Interest, good claims record prompts rapid growth in transactional risk insurance market

By Josh Bradford on May 2, 2016

NEW YORK CITY – The transaction risk insurance market has grown leaps and bounds in a remarkably short amount of time; in fact, 2015 saw a record number of representations & warranties policies written globally.

The rapid growth and interest in the market translated into a sold-out crowd at Advisen’s Transactional Insurance Insights Conference this week in New York.

“Five years ago, we may have been able to get 20 to 25 people together and talk about the subject,” said Peter Rosen, partner at Latham & Watkins and conference chair. “Ten years ago, no one would have even tried to host an event similar to today.”

He added, “We’re probably looking at approximately 750 policies written in the US in 2015 and 2,000 written globally. And the prediction is that the market is going to continue to grow as it is covering approximately only 15 percent of all private deals.”

Panelists agreed that the market’s positive track record on paying claims has assisted its meteoric growth.

“It’s about claims. I think that’s the key to the success,” said Craig Schioppo, transaction risk practice leader, managing director, FINPRO, Marsh. “Beyond enhancing terms and finding the right price point, the market has done a really good job handing claims. If you buy a policy, you expect it to respond.”

Representations and warranties insurance, by far the most-widely-used transaction risk insurance product, is designed to protect a seller or buyer from financial loss resulting from inaccuracies in the representations and warranties provided by the seller as part of an acquisition or sale of a company or a business. In the past, the coverage was primarily a reactive product used to close a gap between the buyer and seller.

“Today, it has become increasingly attractive because it is being used strategically by buyers to differentiate their bids in an auction process,” said Jeffrey Anderson, North American mergers & acquisitions group lead, Allied World.

The panelists agreed that the vast majority of policies are being purchased by the buyers in a transaction.  Buyers include private equity, opportunistic corporates, pension funds, insurers and sovereign wealth funds, and strategic corporates – which are producing a lot more activity of late.

With regards to limits, retentions, and premium, “the limits purchased are usually a function of the deal size and they vary typically between 10 and 20 percent of deal value,” said Edward Markovich, senior vice president of transactional risk at Chubb. “The retentions are also a function of the deal size and are typically in the two-percent and below range. The premiums can be between two and four percent of the limits purchased but typically fall between three and three and one half percent.”

The success of the product is attracting more insurers to the market. The flood of capacity is expected to drive down prices.

“We’ve seen a 60 percent increase in submissions and a lot of it is repeat buyers,” said Anderson. “It’s just amazing to see that kind of elevation in the product.” said Anderson.

Josh is an Editor at Advisen in the Research & Editorial division. He is the lead editor responsible for several of Advisen’s Front Page News editions and he also originates custom research on behalf of Advisen’s largest insurance company clients. Contact Josh at jbradford@advisen.com.