As deal numbers have surged and buyers, sellers and their advisors have become more familiar with M&A insurance, demand for the product has been rising. As a result, the UK market has become increasingly crowded with an influx of new entrants leading to fierce competition. This has resulted in what would appear to be a number of benefits for buyers of M&A insurance as rates have been driven down and carriers have looked to extend coverage in order to win business. But people looking for M&A insurance still need to be selective and tread with care.
The latest AIG M&A Claims Intelligence Series shows that while frequency remains highest for the largest, most complex deals, the number of claims is increasing across the board – around one in five policies now results in a notification. And these claims are getting bigger. We have seen a doubling of claims valued over $10 million, from 8% to 15%, with the average claim size being $19 million. Should anyone need reminding, M&A insurance is a severity product in which policies can incur large losses.
It is also one that can have a relatively long tail. While around three-quarters of claims are notified within the first 18 months from policy inception, we’ve had a steadily increasing number of claims coming in later, with around 15% between 18 to 24 months and 12% beyond that. So it’s vital when selecting an M&A insurer that you can be confident not just that they have the necessary balance sheet strength, but that you have confidence they will still be around to handle any claims.
A number of MGAs offering M&A insurance have set up in the UK market, many of which are run by excellent underwriters with deep knowledge and expertise of the product. However, capacity for MGAs is provided in a different way – insurance capacity providers may only commit themselves for a limited period of time. If the capacity providers pull out of the M&A insurance market after the transaction has completed but before any claims come to light, you might find that the capacity provider who insured your deal isn’t underwriting M&A business anymore, so it’s important to consider what that could mean for the handling of any claim.
Every transaction is different, with a multitude of different factors that can come into play, and so understanding how the terms of the policy should apply to any given unique situation can be a challenging exercise, even for those most familiar with the transaction. Those who choose a well-established insurer with a long track record of smooth claims handling have the added benefit of knowing any payments that need to be made will come from that insurer, meaning that there is only one party involved in making the key decisions.
People looking to take out M&A insurance, on either side of the deal, need to make sure that they're not just thinking about buying the policy as quickly as possible, but also about what might go wrong. Once they’ve got their head around the range of products and providers in the market they will be in a better position not to make decisions based purely on short-term considerations, as this could ultimately prove to have repercussions that come back to haunt them.
Michael Turnbull - M&A Manager - North America & UK