Tokio Marine HCC Report Highlights Unseen Risks in Smaller M&A Deals

A new report from Tokio Marine HCC (TMHCC) highlights an important trend in transactional risk insurance (TRI), revealing that smaller mergers and acquisitions (M&A) deals may carry higher risk exposure than previously assumed. Analysis of over 500 claims exceeding $140 million found that 80% of the most severe losses originated from deals valued below $250 million. This insight challenges the industry norm of offering low or zero retentions on policies for smaller transactions, even as TRI capacity has expanded. The rise in TRI usage aligns with broader M&A market dynamics. Data from Marsh show an increase to $67.8 billion in transactional risk insurance limits placed across more than 2,750 policies in 2024, reflecting the integration of TRI into competitive auction environments and private equity-backed deals. This growth underscores TRI's relevance as a tool for managing deal-specific risks, regardless of transaction size. TMHCC's report also identifies a shift in claim notification timing. Traditionally, claims reported after three years of policy inception were rare, but they now constitute about 20% of all notifications in 2023 and 2024. Additionally, early claims within the first year of policy issuance have declined from over 65% in 2021 to just above 20% in 2024, indicating that claims are emerging later in the policy lifecycle. This change in notification patterns may be driven by increased market familiarity with TRI policy wordings, the prevalence of three-year general warranty periods, and a more volatile economic environment. The evolving claims experience impacts risk pricing, policy structuring, and overall risk management strategies for buyers, sellers, and brokers. Further complexity comes from cross-border M&A deals, which inherently carry heightened risks due to regulatory, jurisdictional, and geopolitical factors. Insights from Liberty GTS emphasize these dynamics amid ongoing trade policy uncertainty, global conflicts, and political shifts, suggesting continued demand for warranty and indemnity insurance as risk mitigation mechanisms. Despite economic and geopolitical challenges, global M&A activity showed resilience in 2024 with a 15% increase in deal value and a 7% volume increase year-to-date according to Bain & Company. TMHCC's analysis and the broader industry data point to transactional risk insurance becoming integral for managing evolving M&A risks across deal sizes and geographies.