The use of a specialised risk transfer mechanism is essential in dealing with the constantly growing financial exposures and other risks faced by the merger and acquisition environment, according to one insurer.
In its annual whitepaper,
Chubb has singled out cyber security, transactional risks and multinational expansions as the three key financial exposures inherent in M&A transaction and offers suggestions on how to mitigate them.
“The M&A environment is evolving at a rapid pace and, as a result, private equity dealmakers are constantly facing growing financial exposures, including cyber security, transactional risks and multinational expansions,” Chubb’s M&A and private equity practice leader Seth Gillston said. “While one size does not fit all, the use of a specialised risk transfer mechanism to deal with these and other risks is essential to ensuring transactions proceed with greater clarity and confidence.”
Gillston co-authored the whitepaper with Steven Goldman and Michael Tanenbaum, both executive vice presidents of Chubb’s financial lines division.
According to Osterman Research, 2016 was the worst year on record for cyberattacks, with nearly half of all businesses surveyed held captive by ransomware incidents alone.
Tanenbaum said forensic analysis of a target acquisition’s cyber risk may no longer provide a credible assessment in determining a company’s exposure after a deal closes.
“One way to mitigate the risk is to seek cyber insurance coverage from a carrier… that specialises in M&A transactions, and also offers loss mitigation services as part of their cyber program,” Tanenbaum said. “Working with a knowledgeable broker is also crucial in identifying the right solutions and partners to help customise these types of risk transfer strategies.”
In order to effectively address transactional risk and streamline the process, a representations and warranties insurance policy should be considered, it was suggested.
“This risk transfer strategy helps protect buyers and sellers against financial exposures related to the underlying transaction,” Goldman said. “The representations and warranties insurance policy is a great alternative risk management tool compared to escrow accounts or other traditional indemnification structures, because of its flexibility. Such a policy also streamlines the negotiation process and reduces deal friction that is often inherent in transactions.”
Chubb said companies that operate across international boundaries already face a set of special challenges and opportunities. In today’s highly uncertain geopolitical climate, transactional activities involving multinational entities are subject to rapidly evolving regulatory, legal and compliance issues.
“From a due diligence standpoint, sifting through a multinational company’s insurance portfolio to address the risk of unforeseen liabilities and insurance coverage gaps can be very difficult,” Gillston said. “Using a controlled master policy as a risk transfer strategy can help companies involved in a transaction reduce exposures by pairing a master policy, issued in the US, with locally issued coverage. This provides consistency across operations, and can help solve inadequacies of an entity’s insurance portfolio.”
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