Firms are increasingly using transactional risk insurance to resolve the risk issues that arise in their most complex transactions, according to a new report by Marsh. Growth in the global transactional risk insurance market is currently underpinned by a sharp rise in demand in emerging territories, amid continued development in mature markets such as the United States and Europe, the company added.
Research conducted by Marsh's private equity and mergers and acquisitions (“M&A”) services practice, “Transactional Risk Solutions: Global Review,” revealed that the limits of transactional risk insurance placed by Marsh globally in the first half of 2014 had increased by 59 percent on the same period in 2013, rising to US$3.5 billion.
In the U.S. and Canada the amount of buyer-side representations and warranties insurance, used by clients to protect themselves against breaches of representations and warranties in acquisition agreements, has increased by 225 percent on the same period in 2013, according to the company.
Private equity sellers have been driving bidders in auctions to accept buyer-side representations and warranties insurance in lieu of a traditional escrow, to achieve a cleaner exit. Marsh also reported an increase in the use of representations and warranties insurance in the U.S. on transactions greater than US$500 million, signaling growing awareness and confidence in the product among the private equity and legal communities.
Karen Beldy Torborg, global leader of Marsh's private equity and M&A services practice, commented, “Awareness of how insurance can be used to mitigate the risks associated with mergers and acquisitions is on the rise among the deal community in jurisdictions where take-up rates have historically been lower, such as Poland, the Philippines, South Africa, and South America.”
Craig Schioppo, managing director in Marsh's U.S. private equity and M&A services practice, and leader of the transactional risk team, said, “Increasingly, buyers in the U.S. are using representations and warranties insurance strategically to differentiate their bids. Seller-initiated buyer-side representations and warranties policies, which have traditionally flourished in Europe, are also increasingly being used in the U.S. to enable sellers to free up capital for new acquisitions.”
Marsh also reported that claims notifications under representations and warranties insurance policies are increasing in line with market growth. “An increase in claim notifications and paid insurance claims for breaches of representations and warranties in private market mergers and acquisitions are by-products of the significant growth in the market since 2010,” concluded Mr. Schioppo.
Learn more: http://usa.marsh.com/.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].