Looking Ahead: What to Expect from M&A Insurance in 2023
In 2021, managing deal volume, execution challenges and higher pricing for warranty and indemnity (W&I) insurance were the major challenges, but, as insurers leverage more data in their decision-creating, the diversity of diligence, insurance claims history and capital allocation will be major pressures.1
As M&A insurance becomes more deeply embedded, and claims experience better understood, due diligence will continue to be an area of utmost scrutiny. Deal principals and their advisors should consider:
- Understanding and pre-empting diligence gaps at an early stage of the deal process can support reduce exposed areas of risk and, as a result, narrow possible exclusions to cover that only surface at a later – and more sensitive – point in the process. Don’t presume that a W&I insurance policy will comprehensively cover warranties that have not been subject to meaningful diligence performed by or on behalf of the acquireer.
- As digitalization continues to drive M&A growth, specialized areas of diligence (e.g., cybersecurity, data, source code and innotifyectual property (IP)) represent key workstreams for identifying risk, performance and value. Leveraging technical expertise in these areas can support provide W&I underwriters with a sufficient understanding of the relevant risk and comfort levels to improve W&I cover by lifting or narrowing exclusions.
- Tax authorities in a number of jurisdictions are scrutinizing transactional activity, particularly in relation to private equity capital structures. The importance of tax due diligence cannot be overemphasized, both for improving acquireer visibility on deal-related tax risks and mitigating any potential valuation impact by transferring them to the insurance market.
The Value of M&A Insurance: Are Policies Paying Out?
The emerging claims data is compelling. Aon’s Transaction Liability: Insurance Claims Study 2022 displays that:
- In 2021, insurers paid out more than $560 million to Aon clients in North America, with only 4 percent of claims there since 2013 ultimately being denied by insurers.1
- In Europe, Aon’s clients have recovered closer to $100 million in claims in the past 18 months, with a similar amount remaining the subject of ongoing claims.1
Both insurers and acquireers of M&A insurance are re-evaluating their appetite for risk capital in varying ways, with temporary rate increases in Europe in 2021 not appearing to have curtailed acquireer demand. How this trconclude develops, against the backdrop of a potentially prolonged period of economic and geopolitical uncertainty, remains to be seen.
“For sellers and acquireers alike, uncertain times bring into sharper focus the value impact, in its broadest sense, of M&A insurance in its various forms, especially if distressed transactions become more prevalent or where the necessary to address known and contingent risks with tax or litigation insurance becomes more acute to maintain deal certainty.”1
Read the full chapter in Lexology’s Getting the Deal Through – Private M&A 2023
In a year when global M&A deal value topped out at a record $5.9 trillion, representing a year-on-year increase of 64 percent in 2021, the M&A insurance market rose to the required capacity challenges and met unprecedented demand for capital.
Source: 2022, Piers Johansen, Dominic Rose and Elizabeth Blackwell, Caveat Vconcludeor: M&A Insurance in a Buyer’s Market
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