Growth in the transactional insurance market has been driven by falling rates and widening covers, according to a JLT report

The M&A insurance market continues to grow, with yet more capacity leading to falling rates, retentions and ever-widening coverage, according to JLT Speciality.

In the most recent half-year update of its Global M&A Insurance Index, JLT reports a 76% increase in the number of mergers and acquisitions (M&A) insurance policies placed year-on-year when comparing H1 2017 to H1 2016.

Average premium rates fell by 25% from their 2015 level, the London market insurance broker found. Premium rates now average at 1.16% versus 1.54% in 2015. Due to this movement in rates, far more of the policies for deals with an enterprise value of under £10m are hitting insurers’ minimum levels. As a result, the average premium rating for deals below £10m is now higher than the market average.

Furthermore, new market entrants among M&A insurers are competing for smaller deals, so that wider market growth has led to a 44% fall in average policy retention rates. This significant reduction delivers noteworthy benefit to the insured – with the retention almost halved, insurers are now required to pay losses far sooner in the event of an insured claim, meaning that the seller can retain even less liability, JLT said.

“It is perhaps the combination of an absence of new large insured losses and the scope of opportunity still being relatively untapped that has fuelled the soft market. As a result, clients are able to benefit from favourable pricing and coverage that has cemented warranty and indemnity insurance as the norm in global M&A,” the report noted.

The research has not shown a notable increase in the average limit of insurance purchased among corporate buyers compared with the previous year. However, the level of cover sought is directly linked to the size of the deal, with smaller transactions often using insurance up to the full deal value.

M&A insurance is used most by the real estate sector, according to JLT, representing 27% of total deals bound by the broker outside the US market. Companies in retail and consumer and IT/technology/communications are also increasingly buying M&A insurance.

Aside from warranty and indemnity insurance, JLT experienced a marked increase in the number of requests for standalone tax liability insurance. This underlines that the desire to ring-fence tax issues is becoming a greater consideration when doing an M&A deal, where there is an increased need to manage multiple risk angles.

Ben Crabtree, partner, mergers & acquisitions at JLT Speciality, said: “We look forward to the half year update of our M&A Insurance Index because it allows us to give our clients real time benchmarking information by sector, jurisdiction and deal size as well as commentary on the state of the market.

“The growth in use of M&A insurance has been fuelled by a number of factors ranging from falling premium rates to a reduction in retention rates. In fact, the scope of what is achievable is evolving constantly and we want to ensure our clients have exactly what they need to make the best insurance decisions on their deals today.”