What is the future of M&A insurance - as a risk management tool for financial institutions?

In the last few years, new features of M&A insurance products have emerged, partly explaining their rise in usage. Examples include:

• Contingent risk insurance – which tends to cover “low risk, big number” items. We have seen this used in tax, title, litigation and environmental.
• W&I coverage enhancements – for example:
  • “scrapes” whereby the policy disregards awareness or materiality qualifications in the SPA or extends time limits;
  • synthetic policies whereby the SPA contains no warranties but the insurer nevertheless agrees to cover a set of warranties on the sale;
  • zero excess/retention in some sectors (such as real estate) and a small “de minimis”; and
  • “new breach cover” where the insurer covers issues discovered between exchange of contracts and completion.

It is likely that COVID-19 will increase the demand for all these features and drive the creation of new ones as buyers, sellers and insurers seek to allocate risk in a highly uncertain climate. It will be interesting to see whether the current squeeze in M&A volumes changes market dynamics.

All crises drive innovation and change. In a “risk-off” environment, demand for innovation in W&I and contingent risk policies is only likely to increase. The big question is whether the recent drop in M&A volumes and increase in claims will give rise to a more cautious attitude amongst underwriters.

Adam Bogdanor wrote about this in our Emerging Themes in Financial Regulation 2021 publication.