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M&A coverage costs increase with losses



A revival of mergers and acquisitions coming out of the pandemic has resulted in a record number of deals and an unprecedented demand for representation and guarantee insurance, say industry experts.

As coverage has become more widely used and the pace of business has accelerated, more claims are filed, and as insurance companies' payouts increase, the price of a scratch and warranty policy has increased.

Offers are also facing more scrutiny as insurers are more selective in the risks they write in response to the overwhelming level of benefits, experts say.

Prices are hardening due to the claims environment and the "sharp increase" in the number of insurance-seeking transactions, says Allyson Coyne, Philadelphia-based CEO and chief broker and chief administrative officer of M&A and transaction solutions at Aon PLC. [1

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Interest rate hikes began in 2020 and have seeped into 2021, with the average online interest rate for primary reps and warranty agreements increasing "about three tenths of a percentage point above the average at the same time 2020," said Coyne.

Some "Small business, healthcare business is very challenging to get placed when there is so much volume in the market right now," she said.

"A rising M&A tide raises all insurance boats" says Rowan Bamford, London-based President of Liberty Global Transaction Solutions, a unit of the US insurance company Liberty Mutual Insurance Co.

Insurance is seen as an increasingly important business tool. more business ", said Bamford.

Prices in America have risen up to 25% since the third quarter of 2020, driven in part by increased claims activity, Liberty Mutual said in a September report. The region sees a higher share of "high" and "medium" serious claims and more claims for the entire tower boundary, the report says.

The prices of major transactions have seen a "significant increase", says Stavan Desai, Head of New York-based M&A at Mosaic Insurance Holdings Ltd.

The larger a transaction is, the more insurance markets are generally involved in providing an adequate level of insurance, and usually the primary market will charge a higher interest rate because it takes the greatest risk, Desai said.

"For a $ 3 billion deal where you might. To get $ 300 million in insurance coverage, the primary market offered a $ 25 million limit and maybe priced it at a 5% interest rate online a few years ago," he says. "Now we see prices at 6.5%, 7.5%. … We had a tower that was priced at 8.6% quite recently, he says.

The market has been going on and insurance companies are trying to keep pace with the demand for additional manpower and availability and setting more boundaries in the market, says Larry Shapiro, San Francisco-based CEO and representatives and guarantees insurance team leader at Alliant Insurance Services Inc.

"Some took the opportunity to correct that course to a level they felt better reflects the risk exposures covered, while others have used pricing as "a proxy for managing business flow," Shapiro said.

The latter trend has spread to more material aspects of coverage, he said. Insurers manage capacity by taking the deals they believe they can carry out in the most efficient way or "they quote tougher deals but on terms that have more material limitations than they may have in the past". he said.

Insurance companies are more likely to change representatives and guarantees in contracts for coverage purposes than they have done in the past, says Michael Wakefield, vice president and transaction manager for transaction insurance at CAC Specialty, which is based remotely in Tennessee. "I have seen more awards of a purchase agreement for insurance purposes," he said.

Insurance companies are also introducing more restrictive restrictions on data protection and cyber security, and in some cases environmental and product liability issues, he said (see related history, below).

Now that representatives and guarantee insurance are a standard source of coverage in a transaction, insurance companies have their choice of business and they do not have to be as accommodating anymore, says Randi Mason, co-director of corporate practice at law firm Morrison Cohen LLP in New York.

"Where I see the biggest change is that insurance companies are kicking the tires because of accuracy that buyers are doing much deeper than before," Mason said.


Insurance companies are paying more attention to the scope of what is covered by a scratch and warranty policy and inserting more restrictions, especially around exposures to data breaches and data protection, experts say.

Data protection and cybersecurity are an area where insurers can point to other insurance coverage as primary sources of recovery for the client, says Michael Wakefield, executive vice president and transaction insurance manager at CAC Specialty, which is based remotely in Tennessee.

“In the past, it was more likely not to have specific exceptions to these issues. We see insurers drawing tighter limits for that now, says Wakefield.

Increased insurance review of M&A agreements makes negotiations more complex, says Randi Mason, co-director of corporate practice at the law firm Morrison Cohen LLP in New York.

In a recent transaction, the insurer sent six pages of questions to the buyer in the middle market and proposed exemptions covering topics such as business, taxes, insurance, benefits, intellectual property / cyber, real estate and economic issues, Ms. In Mason. "Ultimately, there were over 15 to 20 contract-specific exclusions in the policy, in addition to exceptions for known violations," she said.

Standard exclusions for coverage – which include breaches of contract, forward-looking statements and purchase price adjustments – have remained "fairly consistent" even with changes in the market, says Paige Brewin, chief insurance officer, transaction manager at QBE North America.

"A trend we are seeing with the hardening market is that there is a greater need to negotiate terms early, even in the listing stage, before the insurer has become engaged," Brewin said.

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