R&W’s softest market ever won’t recover soon, even if deals do: Marsh
The representations and warranties (R&W) insurance market in North America may continue to soften in the near- and mid-term, even if M&A activity picks up as expected to stoke demand, as the space remains too carrier-crowded to allow the market any traction, analysts a global insurance brokerage Marsh have claimed.
“Most R&W insurance policies in 2023 were cheaper and provided better coverage for insureds than at any time in the product’s history in North America,” Marsh analysts said to set the stage.
“Given the competitive dynamics, we believe this favourable coverage environment will continue in the short- to medium-term,” they concluded.
Rates on R&W deals have come down, retentions have followed and wordings have eased, all pretty much uninterrupted since the post-pandemic M&A boom sent the market to an early 2022 peak, Marsh said.
That heavy deal flow and hard market put a lot of underwriters on the field, now in heated search of deals amid an M&A drought, with more carriers said to be on the way.
The market early 2024 looks “already crowded” and is “expected to become further saturated by one or two new transactional risk market entrants,” Marsh said.
“Even in the face of a potential increase in demand for R&W insurance on more and larger deals, the sheer number of underwriters and robust competition is expected to keep primary R&W rates depressed,” Marsh wrote.
Pricing has fallen from its peak well above 5.5% of transaction value at the start of 2022 to just over the 2.5% mark at end-2023, a pricing graph from Marsh indicated. Authors reiterated the cause as “meaningful price competition returning to the marketplace, leading to additional — and more robustly staffed — underwriting firms facing a weakened deal flow”.
Other terms and structures have also turned to favour insureds. Retentions slipped from their historical tie to some 1% of enterprise value, moving “dramatically lower” in 2023 across all transaction sizes, again “due to the increased competition among underwriters”.
Likewise on exclusions. Prior tightening of wordings were “dramatically reversed” in 2023 and led to a market of 'clean' quotes with exclusions added “only as a last resort,” brokers from Marsh claimed.
Marsh tips its hat to adages about nothing lasting forever. “R&W insurance claims activity continues to grow in both frequency and severity, which may result in some markets reducing capacity and/or narrowing coverage terms and conditions in order to maintain profitability in the current rating environment,” analysts said in hedge.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
