Demand for transactional risk insurance soars 35% in 12 months

Businesses around the world are increasingly buying transactional risk insurance in a bid to protect revenue and assets from the risks they face on acquisition and upon exit or sale, notes a new update from Marsh.

Total policy limits for insurance purchased by clients rose by 35% to $2.3 billion in the first half of 2012 compared with the first half of 2011, the company notes in Marsh Insights: Transactional Risk Update, released on Oct. 22.

The limits of transactional risk insurance placed in the first six months of 2012 were as follows: Europe, the Middle East and Africa (EMEA), $1.29 billion; Asia Pacific, $109 million; and the Americas, $897 million.

Growth in the Americas and EMEA is fuelled by an increase in the average limit of insurance being placed per transaction and solutions becoming increasingly used on larger transactions, the report notes. The largest deal that Marsh worked on in 2012 to date had a transaction value in excess of US$5.5 billion.

“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,” Lorraine Lloyd-Thomas, a senior vice president in Marsh’s Private Equity and Mergers & Acquisitions (PEMA) Practice, notes in a company statement.

In 2012, Marsh reports that 60% of the policies placed worldwide were for corporate sellers or buyers, which are typically more cautious on the amount of warranty protection they require in a transaction than private equity counterparts.

The report offers transactional risk global statistics for the first half of 2012 related to both seller-side and buyer-side representations and warranties (R&W) policies as a percentage of R&W policies placed. For the former, it is 35% for EMEA, 45% for Asia Pacific and 22% for the Americas. With regard to the latter, it is 65% for EMEA, 55% for Asia Pacific and 78% for the Americas.

“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,” Lloyd-Thomas says.