Growth in Demand for Transactional Risk Insurance
Businesses globally are increasingly turning to the insurance market for transactional risk protection in a bid to shield their revenue and assets from the risks they face on acquisition and upon exit or sale, according to insurance broker and risk adviser Marsh.
The group’s report, entitled ‘Marsh Insights: Transactional Risk Update’, states that the total policy limits for transactional risk insurance purchased by clients increased by 35% to US$2.3bn in the 12 months to June 2012. Marsh also reports that 60% of the policies placed worldwide in 2012 were for corporate sellers or buyers, which are typically more cautious on the amount of warranty protection they require in a transaction than their private equity counterparts.
“Demand for transactional risk insurance has soared as both buyers and sellers worry about how to protect their positions during a deal,” said Lorraine Lloyd-Thomas, a senior vice president (SVP) in the private equity and mergers and acquisitions (PEMA) practice at Marsh. “We are increasingly seeing sellers build transactional risk insurance into the M&A process in order to exit with minimal post-closing warranty exposure, while at the same time preventing buyers from seeking to reduce the purchase price.
“US buyers are traditionally more risk-averse and are leveraging transactional risk insurance to counter the risks associated with investing overseas in Europe and Asia. We expect the use of transactional risk insurance to become increasingly common in larger and more complex deals, given the reassurance it provides to all parties involved.”
By geography, the limits of insurance placed in the first six months of 2012 were: Europe, Middle East and Africa (EMEA) US$1.29bn; Asia Pacific US$109m and Americas US$897m. In particular, rapid growth in the Americas and EMEA is being fuelled by clients buying higher than average limits of insurance per transaction and the solutions increasingly being used on larger deals.