WI insurance on the rise in APAC as investors look to ‘de-risk’ deals

Investors are cautiously pursuing merger opportunities in foreign jurisdictions and pushing insurance limits higher than ever before, according to research published this week by Marsh’s private equity and merger and acquisition (M&A) services practice.

Marsh’s Asia-Pacific team has placed an increase of 143% on insurance limits since 2010 and experienced the greatest growth of all the firm’s transactional risk solution teams.

The broker’s transactional risk leader in Asia-Pacific Josh Roach (pictured) told StrategicRISK that private equity firms and corporates continued to be active in M&A in Asia-Pacific, “albeit with a much more risk-aware approach”.

“Warranty and indemnity (WI) insurance is particularly widely used for cross-border transactions where private equity was looking to exit portfolio companies, often structuring the insurance for the buyer to ultimately take-up,” Roach told SR following the launch of Marsh’s insight report, M&A Transactional Risk Solutions: Global Growth Special Edition.

“We expect the utilisation of WI insurance to continue to increase, as investors look to de-risk deals and more insurers offer this niche solution, which helps to bring the cost lower and broaden coverage terms.”

Increased appetite in M&As in new jurisdictions has seen transactional risk insurance limits rise globally by 155% in three years, according to report. The uncertainty about risks attached to M&As for investors pursuing opportunities in new jurisdictions has led to buyers seeking protection with more cover for WI.

Senior vice president at Marsh private equity and M&A services practice Lorrain Lloyd-Thomas said that the transactional risk insurance market had evolved from being largely concentrated in Western Europe and the US in 2010 into a global industry.

“The push into new markets over the past 10 years has been huge, with Asia-Pacific the perfect example,” she said.

The increased demand for transactional risk insurance means insurers must adapt to a highly competitive marketplace, which assistant vice president private equity and M&A David Cooper believes will be a learning process as they grapple with pricing.

“Insurers were initially cautious, but it’s a very competitive market,” he said.

“It’s going to be a case of experience over time as there is not a long claims history or large quantity of data, although the history is building.”

Lloyd-Thomas added that the current market situation would encourage innovation and give insurers the chance to differentiate themselves.

“New entrants to the market coupled with falling premiums have fuelled product innovation as insurers look for new ways to differentiate themselves from competitors and sustain their books of business,” she said.

“Clients are taking full advantage of this.”