Transactional risk in Europe
January 2024 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
January 2024 Issue
FW discusses transactional risk in Europe with Bryan Dressler at Markel International.
FW: What factors are driving the rising awareness of, and appetite for, specialist insurance to mitigate transactional risk in Europe? How common is it to see deals reach completion without some form of insurance component?
Dressler: The demand for transactional liability insurance products is driven by inherent uncertainty in dealmaking which is high at the moment. Interest rate volatility creating valuation mismatch between sellers and buyers – coupled with geopolitical tension, regulatory scrutiny and solvency challenges – amplify the need for protection when it comes to completing deals. Warranty and indemnity (W&I) insurance does that for the undisclosed risks remaining after the due diligence process runs its course. Tax, contingent liability and other specific risk products do that for disclosed issues that would otherwise block the path to signing. So, while aggregate demand is falling in line with M&A activity, relative demand continues its unabashed ascent.
FW: Could you outline the benefits that warranty and indemnity (W&I) insurance brings to the M&A context?
Dressler: The beauty of W&I is the benefit alignment between parties involved in the transaction. The seller can reduce its residual liability and put its proceeds to productive use; the buyer has protection from a single and strong counterparty in the business of paying covered claims and the insurer unlocks the opportunity for both by spreading risks across a well-structured portfolio. It is key that the introduction of the insurer into the equation facilitates the deal rather than impeding it or slowing it down. This requires a ‘to the point’ underwriting process that prioritises the variables that matter to the claims profile from a portfolio perspective.
FW: Are you seeing rising demand for tax liability insurance in Europe? What does this entail?
Dressler: The demand for tax liability insurance is a secular trend with tailwinds only gaining force. As governments increasingly adopt tax incentive schemes – be it for sustainable energy development or productivity enhancement – the tax insurance market is well-suited to help drive these policy goals. This rising demand, though, entails being able to distinguish between risks that promote and risks that pervert the intent of the taxing authority. This is done through high conviction cover holders who have the expertise and resources in their chosen jurisdictions to make this call.
FW: Could you outline the function of contingent risk insurance?
Dressler: The contingent risk market is a potential home for non-tax-specific risks identified in a transaction or where a client is simply looking to secure balance sheet or recourse protection outside of M&A by assigning a price to it. Akin to tax insurance, its sweet spot is low probability events, giving rise to insurability in the context of a portfolio, but with severity if they transpire, giving rise to the motive for purchase. In this way, the contingent risk product is a broad church for allocating risks in respect of historical events. It is in its early innings.
“Insurers are beginning to marry the traditional legal agility of W&I underwriting with lessons learned from more ingrained lines of insurance around portfolio management.”
FW: How would you compare transactional risk insurance claims seen in Europe in recent years with those in other regions across the globe?
Dressler: The story of claims in Europe versus other regions – in particular, the US – is a tale of the trade-off between lower pricing, lower retentions and higher-touch underwriting with lower claims frequency to date. We are seeing an increase in third-party demands generally but the plaintiff’s bar in the US feeds third-party claims in M&A insurance as it does on other lines, such as management liability and professional indemnity. Areas such as material contract disputes, accounting breaches and regulatory compliance feature prominently across the regions and offer a spotlight for deeper diligence.
FW: Based on your experience, what considerations do parties need to make when assessing their options for M&A insurance? How have insurance providers evolved their M&A-related policies in recent years to meet market needs?
Dressler: Not enough value is assigned to counterparty strength in the form of claims-paying reputation, multiline support and long-term commitment to the M&A insurance market, or the underwriting experience for clients in the form of succinct Q&A and coverage decision-making reverse engineered from notification data. This is especially true for smaller transactions which requires balancing volume with a systemic approach to underwriting. Insurers are beginning to marry the traditional legal agility of W&I underwriting with lessons learned from more ingrained lines of insurance around portfolio management, affording a more streamlined and decisive process for clients.
FW: What advice would you offer to parties in Europe on selecting a transactional insurance solution that is crafted specifically for their particular deal and reflects its unique risk profile?
Dressler: Parties should pick an insurer with an underwriting model tailored for the size of their transaction. That is the defining attribute of the risk when viewed through a portfolio lens. Of course, sector, geography and a host of structural dynamics influence the risk and its treatment, but enterprise value is the closest gauge for limit exposure and the materiality of the risks flowing through the warranties when considering coverage impact. An insurer that takes a portfolio approach – bolstered by limit discipline and an informed view of how other dedicated lines of insurance work – can ultimately provide a better product at a competitive price.
FW: How do you envisage the transactional risk insurance market in Europe evolving in the months and years ahead? What developments do you expect to see in 2024 and beyond?
Dressler: I expect the penetration rate of transactional liability products to continue expanding as insurers focus on a sustainable product for the countless micro, small and medium-sized enterprise transactions happening without the benefits of insurance, despite the limit discipline and diversification those opportunities present. Data insights should continue to grow in influence with respect to risk selection, rate adequacy and coverage parameters, narrowing the aperture for risk review and minimising execution risk for clients.
Bryan Dressler is head of warranty and indemnity at Markel International, where he has played an integral role in building out the organisation’s W&I insurance line. He has spent his career split between broking and underwriting, both in the US and in London, and not only in the transactional liability space but across financial lines, with a focus on placement strategy. He also qualified as a lawyer in the US. He can be contacted on +44 (0)7833 865 221 or by email: bryan.dressler@markel.com.
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