Significant capacity crunch expected to hit M&A market in early 2021: Howden

A new report by insurance broker Howden predicts that a "significant capacity crunch" is expected to hit in early 2021, meaning that MGAs will struggle to secure the capacity they currently enjoy and insurers weather the storm of M&A and COVID-19 claims.

Howden M&A, a mergers and acquisitions insurance advisor and part of international insurance broker Howden, has published its 2020 EMEA M&A Insurance Claims Report, which analyses claims data derived from Warranty & Indemnity (W&I) policies placed by Howden on over 1,000 deals during the past five years.

The report considers the impact of COVID-19 on M&A insurance activity in 2020. Howden said the "large dent in premium income after March 2020 combined with continued notification of claims from prior years, will likely lead to a significant capacity crunch, expected to hit in early 2021."

"This is exacerbated by rates for other more traditional lines of insurance increasing by up to double-digit figures, whilst M&A insurance rates are currently decreasing as insurers find there are fewer M&A deals to write," it added.

According to the report, claim volumes across EMEA over the past two years are made at a rate of approximately one in every seven policies, whereas they were made in approximately one in every 11 policies during the previous three years.

Premium rates have fallen by approximately 50 percent over the past five years, including an approximate 10% drop during 2019. Premium rates are no longer reflective of claims rate increases and the broader cover now offered under W&I policies.

Howden noted that M&A claims are longer tailed than many predicted – most insurers expected claims to arise within two years of completion. However, Howden data suggests 5 percent of claims are made three or four years after policy inception, with that percentage expected to rise going forward.

Furthermore, large deals (value greater than €1bn) generate more notifications. Over the past five years, insurers have been willing to cover deals of this size, whereas prior to 2015, most insurers focused on mid-market transactions, valued between €50m and €500m, which generate much lower claims volumes.

Claims vary by jurisdiction, for instance, the claims rate on Italian deals is approximately four times more than Nordic deals, but they are only priced approximately 1.5 times more.

Tax warranties are the most commonly breached (27 percent of all breaches). Material contracts and financial statements warranty breaches are the next most common, each constituting 20% of all breaches.

Anna Robinson, director and head of Claims, Howden M&A and co-author of the report, said: “As the number of notifications has increased, so has the complexity and quantum of claims. Without a doubt, well advised clients who present insurers with detailed evidence of a warranty breach and loss calculation experience a smoother claims process, and secure greater pay-outs. Claims brokers have a key role to play in this, with both our clients and insurers comforted by the value we add to the claims experience.”

Joe O’Brien, co-managing director, Howden M&A and co-author of the report, added: “Our analysis shows that a pricing correction is likely early in 2021 as several MGAs will struggle to secure the capacity they currently enjoy and insurers weather the storm of M&A and COVID-19 claims. In such an environment, advisory focused brokers, with fulsome jurisdictional coverage and expertise across multiple M&A insurance product lines will be the ones who can best meet client requirements. The days of non-UK W&I policies being placed by London-based brokers are numbered, with local presence and legal expertise demanded by European clients, especially post-Brexit.”

Drew Wardrope, co-managing director, Howden M&A commented: “We have continued to support our clients throughout the current crisis and responded to their changing needs, whether through the use of W&I policies to boost returns on distressed sales or by facilitating the release of trapped cash using contingent risk insurance. Our company culture is focused on independence and People First, meaning our employees are empowered and will go the extra mile for clients. Against a backdrop of mega-broker consolidation, we continue to attract the best talent in the market and to invest in subject matter experts who can advise clients on how to secure the best possible cover.”