Growth, but more competition

A growing awareness of risk transfer products designed for mergers & acquisitions (M&A) transactions and an element of nervousness following so many years of economic upheaval are driving a rapid growth in transactional risk insurance and loss mitigation-evaluation services. But as more insurers enter the market, buyers should choose their partner carefully and not simply take the cheapest price.

That is the view of David S. De Berry, the chief executive of Concord Specialty Risk, part of the Ryan Specialty Group, which is a managing general underwriter and consultant that provides these types of products.

Specifically, Concord can provide tailored solutions to the risk of losses arising from M&A, potential regulatory enforcement, pending lawsuits, uncertain tax positions and other contingent liabilities.

Concord’s leaders, brothers David S. De Berry and Kenneth W. De Berry, its president, collectively have more than two decades of experience underwriting transactional risk insurance.

David De Berry says that the transactional insurance market around M&A has grown quickly in the past three years with the percentage of deals that use some form of transactional insurance increasing from around the 8 percent mark to close to 20 percent in recent times.

He says as well as the wider macroeconomic climate, which has made people more aware of transactional risks, there are specific reasons for this growth. Tax insurance provides added (behind the scenes) tax counsel with a guarantee.

Likewise, specific litigation insurance provides added (behind the scenes) trial counsel with a guarantee. Representations and warranties insurance can be tailored to mirror, backstop, or even enhance the terms of an underlying deal. Some of the biggest legal advisers on M&A transactions, including Kirkland & Ellis, have become staunch supporters of the use of such products.

“That has meant that for some of the bigger and very active private equity firms, it has become the norm to have this type of coverage in place,” David De Berry says. “Soon, investors in private equity funds will be inquiring, if not requesting, that funds obtain the strategic and risk transfer benefits of such insurance.”

Concord Specialty Risk is also seeing strong growth in its division that evaluates and insures tax uncertainties. Although this can often be linked to transactions, it can also be sold as a standalone product.

“There have been some recent rules changes around tax in the US especially around a threshold the IRS has set over which it requires detailed information about uncertain tax positions, which must be described in a concise narrative, given a relative ranking, and disclosed on the IRS’s Schedule UTP. The threshold has just been lowered from $100 million gross assets to $50 million gross assets. The tax spotlight is on the middle market sector more than ever.

“We are true specialists in this field, including tax uncertainty around transfer pricing, reorganisations, executive compensation, net operating losses, etc, and our solutions provide cash when required to pay taxes, interest and/or penalties,” he says.

A third area that David De Berry identifies as growing is where coverage is sought around specific pending litigation, the outcome of which has the potential to harm a deal that is going through. “It’s for when the house is already burning and the question is whether you can estimate the loss and underwrite it. We see less competition in this sector,” he says.

Finally, he says the company also offers a suite of other products which is rapidly expanding to cover other uncertainties such as successor litigation and regulatory concerns that could have an adverse effect on a deal in the future.

Although the products underwritten by Concord Specialty Risk are all US-focused, the market is affected by global competition in this sector. He believes that deal volumes are highest and rates lowest in Australia. This dynamic has filtered into the UK market to a certain extent and, in turn, eventually migrates to the US market.
“There is a lot more interest in this market now and to a certain extent, a rising tide lifts all boats. But few of the newer entrants are specialists and they may lack the experience and expertise we have.”

David De Berry acknowledges that this competition has hit rates and terms and conditions on some lines, however. “We are long-term players in this market with an excellent record for paying just claims fairly. Obviously, in order to be sustainable, the terms of the policies must be appropriate to its pricing on a deal by deal basis,” he says. “It is partly on instinct because of the lack of homogenous risk required for statistical and actuarial analysis, but experience can be a useful guide.”

One area where the firm is not seeing competition, however, is around tax issues. He notes that this is such a specialised area, other insurers (and even their managing general agents or underwriters) generally need to engage the services of expensive law firms to underwrite this business.

“As such, this is one market, especially around these recent threshold changes implemented by the IRS, where we are standing alone by providing tailored, in-house, fast and professional solutions,” he says.

David S. De Berry can be contacted at:  daviddeberry@concordspecialtyrisk.com