Insurance capacity can't keep up with red-hot M&A market: Howden

A thriving M&A market will drive rates in warranty and indemnification (W&I) policies where industry capacity has not fully kept pace.

"Recent hikes in W&I pricing have been driven principally by capacity constraints in the market in the face of unprecedented demand," analysts at Howden said in its annual M&A Insurance Claims Report.

With the market booming in both demand for policies and claims, insurers are likely to get more sophisticated quickly in differential pricing.

Claims history will play "an increasingly important role in driving future price rises," especially given varied performance at the sector level, analysts wrote.

"Increased deal activity and use of M&A insurance has led to an increase in the number of notifications,” Drew Wardrope (pictured), managing director at Howden M&A, said. “Price adjustments are therefore inevitable, particularly at sector level.”

Notifications on policies continue to fall in percentage terms, down from ca. 14 percent in 2019 to just over 10 percent for a delayed 2020/21 issue, but the nominal count is rising with the pace of deals.

Operational M&A deals continue to draw higher notifications given workforce, contractual and related factors. Real-estate deals see fewer notifications, but sub-sectors are differentiating, authors noted.

Mega deals on M&A transactions with EV above €1 billion have gone the other way, with notification rates rising on higher deal complexity, Howden claims of its research, a contrast to some studies in the industry.

Underlying rates of notification might be masked by an increasing trend for longer delays to notification, authors suggested.

The percentage of notifications arriving 18 or more months after transaction rose from 10 percent in the 2020 report to 38 percent now.

Claimants could just be moving slower given longer warranty periods from one major provider, Howden analysts speculate. Other carriers are said to be considering similar changes in warranty periods.

Alternatively, the delay could be tied to a rise in tax-related claims which benefit from longer warranty periods, they wrote.

Across all deals, warranties on material contracts and financial statements remain the most common subject of eventual notifications. Notifications on tax issues have dropped; notifications on legal compliance have risen from 3 percent to over 18 percent.

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