Lockton’s latest Transactional Risk Market Update delivered timely insights into the trends shaping today’s transactional risk market. Expanding on its findings, Harry Blakelock (pictured), partner, transactional risks at Lockton, highlighted how macroeconomic pressures, including high inflation, rising interest rates and global economic uncertainty are influencing deal-making.
Economic turbulence has reduced investors' confidence, he said, resulting in a more cautious approach to mergers and acquisitions (M&A). There is a disparity in valuation expectation levels between buyers and sellers, leading to uncertainty and reducing overall transactional activity.
“This is being driven by differing perspectives on market conditions and future performance,” he said. “Elevated borrowing costs are reshaping deal structures, so buyers are either repricing deals to accommodate higher financing costs or renegotiating terms, further slowing the pace of transactions.
“The insurance market is currently experiencing a soft rate environment, leading to price pressures. This soft market can be attributed to increased competition from new insurers, relatively low loss ratios and excess capacity in the market.”
Collectively, these headwinds challenge both deal-making and the transactional risk insurance market’s profitability, Blakelock said, but, despite this, there are new products that could provide opportunities to drive its evolution and growth. In 2023-24, Lockton observed significant demand for warranty and indemnity (W&I) insurance solutions in secondaries transactions, driven by the overall strength of the sector.
The secondaries market, valued at $150 billion and expected to reach $1 trillion by the end of the decade, is expanding rapidly, he said, with growing awareness of secondaries among investors. With growing recognition of Intellectual Property (IP) as a critical asset in many deals, products that protect buyers and sellers against IP-related risks are gaining traction.
“Moreover,” he said, “the appetite for tax-related coverage continues to grow, with insurers developing innovative solutions to address specific risks, such as tax credit eligibility. The W&I space is ripe for innovation to cater to evolving deal structures. For example, simplifying the underwriting processes through digital tools and analytics can make policies more accessible.
“Offering more flexible coverage to address emerging risks like ESG liabilities or regulatory changes is another opportunity that underscores the potential for the transactional risk market to adapt and thrive. Lastly, the uptake of digital and AI solutions is likely to continue, as insurers look to streamline their workstreams to enhance user experience.”
As to what’s driving the strong demand for W&I insurance – and whether it’s a trend that can be expected to continue into 2025 – he noted that the growing demand for this coverage reflects several compelling trends across the sector. Technology, media, and telecommunications (TMT) remain the largest contributors to bound deals, he said, a continuation of patterns seen in 2022-23.
Digital infrastructure and real estate have also sustained their strong showing, fuelled by an increase in AI tools and tighter data retention regulations. The manufacturing sector stands out for its remarkable growth thanks to a more stable macroeconomic climate and increased interest in acquiring transformative technologies.
“The rising demand for clean energy projects, such as wind, solar, and battery energy storage systems (BESS), has made W&I insurance indispensable, offering crucial risk mitigation for these high-stakes investments,” Blakelock said. “Favourable pricing, particularly for small-to-medium enterprise (SME) deals, has further cemented the appeal of W&I.”
Offering an overview of the broader market conditions in the W&I insurance sector, he highlighted that market conditions are soft, following a slow period for M&As, and underwriters’ appetite for transactional risk insurance remains extremely strong. In turn, this has created an attractive environment for W&I insurance buyers.
Pricing, as always, depends on the level of risk involved, he said. Asset-backed, property sectors, including renewable energy and real estate are generally considered lower risk and therefore tend to secure more favourable rates. “Conversely, industries subject to stringent regulation often undergo greater scrutiny from insurers and face higher rates. This trend is reflected in our data. Real estate deals had an average rate on line of 0.6%, significantly below the portfolio-wide average. On the other hand, financial services deals averaged 0.97%, among the higher rates.”
Looking to 2025 and what the next year looks set to bring for the transactional risk space, Blakelock emphasised that market fundamentals remain sound. Deal flow should pick up as interest rates fall and the delta between buyers and sellers’ valuation expectations decrease. With the dollar strengthening following the US elections, he believes Europe will continue to be an attractive market for US buyers.
“Recent months have seen signs of upwards rate movement from the historic lows of earlier in the year,” he said. “Looking ahead, whether this continues will depend on a number of factors. With sustained growth in technology adoption, regulatory pressures, and the transition to renewable energy, W&I insurance is poised to remain a vital tool in deal-making.
“Additionally, as insurers continue to innovate with enhanced coverage options, the relevance and appeal of W&I insurance will only increase, underpinning its enduring role in M&A transactions.”
