of a potential claim very soon after closing, implying that insufficient research had been conducted in advance.
"Everyone has been trying to do too much in too little time," Furlonge said.
According to industry sources, manufacturing and healthcare were among the sectors that had seen a high number of claims, with workforce and supply chain issues causing companies to not always deliver on their promises.
Most M&A insurance disputes are resolved behind closed doors and only become public if arbitration is unsuccessful. According to sources, this has not yet occurred for claims filed since the pandemic began.
Global M&A activity reached a new high of $4.33 trillion in the first nine months of 2021, up 97 percent from $2.2 trillion in the first nine months of a pandemic-hit 2020, as companies prepared for life after COVID.
Swan stated that the M&A insurance market has grown to more than $5 billion from less than $3 billion a year ago, and that a contract he was working on in Europe was priced at around 1.9 percent of the available cover, up from around 1% a couple of years ago.
Caroline Rowlands, an executive director at insurance broker Howden, said that rates for some deals in the United Kingdom had risen to 1.5 percent of the cover provided, up from 1% previously.
And, according to William Monat, global head of transactional liability at insurer Mosaic, rates for some U.S. deals have risen to around 4% of cover from below 3% previously.
CUTTING CORNERS?
Whereas private equity firms used to buy the majority of M&A insurance, corporates are increasing their purchases, according to industry sources.
"With the pandemic and issues around doing proper diligence on businesses, perhaps there has been some process cutting," he said, adding that buyers were unable to visit businesses easily due to restrictions, and that competition for deals may have encouraged haste.
According to a recent Liberty report, the time required to complete due diligence was sometimes cut in half.
Adrian Furlonge, partner at Hemsley Wynne Furlonge, stated that on a couple of M&A transactions, the broker received notification of a potential claim very soon after closing, implying that insufficient research had been conducted in advance.
"Everyone has been trying to do too much in too little time," Furlonge said.
According to industry sources, manufacturing and healthcare were among the sectors that had seen a high number of claims, with workforce and supply chain issues causing companies to not always deliver on their promises.
Most M&A insurance disputes are resolved behind closed doors and only become public if arbitration is unsuccessful. According to sources, this has not yet occurred for claims filed since the pandemic began.