Transactional Risk Insurance 2020: Year in Review

US and Canada Transactional Risk Insurance Market Reaches Record Highs

The transactional risk insurance market had a tumultuous year in 2020. Despite challenges related to the pandemic, the US and Canada transactional risk marketplace remained robust – signaling that transactional risk insurance will be increasingly important for insurers and merger and acquisition (M&A) players.

Mergers & Acquisitions Snapshot

After some early momentum, M&A activity came to a screeching halt in the second quarter of 2020. But, the second half told a different story, with deal volume soaring to record heights.

Overall US M&A activity was down 21% by value and 16% by deal count from 2019, according to data from Mergermarket. After swings throughout the year, the fourth quarter yielded a total of $545 billion in deal value – the highest on record, according to Mergermarket. 

Figure 1: Overall US Deal Volume

 

Transactional Risk Insurance Market Overview

The transactional risk insurance market charted a similar course in 2020 (see Figure 2). After what started off as a promising year — with Marsh closing what was then a record 157 transactional risk placements in the US and Canada in the first quarter — deal volume was cut in half in the second quarter. But like the overall M&A market, transactional risk activity recovered significantly. Our team closed 92 deals in the third quarter and 259 in the fourth quarter — a new record for Marsh and a 77% increase from the fourth quarter of 2019. 

Figure 2: Marsh Transactional Risk Insurance Activity

 

Trends in Representations and Warranties Insurance (R&W) 

From 2015 to 2019, rates for representations and warranties (R&W) insurance steadily declined. That trend, however, halted in 2020. 2020 marks the first year that primary rates are sitting above 3% since 2017, which we attribute principally to two factors: 

  1. An increase in the frequency and severity of transactional risk claims.
  2. “Surge pricing” during the flood of deal activity in the fourth quarter. 

Claims concerns continue to influence insurers’ approaches to pricing, and we expect rate increases to continue in the short-to-medium term.

The Increasing Importance of Transactional Risk for Insurers

The marketplace for transactional risk insurance stayed strong in the US and Canada last year, despite the many challenges presented by the pandemic. Insurers continue to show their commitment to the sector, and deal participants are using transactional risk insurance across a multitude of industries. 

The events of 2020 confirmed that transactional risk will continue to play an integral role in the M&A marketplace. However, there are challenges ahead to be aware of, including a continued increase in claims frequency and severity, rising prices, and a focus by insurers on pandemic-related exclusions.