Transactional risk insurance 2021: Year in review

Transactional risk insurance includes policies that cover risks related to M&A, such as representations and warranties (R&W) insurance (also known as warranty and indemnity (W&I) insurance), tax insurance, and other types of contingent liability insurance.

Mergers and acquisitions (M&A) snapshot

Last year was an extraordinary year for mergers and acquisitions 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 US$5.9 trillion across 63,000 transactions — an increase of 64% on the previous year (see Figure 1). The fourth quarter marked the sixth consecutive quarter with deal values over US$1 trillion, reaching US$1.5 trillion in the quarter alone.

A combination of favorable deal environment factors remained intact throughout 2021, including persistently low interest rates, robust uninvested private equity funds, strong strategic investor balance sheets, responsive credit markets, and the rising number of special purpose acquisition companies (SPACs). All these elements led to fierce competition for assets and record levels of announced and completed transactions.

Transactional risk insurance placements by Marsh globally reflected the backdrop of the favorable M&A market, coupled with the increasing adoption of the product by financial sponsors and strategic investors, alike. Marsh results showed accelerated growth with substantial increases in aggregate limits placed (up 73%) and the number of insured transactions (up 79%). The purchase of transactional risk insurance continues with parity between both private equity and strategic investors, as they represented roughly 51% and 49% of placed limits, respectively.

Global trends

Transactional risk insurance includes policies that cover risks related to M&A, such as representations and warranties (R&W) insurance (also known as warranty and indemnity (W&I) insurance), tax insurance, and other types of contingent liability insurance.

In 2021, transactional risk insurance limits placed globally by Marsh totaled US$81.1 billion — an increase of 73% on the previous year (see Figure 2). These limits were spread over more than 3,000 policies on over 1,900 transactions — an increase in deals of 69% from the prior year.

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. Overall capacity can support limits in excess of US$1 billion for a single transaction, depending on region and deal parameters.

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Last year proved to be a challenging year for the transaction risk insurers, notably so in the second half, as global demand pressed the capacity and execution capabilities. That demand is self-evident, as the global placements completed by the major markets rose to new heights. Transactional risk insurance remains an established deal solution in the M&A marketplace, seeing wider adoption across industries, geographies, and transaction sizes. Tax and contingent risk insurance solutions continues to expand their role in the transaction environment and we anticipate that this trend will persist.

Pricing increases were universal last year, while varying across geographies. Capacity constraints compounded the rate increases, so we anticipate some rate moderation in the medium term, as deal activity normalises, annually allocated capacity is reopened, and new market entrants begin writing business. Overall capacity expansion is likely in 2022, along with modest pressure for rate relief and continued policy innovation. Claim notifications are rising, and the speed of notification is accelerating, but time will tell how these correlate with payment dollars. It is logical to assume claims activity will rise based on transaction volume, and the increased number of transactions alone.

Last year has demonstrated that transactional risk insurance is a highly responsive, as well as important and growing, part of the M&A deal environment and we expect this to continue moving forward.

Transactional risk insurance 2021: Year in review

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”