An increase in M&A activity in today's challenging economic environment is driving significant growth in demand for M&A insurance products, according to a report published by Aon.
Aon's report finds that following a decline in M&A activity after the 2008 financial crisis, the volume of deals reached pre-recession values in 2015 and has continued to increase.
The recent economic environment has been favorable for M&A as interest rates remain low, company balance sheets are stronger, and deal activity rises significantly among private equity firms, said the report titled "Insurance for M&A: a coming of age and an exciting future ahead."
Aon's analysis of data from Allen & Overy found that 3,200 deals were transacted globally using warranty and indemnity (W&I) insurance in 2018. (W&I is also known as reps and warranties, or R&W).
Aon's research also finds that the market value for transactional liability solutions reached $2.3 billion in 2018, demonstrating a 35% increase from 2014. While W&I insurance remains the largest product by premium volume, buyers and sellers are also looking to tax insurance, litigation and contingency insurance, and bespoke products that include environmental or cyber policies, the report noted.
Aon's report also identifies a growing trend of demand for U.S.-style W&I policies in Europe, driven by U.S. buyers trying to drive US terms and structures into European sale agreements.
"Despite a decrease in M&A activity in EMEA during 2019, it is striking to see the see continued strong demand for insurance solutions in transactions," said Alistair Lester, CEO of Aon M&A and Transaction Solutions EMEA.
"Buyers, sellers, and legal and professional service firms are fully aware of the value of insurance during the transaction process, and this has culminated with improved infrastructure within the insurance market," he added. "Insureds now have access to more sophisticated products, a wider choice of providers, larger coverage limits, lower premiums, and services such as capital advisory and consultancy."
Lester said that Aon expects to see increased awareness and use of M&A products "as insurers begin to offer broader coverage, serve local European markets and penetrate the small and medium deal size bracket. Tax insurance will be a major growth area, as the value proposition of tax insurance products extends past the M&A deal itself."