Transactional risks to increase as economic headwinds blow

Broker Lockton has warned economic headwinds are threatening to temper the surge in dealmaking after a record year for transactional risk demand.

Its Transactional Risks team has issued its market update report which found a flurry of dealmaking in the second half of 2021 and into 2022 led to both positives and negatives in the transactional risk market.

New products and the innovative use of existing products were stress tested, but capacity restraints from the insurance market, both financially and in manpower, led to difficult coverage and pricing for buyers in the final three months of last year.

“Dealmaking continues, however mounting headwinds of inflation, supply chain and employment issues from lockdowns, the war in Ukraine, spiralling interest rates, commodity and energy issues and potential political instability continue to raise alarm bells for dealmakers,” the update cautioned.

The broker has also looked ahead to 2023 and found four major themes for the coming 12 months.

There will be an ever-greater use of contingent risk and tax policies as buyers push for greater certainty on risks in an ever-changing world. Tax structures will be under more scrutiny than ever, ESG risks will become an increasingly important issue and buyers will look to the insurance market to provide certainty for non-M&A risks such as regulatory reclassification or judgement preservation on a case.

Claims will begin to impact client’s view on different insurers, as claims frequency increases and more claims stories emerge, clients will become ever more aware of the response from insurers on claims and the role of a broker in claims-handling. While greater competition of insurers has generally led to positives of low premiums and wider coverage for insurance buyers, the merry-go-round of team moves within the underwriting space will lead to more established, solid teams with a long-lasting track record being more sought after by experienced dealmakers.

It continued the W&I market has ridden a wave of a seller-friendly M&A market for the last seven years. As economic headwinds and political instability become more present, the ability of sellers to cap their liability at £1 may prove less accepted by buyers. Whether we return to the early days of W&I where insurance sat in excess of a seller’s liability cap or the product is now so well established in the deal tool-kit that £1 caps are here to stay, whatever the economic weather, remains to be seen.

Finally market penetration in emerging markets and across Europe will continue at pace. Insurers and broking firms continue to expand geographically, linguistically, within sectors and within deal sizes. Lockton Transactional Risks continues to expand its geographic scope across the UK, Europe, Asia and the US. Sector experts joining the market from backgrounds in oil and gas, FMCG and Financial Institutions continue to push the products capabilities in coverage for specific sector risk areas.

Kevin Stout partner, Due Diligence, at Lockton explained: “The last six months has brought unprecedented change in the insurance market. The escalation of the Russia- Ukraine conflict coupled with a post-covid lockdown demand surge has created a threat to the status quo of global growth and low inflation.

“Considering the sheer magnitude of across-the-board premium rate increases in, and around, 2021, the market for insurance is softening, except for cyber insurance and potentially motor, due to claims cost inflation. Since 2017, claims have increased 13% year-on-year, with most of the increases arising from external factors malware, ransomware, and social engineering. This persistent increase in cyber claims has attracted scrutiny from insurers. In response, average premium per million dollars of limit has more than doubled year-on-year, with some companies experiencing increases in excess of 500%.

“Although the current outlook may seem bleak, there are many factors in play to soften the cyber insurance market, such as new insurers stepping into the market as well as higher security standards being more commonplace, for companies with revenues upwards of £1bn, and less expensive to implement.”

He added: “With interest rates continuing to rise in response to inflation, we expect to see premium rate hardening start to fade. Restrictive changes to policies passed by insurers, be it in wordings, conditions, or exclusions, have already been accepted and passed on to the insurance market, particularly property and casualty.

“These macro and intermarket conditions all signal peak hardening conditions.”