By Steve Anderson
The number of mergers and acquisitions has been robust in recent years despite questions about regulatory oversight, geopolitical uncertainty and technology disruption.
Senior business executives, in fact, are feeling more confident about the mergers and acquisitions market, thanks to a stable U.S. economy, a healthy stock market and waning concerns about the Brexit vote, according to a recent annual survey by Dykema Cox Smith.
- Around the world, the number of insurance policies related to mergers and acquisitions nearly tripled from 600 in 2012 to 1,750 in 2015.
- The amount of gross written premiums in the transactional risk insurance market is expected to climb from $350 million in 2013 to $1.5 billion this year.
Mergers and acquisitions market presents untapped growth potential for U.S. insurance brokers
For insurance brokers looking to expand their business, this market – particularly in the U.S. – remains largely untapped. It presents a tremendous opportunity for growth:
- Market penetration in the U.S. is currently 20 to 25 percent.
- Market penetration could double in the coming years as more lawyers, accounting firms and bankers who specialize in mergers and acquisitions deals increasingly become aware of the value of this coverage.
Realizing the benefits of representations and warranties coverage
Many U.S. lawyers and bankers remain unaware of the value of representations and warranties insurance as part of the merger or acquisition transaction. Representations and warranties are written statements about the company that buyers require from sellers as a condition of purchase. Representations and warranties insurance protects against financial losses from most breaches of unknown or undisclosed liabilities in the purchase, merger, sale, acquisition or divestiture.
Without a representations and warranties insurance policy, sellers typically have to set aside 10 percent of the sale price in an indemnity escrow account for up to two years. Representations and warranties insurance offers a huge benefit in not having substantial funds tied up in escrow. Those funds can be freed up to use toward other investments and other priorities.
Key advantages for sellers and buyers: a closer look
For sellers, representations and warranties coverage can:
- Reduce the risks of contingent liabilities that arise from future representations and warranties claims.
- Enable distribution of most or all of the sales proceeds to investors or be used to pay toward an existing debt.
- Shield sellers from unintentional breaches.
- Speed up a sale by increasing the efficiency of the negotiations.
For buyers, representations and warranties coverage can:
- Supplement indemnification that sellers provide.
- Give buyers more time to detect and report problems that may arise.
- Ease concerns about collecting sellers’ indemnification because of sellers’ poor financial condition or other issues.
- Protect relationships with sellers who may become buyers’ key employees or business partners after closing.
For brokers in the U.S., it’s never been a better time to sell representations and warranties coverage to your clients.
If lawyers, accounting firms and bankers are part of your clientele, shining a spotlight on the benefits of representations and warranties insurance can help your business grow.
About the author
Steven Anderson, along with Scott Fritts, formed BlueChip Underwriting Services LLC in late 2016 to incubate and grow a series of specialty managing general agency funds. BlueChip launched a transactional risk insurance program in partnership with Argo Pro in January. Under the partnership, BlueChip sells and underwrites a suite of insurance products including representation and warranties, tax indemnity and contingent liability.
About Argo Pro
Argo Pro, a member of Argo Group, is a leading provider of professional lines insurance products and services that can accommodate medium and large organizations on an admitted and non-admitted basis. Through a single operating platform and a robust network of appointed wholesale and retail distribution partners, Argo Pro offers a broad, customizable portfolio of errors and omissions and management liability insurance solutions. Argo Pro maintains offices in Chicago, Jersey City, San Francisco, Scottsdale and Hamilton Township (New Jersey).