M&A insurance – a review of the year 2021

General review

Already in the first quarter of 2021, an increased num-ber of transactions was seen in the M&A market in Germany, Austria and Switzerland (the DACH region), as well as a greater demand for M&A insurance products, mainly Warranty and Indemnity (W&I) policies.

This trend continued seamlessly throughout 2021. Due to capacity constraints, some insurers had to repeatedly turn down requests for W&I insurance, as the increased demand temporarily left them without underwriting staff resources. However, this bottleneck did not persist and could be com-pensated by a strong increase in the number of insurers and underwriting agencies in the market who wanted to expand their offering to the DACH region. The increase on the part of insurers and underwriting agencies was also re-sponsible for the fact that the required coverage amounts for W&I policies could be made available, although some insurers had already almost completely used up their avail-able liability capital for the entire year by the beginning or in the middle of the fourth quarter of 2021.

As before, W&I insurance is more common among finan-cial investors than among strategic investors, although the latter group of investors is also using the product more fre-quently than in previous years. In 2021, for example, stra-tegic investors opted to prepare W&I insurance already on the sell-side in a large number of sales processes in order to facilitate and accelerate the access to W&I insurance for bidders.

M&A insurance solutions placed by Marsh (Germany)

Marsh Germany placed well over 100 M&A policies in 2021, representing a 54% increase year-over-year

Marsh

Coverage amounts and deal size

Marsh placed a total of approximately EUR 18 billion in coverage outside of Germany in 2021, with an average deal value of approximately EUR 210 million.

Premiums

There was a slight increase in premiums for W&I insurance in 2021 in the third quarter and particularly in the fourth quarter. This was due to a temporary tightening of supply as a result of high demand in the market and significant staff capacity bottlenecks at insurers. However, the higher premiums were still within bounds and typically ranged from 1.5% to 2.9% of the insured sums, while in other ju- risdictions such as the USA premiums at the time were be- tween 4% and 6% of the insured sums.

Coverage

Coverage under W&I insurance remained stable and could be extended in some areas via enhancement options. In particular, knowledge scraping has become established in the market, while materiality scraping is now also increas- ingly requested. In addition, coverage of unknown tax risks is increasingly being provided synthetically under the W&I policy and thus outside the acquisition agreement. The same applies to the expansion of the loss definition. As in the years prior to 2021, acquisition agreements to be in- sured generally contained very seller-friendly definitions of damages. Buyers were able to compensate for this liability deficit via synthetically expanded loss terms in the policy.

2021 also saw an increased request for full coverage of fun- damental warranties (title warranties) up to the amount of the purchase price either by the W&I insurer in smaller transactions or through a title insurer in medium to larger transactions. This is mainly due to the fact that more and more sellers are applying the nil-seller-liability concept to the fundamental warranties in the acquisition agreement as well, and buyers or bidders are also referring to W&I or title insurers in this respect.

Strong increase in demand for insurance soltions for known risks

In addition to the strong demand for W&I insurance, Marsh also recorded growth of over 300% in 2021 compared to 2020, particularly in the area of insurance solutions for known risks (deal-breaks). The majority of these risks were insurance policies for known tax risks.

Marsh

Outlook for the remaining year 2022

M&A insurance solutions will continue to enjoy great popularity in 2022. New insurers have expanded their product offerings to the DACH region, making the market even more competitive. While the M&A market in the DACH region initially got off to a somewhat sluggish start and briefly stagnated due to the conflict in Ukraine, demand for insurance products in connection with transactions in the DACH region has now increased significantly, particu- larly in the second quarter.