In its most recent Global M&A Insurance Index, JLT Specialty (JLT), the specialist insurance broker and risk consultant, reported a 76% increase in the number of M&A insurance policies they placed year on year when comparing H1 2017 to H1 2016. The findings highlight significant growth in the Mergers & Acquisitions (M&A) insurance market linked to falling rates and lower retention levels as a result of increasing competition. This type of M&A insurance, also known as Warranty and Indemnity (W&I) insurance is designed to protect buyers against breaches of warranties that are discovered post completion.
In its half-yearly update to the Global M&A Insurance Index, JLT found that average premium rates fell considerably from their 2015 level. Premium rates now average at 1.16% versus 1.54% in 2015, representing a 25% drop. Due to this considerable movement in rates, far more of the policies for deals with an enterprise value of under £10m are hitting insurers' minimum levels. As a result the average premium rating for deals below £10m is now higher than the market average.
Meanwhile, new market entrants competing for smaller deals and wider market growth has led to a 44% fall in average policy retention rates. This significant reduction delivers noteworthy benefit to the insured - with the retention almost halved, insurers are now required to pay losses far sooner in the event of an insured claim, meaning that the seller can retain even less liability.
JLT's report has not shown a notable increase in the average limit of insurance purchased compared with the previous year. The findings do make clear, however, that the level of cover sought is directly linked to the size of the deal, with smaller transactions often using insurance up to the full deal value.
The real estate sector continues to be one of the main users of M&A insurance, representing 27% of total deals bound by JLT outside the US. Alongside this, retail and consumer and IT/technology/communications are increasingly frequent users.
Aside from W&I insurance, JLT experienced a marked increase in the number of requests for standalone tax liability insurance. This underlines that the desire to ring-fence tax issues is becoming a greater consideration when doing an M&A deal, where there is an increased need to manage multiple risk angles.
Ben Crabtree, Partner, Mergers & Acquisitions, JLT Speciality, said: ‘We look forward to the half year update of our M&A Insurance Index because it allows us to give our clients real time benchmarking information by sector, jurisdiction and deal size as well as commentary on the state of the market.
‘The growth in use of M&A insurance has been fuelled by a number of factors ranging from falling premium rates to a reduction in retention rates. In fact, the scope of what is achievable is evolving constantly and we want to ensure our clients have exactly what they need to make the best insurance decisions on their deals today.'