Lockton’s Transactional Risk Market Update highlights strong demand for warranty and indemnity (W&I) insurance throughout 2023-24, driven by a recovering UK mergers and acquisitions (M&A) market.
The firm reported placing policies for transactions with an aggregate value of £14 billion over the period, up from £13.2 billion the previous year. However, the data also reveals a 3% decline in average transaction values, reflecting increased use of transactional risk insurance in SME acquisitions amid historically low pricing.
W&I insurance pricing fell to its lowest point in 2023-24, with the average rate on line decreasing to 0.91%. According to Lockton, asset-backed and property-heavy sectors such as real estate recorded rates as low as 0.6%, while regulated industries like financial services saw higher rates at 0.97%.
Infrastructure and technology, media, and telecommunications (TMT) transactions attracted rates exceeding 1%, reflecting their higher risk profiles.
Lockton noted an increase in W&I market capacity over the last year, with additional offerings from underwriters including Aviva, Chubb, and Devonshire. Insurers are offering broader coverage, particularly in lower-risk sectors, but are also differentiating themselves by underwriting more complex risks with higher rates.
For example, real estate transactions continue to benefit from improved coverage terms, while sectors like renewable energy have seen an uptick in W&I use due to high demand for clean energy investments.
TMT remained the most active sector for W&I insurance, consistent with the prior year. Lockton attributed this to increased M&A activity in digital infrastructure and data centre transactions, driven by artificial intelligence advancements and tighter data regulation.
Real estate and manufacturing also saw significant activity, with manufacturing moving up eight positions in Lockton’s rankings, reflecting stable macroeconomic conditions and a focus on acquiring new technologies. Renewable energy entered the top five sectors for the first time, underpinned by strong demand for wind, solar, and battery storage system (BESS) projects.
Lockton also observed growing demand for US-style representations and warranties insurance (RWI) policies among private equity sponsors acquiring European assets. These policies, while more expensive at 2.5–3% of the limit, offer broader coverage than traditional European W&I policies.
RWI adoption reflects a 61.5% year-on-year increase in US-backed acquisitions in Europe, supported by the relative strength of the US dollar.
The market for tax insurance outside of transactional contexts continued to grow. Lockton reported increased appetite for bespoke tax policies addressing potential legislative risks and compliance issues. This trend mirrors broader adoption in the US market, where custom tax coverages have expanded significantly. Non-transactional tax insurance is expected to become a staple feature across the business lifecycle.
Contingent and litigation risk insurance (CLRI) also saw increased interest, particularly following high-profile losses in the US. Lockton anticipates higher pricing and reduced limits for CLRI policies in the near term, with market capacity for single risks likely to remain between US$5 million to US$10 million, and towers above US$50 million proving challenging to assemble.
Lockton’s data reveals that tax breaches accounted for 32% of W&I claims notifications in 2023-24, surpassing financial statement breaches at 24%. Compliance with laws was the third most common breach type, at 16%.
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The market’s low claim volume but high severity dynamic continues to shape policy structures, with insureds increasingly opting for policy enhancements such as indemnity-based damages and exclusions of general disclosure.
Looking ahead to 2025, Lockton expects deal flow to increase as interest rates decline and valuations stabilise. With significant capital awaiting deployment, private equity activity is anticipated to grow, particularly in mid-market transactions. However, signs of upward rate adjustments may emerge as loss ratios pressure insurers' profitability.
Lockton also projects continued adoption of digital and AI tools by insurers to improve efficiency and client experiences.
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