M&A insurance buoyant as premiums and retentions fall, JLT Specialty survey finds

The mergers and acquisitions (M&A) insurance market is facing “significant growth” linked to falling rates and lower retention levels as a result of increasing competition, a new report from specialist insurance broker and risk consultant JLT Specialty Limited has found.

In its most recent Global M&A Insurance Index half-year update, released on Monday, JLT Specialty reported a 76% increase in the number of M&A insurance policies they placed year-on-year when comparing H1 2017 to H1 2016. This type of M&A insurance, also known as warranty and indemnity (W&I) insurance, is designed to protect buyers against breaches of warranties that are discovered post completion, the brokerage explained in a press release.

In addition to the 76% increase in M&A policies, JLT Specialty also found that average premium rates fell considerably from their 2015 level. Premium rates now average at 1.16% compared to 1.54% in 2015 – a 25% drop. “Due to this considerable movement in rates, far more of the policies for deals with an enterprise value of under [10 million pounds] are hitting insurers’ minimum levels,” the release said. “As a result, the average premium rating for deals below [10 million pounds] is now higher than the market average.”

Meanwhile, new market entrants competing for smaller deals and wider market growth has led to a 44% fall in average policy retention rates. This significant reduction delivers noteworthy benefit to the insured – with the retention almost halved, insurers are now required to pay losses far sooner in the event of an insured claim, meaning that the seller can retain even less liability, JLT specialty reported.

One aspect that has not seen a “notable increase” is the average limit of insurance purchased compared with the previous year. “The findings do make clear, however, that the level of cover sought is directly linked to the size of the deal, with smaller transactions often using insurance up to the full deal value.”

The real estate sector continues to be one of the main users of M&A insurance, representing 27% of total deals bound by JLT Specialty outside the United States. Alongside this, retail and consumer and IT/technology/communications are increasingly frequent users.

Aside from W&I insurance, the brokerage experienced a marked increase in the number of requests for standalone tax liability insurance, underlining “that the desire to ring-fence tax issues is becoming a greater consideration when doing an M&A deal, where there is an increased need to manage multiple risk angles.”

JLT Specialty reported that it provides industry knowledge and expertise in specialist fields to some of the world’s largest companies. JLT Specialty is part of the Jardine Lloyd Thompson Group of companies (JLT), a provider of insurance, reinsurance and employee benefits-related advice, brokerage and associated services. The brokerage owns offices in 39 territories, with more than 10,000 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.