The transactional risk insurance market had a tumultuous year in 2020.

Despite challenges related to the pandemic, the US and Canada transactional risk marketplace remained robust – signaling that transactional risk insurance will be increasingly important for insurers and merger and acquisition (M&A) players.

Mergers & Acquisitions Snapshot
After some early momentum, M&A activity came to a screeching halt in the second quarter of 2020. But, the second half told a different story, with deal volume soaring to record heights.

Overall US M&A activity was down 21% by value and 16% by deal count from 2019, according to data from Mergermarket.

After swings throughout the year, the fourth quarter yielded a total of $545 billion in deal value – the highest on record, according to Mergermarket. 

Transactional Risk Insurance Market Overview

After deal volume decreased by half in the second quarter, activity recovered significantly.

In fact, Marsh’s team placed 1,041 policies – the first time Marsh team has placed in excess of 1,000 transactional risk policies in a calendar year and a 22% increase over 2019. These results are evidence of the growing value that M&A players see in transactional risk insurance, and a sign of its enduring role in the North American deal-making environment, according to data published by Marsh in its 2020 US & Canada Transactional Risk Year in Review report.

Trends in Representations and Warranties Insurance (R&W) 

From 2015 to 2019, rates for representations and warranties (R&W) insurance steadily declined. That trend, however, halted in 2020. 2020 marks the first year that primary rates are sitting above 3% since 2017, which Marsh report attributes principally to two factors: 

An increase in the frequency and severity of transactional risk claims.

“Surge pricing” during the flood of deal activity in the fourth quarter. Claims concerns continue to influence insurers’ approaches to pricing, and we expect rate increases to continue in the short-to-medium term.

The Increasing Importance of Transactional Risk for Insurers

The marketplace for transactional risk insurance stayed strong in the US and Canada last year, despite the many challenges presented by the pandemic. Insurers continue to show their commitment to the sector, and deal participants are using transactional risk insurance across a multitude of industries. 

The events of 2020 confirmed that transactional risk will continue to play an integral role in the M&A marketplace. However, there are challenges ahead to be aware of, including a continued increase in claims frequency and severity, rising prices, and a focus by insurers on pandemic-related exclusions.