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A lucrative opportunity may be emerging for brokers who can facilitate transactional risk insurance for their clients after a recent study found demand for the coverage is soaring across Asia-Pacific.
According to Marsh’s annual Transactional Risk Report, the region’s competitive merger and acquisition atmosphere resulted in record numbers adopting the insurance in 2017 and early 2018.
Globally, the firm placed 28% more transactional risk insurance policies in 2017 compared to the previous year, with Asia-Pacific adoption in line with global figures.
Commenting on the report, Sara Stebbing – Marsh’s head of transactional risk – said 2017 had been a particularly successful period and was the third consecutive year with transaction volumes in excess of US$3 trillion.
“This growth is a function of increases in average deal size as well as the number of transactions where insurance is used,” she said. “We are also up around 50% year-on-year for the first six months of 2018.”
Stebbing also pointed to increased interest from corporate and strategic buyers as one of the reasons behind the recent surge.
“In previous years, the majority of purchases were made by private equity firms, but the dynamics are changing here in Australia and across the broader Asia-Pacific region,” she said.
However, across the Pacific business, corporate buyers now represent 90% of policy purchasers, which was once almost exclusively the domain of private equity firms. Globally, corporate buyers account for just half of policy purchases.
The Marsh report also indicated an increased take-up of transactional risk insurance across all classes of policies which cover exposures related to M&A transactions – including warranty and indemnity (W&A) insurance, liability insurance, and contingent liability insurance. The study also reported an increase in the number of sellers opting to run competitive auction processes, which resulted in a rise in the number of sellers who required bidders to acquire W&I insurance as part of the transaction.
“These deals attracted more strategic bidders looking to purchase competitors – or to expand or diversify their businesses through acquisitions – than in previous years, which in turn led to an increase in their use of W&I insurance,” said Stebbing.
In 2017, Marsh saw a 10% increase in the number of warranty and indemnity opportunities generated from cross-border transactions involving both Australian inbound and outbound investments.
More than a third of Marsh’s W&I insurance placements in 2017 had a cross-border component and W&I insurance was chosen by parties and advisors involved in the transaction as a risk mitigating tool where there was some unfamiliarity with jurisdiction, tax and legal framework and overall risk exposure. So far in 2018, cross-border transactions account for 47% of deals.
Importantly, pricing is also falling dramatically – dropping 19% in 2017 after a 3% drop in 2016.
“In Australia, premium rates continued to come down, fueled by greater amounts of insurance capital and increased competition between insurers,” said Stebbing. “New entrants have bolstered competition in the W&I market, encouraging established providers to consider alternative options on how to distinguish themselves and to provide innovative coverage. This will continue.”
