Rates for mergers and acquisitions-related (M&A) risk products are set to increase after corporate appetite for business expansion was dented last year because of the pandemic, Gallagher says in a report.

The broker says many of its clients have built up substantial backlogs of capital, eagerly awaiting deployment on what they see as opportunities that the COVID-19 crisis has created. This could lead to a record number of transactions this year, potentially boosting demand for M&A risk services.

“With other lines of insurance hardening in 2020, rates in M&A insurance have remained relatively stable,” Gallagher said. “This period of calm is expected to be short lived.”

Premiums in the M&A line are also expected to harden due to growing claims frequency, Gallagher says.

But M&A insurers, even as they feel the squeeze on profitability, are likely to compete on what they can offer rather than price.

“[This] is certainly a reflection of the extensive enhancements M&A insurers have begun to offer,” Gallagher said.

“For example, coverage for distressed M&A marks a radical change since the disclosure process and extensive [due diligence] exercises have formed the cornerstone of M&A insurance from the beginning.

“Cover for known risks is also likely to be a prominent feature of 2021 as insurers will not only need to differentiate themselves, but they will want to justify potentially higher premiums.”

Coverage for distressed M&A and public to private (P2P) transactions was a common theme last year and more of this is expected in the months ahead.

Gallagher expects the role of synthetic warranty insurance to become crucial for deals where the seller is not present or able to offer warranties, such as during a liquidation.

Synthetic warranties are artificially negotiated between the insured and the insurer and can be an attractive solution in distressed situations where seller warranties are not available. They provide the buyer much needed protection and allow transactions to move forward.

While such policies are more expensive than traditional Warranty and Indemnity and Representations and Warranties cover, the benefits they provide to investors, creditors and insolvency practitioners should not be dismissed, Gallagher says.

“All in all, it will be a very interesting year for M&A insurance,” the broker said. “Whilst there are likely to be more transactions and opportunities to test the market’s capabilities during the placement process, insurers’ claims statistics will be eagerly analysed.”

Click here for the report.