In its fourth annual Global M&A Insurance Index, JLT Specialty (JLT), the specialist insurance broker and risk consultant, has found that a drop in premium rates in 2017 led to an increase in insurance cover for mergers and acquisitions (M&A) transactions, signalling that clients prefer greater levels of protection and enhancements to their policy beyond the traditional “standard” scope of Warranty and Indemnity (W&I) insurance.
In its latest full year update to the annual benchmark, JLT noted that the average policy limit for deals outside North America continued to rise, representing 28% of the deal size in 2017 as compared to 25% in 2016 and 22% in 2015. During the same period, premium rates as a percentage of the limit purchased dropped from 1.87% in 2015 to 1.35% in 2016 to 1.15% in 2017. This indicates that, on average, W&I insurance policies in transactions were 15% cheaper last year than in 2016 and 39% cheaper than two years ago.
JLT reported that policy retentions have reduced significantly, and are 41% lower than 2016. Real estate remains the sector with the lowest average policy retention at just 0.85% of the deal value – with insurers now giving options with nil retention structures if needed. This means that clients are able to access policy payments from the first £1 of loss, subject only to the standard small claims thresholds that are always applied in sale agreements.
For the first time, the JLT Global M&A Insurance Index showed a decisive shift toward sellers being a driving force behind the introduction of W&I policies. In 2017, 52% of sellers facilitated the introduction of such a policy as part of the deal (versus 48% of buyers). Despite this, the numbers skewed towards buyers at deal closure with 93% of policies in the buyer’s name. The reason for this is that sellers are continuing to see W&I insurance as a means of securing a completely clean exit from a transaction. A W&I policy gives the buyer protection and allows the seller to walk away following completion.
Examining the W&I market by different jurisdictions, the report indicates that policyholders in the UK and Asia purchased policy limits twice as high as their counterparts in the US and Northern Europe. This could be due to the variance in risk appetite but may also reflect that premium rates in both Asia and the UK have fallen considerably in 2017 – by 35% and 23% respectively.
Ben Crabtree, Partner, Mergers & Acquisitions, JLT Specialty, said: “We have seen a material drop in the cost of M&A insurance policies over the last 24 months and our experience is that those insured have elected to increase protection rather than take the cost saving. It is rare in our experience for clients to ask us to focus on premium as their key requirement. At the outset we can give them comfort on costs based on our experience in the market and our data. Instead, our clients ask us to secure broader cover, tax specific cover and higher policy limits.”
“It is clear that insurance has become an integral part of the M&A transaction process, and that – with more insurers writing M&A insurance – there are solutions available whatever the underlying deal structure, jurisdiction or dynamic. The M&A market as a whole is embracing the use of these policies, as institutional investors, corporates, individuals and the full spectrum of the tax and M&A advisory community buy into how M&A insurance can be used to address risks in transactions.”