Transactional Risk Insurance Growth in the UK M&A Market

Renewable energy and digital infrastructure take the lead in sector activity growth

Lockton’s Transactional Risk Market Update has pointed out a strong demand for warranty and indemnity (W&I) insurance in the UK M&A market, leading to a rise in policies placed for transactions totaling £14 billion over the last period, up from £13.2 billion the year before. In a surprising turn, there has been a 3% decline in average transaction values due to the widespread use of transactional risk insurance in small and medium enterprise (SME) acquisitions with historically low pricing.

This trend has seen the average rate on line for W&I insurance hitting its lowest point in 2023-24 at 0.91%. Sectors like real estate, with heavy assets, recorded rates dipping as low as 0.6%, while industries like financial services saw slightly higher rates at 0.97%. In contrast, transactions in infrastructure and technology, media, and telecommunications (TMT) have attracted rates crossing the 1% mark due to their elevated risk profiles.

Over the past year, Lockton has noticed an increase in the capacity of the W&I insurance market, with more offerings from key underwriters such as Aviva, Chubb, and Devonshire. Insurers are broadening coverage, especially in lower-risk sectors, while also focusing on providing coverage for more complex risks with higher rates.

Sectors such as renewable energy are seeing a surge in W&I use owing to the soaring demand for clean energy investments, while TMT continues to dominate as the most active sector for W&I insurance. Manufacturing has also seen significant movement in Lockton’s rankings, indicating stable macroeconomic conditions and a drive to adopt new technologies. Notably, renewable energy has broken into the top five sectors, driven by the high demand for wind, solar, and battery storage system (BESS) projects.

Furthermore, there has been an uptick in demand for US-style representations and warranties insurance (RWI) policies among private equity sponsors acquiring European assets. Despite being costlier at 2.5-3% of the limit, these policies offer more expansive coverage than traditional European W&I policies, mirroring a 61.5% increase in US-backed acquisitions in Europe.

On another note, the market for tax insurance outside of transactional settings is expanding, with a growing appetite for customized tax policies addressing legislative risks and compliance concerns. Similarly, contingent and litigation risk insurance (CLRI) has garnered increased attention following notable losses in the US, prompting expectations of higher pricing and reduced limits for policies in the near future.

According to Lockton’s data, tax breaches represented 32% of W&I claims notifications in 2023-24, surpassing financial statement breaches at 24%, with compliance with laws as the third most common breach type at 16%. These dynamics underline a shift towards policy enhancements like indemnity-based damages and exclusions of general disclosure as insureds navigate the evolving landscape of risk management.