The M&A insurance market is coming under increased scrutiny in light of an increase in paid claims and rumours of some large potential payments in the pipeline – all at a time when rates are close to historic lows and coverage is probably broader than it has ever been.
Of course, an increase in paid claims is not unexpected to some extent given the M&A boom of 2020 & 2021 when insurers wrote a record number of R&W policies. Indeed, last year we paid out approximately $150m in R&W claims, with many of these payments relating to 2020 & 2021 deals. This included a payment of approximately €46M to B&C KB Holding GmbH in connection with their acquisition of the Schur Flexibles group – our largest single payment ever.
However, in addition to this, there have been reports in the press about a couple of significant (but unpaid) R&W claims involving large towers of insurance, including one that is thought to have the potential to result in a $300m payment. Whilst we are not involved in this particular claim, we believe it would become the single largest paid R&W claim ever if it becomes a full limit loss.
This has all come at a time when the M&A insurance market is facing a number of large potential losses in the contingent legal risk sector. Whilst most of these losses – which mainly involve judgment preservation risks – have yet to crystalize (and some may never do so depending on the outcome of the underlying insured litigation), it is important that the market is quick to learn lessons from them. We have already responded by announcing that we will no longer write ‘in-litigation’ risks going-forward and, in addition, we have made adjustments in our appetite for ‘not-in litigation risks’ – seeking to be even more selective when deploying larger limits and moving away from risks that are binary in nature and instead focusing more on non-binary risks. Further information about the issues impacting the contingent legal risk sector can be found here in our most recent claims briefing.
One consequence of this increase in claims activity is that capacity providers and also reinsurers, who stand to bear the brunt of the these (potential) losses, will be thinking carefully about aggregation issues, risk selection, rate adequacy and scope of cover. This has the potential to have a profound impact on the M&A insurance market. It is likely, for example, that capacity providers – some of which currently back multiple MGAs – will pull back and focus their capital on fewer MGAs. They can do this with relative ease because they have not invested in the people and infrastructure necessary to write the business directly for their own account. This could lead to a period of mergers and consolidation in the MGA space, resulting in capacity becoming focused on a smaller number of larger players. It is also possible that reinsurers will look to manage down their exposure(s) and this could impact the line size that some M&A insurers are able to put out. Either way, we expect that capacity providers and reinsurers will become increasingly focused on underwriting discipline. This is not a bad thing, as the soft underwriting dynamic that we have seen over the last 12 months was, of course, never going to be sustainable for long. We expect, therefore, that rates — having already bottomed-out following the return of more normal dealmaking conditions — will now start to increase and that coverage enhancements will begin to be pared back again or become more expensive to more accurately reflect the risk. This will, of course, be welcome news to the carriers who, like us, have shown strategic patience during this difficult period, focusing on deals where we have a competitive advantage and avoiding trying to win deals at any cost by either cutting pricing or expanding coverage.
In addition, from an insured’s perspective, there is likely to be a renewed focus on placing risks with multi-line insurers that have the balance sheet strength to pay large claims when called upon and are committed to providing their clients with a positive claims experience because they are in the market for the long-haul. In this regard, we are one of the most experienced insurers in the M&A insurance market and have been writing this class of business since 2010, initially via an Ironshore owned-and-operated platform and, since January 1, 2019, as Liberty Global Transaction Solutions (GTS), which is backed by industry icon Liberty Mutual Insurance – the eighth largest global property and casualty insurer based on 2023 gross written premium, and also ranking 87 on the Fortune 100 list of largest corporations in the US based on 2023 revenue. We have a proven track record of paying valid claims that is much longer than most in the market and we will continue to do so, aided by our on-going commitment to offering a best-in-class claims service. That is the Liberty way – to be a trusted partner that you can rely on no matter what. Choose wisely.
