Introduction: Understanding the Evolving Transactional Risk Landscape
Marsh’ LLC’s recent report “Transactional Risk Insurance 2024: Year in Review” offers valuable insights into a specialized insurance market that, while unfamiliar to many “Main Street” agents, is increasingly relevant to the broader risk management and M&A landscape P&C professionals navigate. Traditionally associated with large corporate deals, transactional risk insurance products are becoming more accessible, particularly for middle-market transactions—a trend worth monitoring.
The global market saw significant activity in 2024, with Marsh placing $67.8 billion in limits, a 38% increase over 2023. Crucially for the Massachusetts market, this growth coincides with a downward shift in the minimum transaction sizes where these products are feasible, now often including deals valued below $50 million. This article distills key findings from Marsh’s comprehensive report, focusing on the potential relevance for sophisticated insurance professionals operating in Massachusetts.
Core Transactional Risk Products: An Overview
Marsh’s report centers on several key products:
- Representations & Warranties (R&W) Insurance: Known internationally as Warranty & Indemnity (W&I) insurance, this product protects buyers (and sometimes sellers) against financial losses from breaches of the representations and warranties made in a purchase agreement. Essentially, if statements about the target company’s condition (financial accuracy, legal compliance, liabilities, etc.) prove incorrect post-closing, R&W Insurance can respond. Common claims involve breaches of financial statements, compliance with laws, material contracts, IP, employment, and tax warranties.
- Relevance: Marsh data shows R&W is now common in middle-market deals ($50M-$250M). Coupled with decreasing premium rates (down 14% in North America) and lower retentions (often below 0.6% of enterprise value for deals over $50M), this makes R&W a more viable tool for larger transactions that Massachusetts professionals might encounter.
- Tax Liability Insurance: This rapidly growing segment provides coverage for specific, identified tax risks. Examples include risks related to transaction structuring, renewable energy tax credits (a key area for Massachusetts), historical filing positions, or corporate restructurings. Demand surged in 2024, particularly for Investment Tax Credits (ITC) and Production Tax Credits (PTC) in the renewable energy sector. Given Massachusetts’ clean energy goals, this coverage is increasingly pertinent for local projects seeking tax certainty. Premiums typically averaged 2% to 3% of the policy limit in 2024.
- Contingent Liability Insurance: Used less frequently but valuable for addressing known issues identified during due diligence that could otherwise halt a deal. This can cover risks like pending litigation, environmental issues, potential regulatory penalties, or disputed contracts. In a state with robust regulatory oversight like Massachusetts, this coverage can facilitate deals by transferring specific known exposures to an insurer.
Key Market Trends Highlighted by Marsh’s Report
Several overarching trends identified by Marsh signal important shifts:
- Expanding Access to Smaller Transactions: Perhaps the most significant finding for the broader Massachusetts market is the increasing viability of these products for smaller deals. In 2024, Marsh reported that 43% of North American R&W-insured deals had enterprise values below $100 million, and 23% were below $50 million. Minimum feasible transaction sizes continue to fall, with policies now regularly considered for deals valued as low as $15-20 million. This trend is particularly relevant as valuations for larger regional Massachusetts agencies increasingly push into this range, making R&W insurance a newly viable risk transfer tool for these specific types of transactions.
- Competitive, Buyer-Favorable Conditions: The market strongly favored insurance buyers in 2024. Key indicators documented by Marsh include the 14% decrease in North American primary R&W rates, retentions dropping below historical norms (averaging ~0.6% for deals >$50M), the emergence of “nil retention” structures for certain fundamental reps, and generally fewer exclusions with broader coverage terms. This robust competition among roughly 30 North American insurers creates opportunities for Massachusetts entities involved in M&A to transfer risk effectively at attractive pricing.
- Rising Claims Activity: Marsh’s claims data underscores the tangible value these policies provide. North American claims notifications rose 21% in 2024, with insurers paying nearly $306 million to Marsh clients (up from $241 million in 2023). Financial statement breaches were the most common claim type (32%), followed by compliance with laws (16%) and tax issues (14%). This demonstrates that these policies are responding and providing actual financial recovery, not just theoretical protection.
Why This May Matter for Massachusetts P&C Professionals
While transactional risk insurance is primarily for M&A, its evolution may have positive implications for progressive Massachusetts P&C professionals:
- Insurance Agency M&A: Ongoing consolidation means many Massachusetts agency principals may face M&A scenarios, either as buyers or sellers. Transactional risk insurance, particularly R&W, offers strategic advantages identified by Marsh: enabling a “clean exit” for sellers with limited liability and quicker proceeds distribution, while buyers gain protection against unknown liabilities and potentially a competitive edge in auctions. The fact that R&W is now viable for deals potentially in the $20M+ range makes it directly relevant to larger Massachusetts agency transactions.
- Client Sector Applications: Understanding where these products are used can inform client conversations. Marsh data highlights key Massachusetts sectors:
- Healthcare/Life Sciences (5% of NA deals): Relevant for regulatory compliance, billing exposures, or IP risks in biotech deals.
- Technology (~20% of NA deals): Applicable to software licensing, data privacy/security, IP infringement, or customer contract risks common in the Route 128 corridor.
- Renewable Energy: The surge in tax insurance use directly aligns with Massachusetts’ renewable goals, providing certainty around Investment and Production Tax Credits vital for project finance.
- Educational Value & Referrals: Even if not placing these policies, understanding them enhances a professional’s value. It allows for the recognition of situations where clients involved in M&A could benefit, enabling informed referrals to specialized transactional risk brokers. Awareness also helps understand interactions with traditional P&C coverages.
Practical Insights from the Marsh Report
- Underwriting Process: Marsh outlines a process involving initial assessment (1-2 days), formal underwriting (reviewing due diligence, agreements – often 5-7 days, down from 7-10), and negotiation/binding. Timelines have compressed, making policies more practical for fast-moving deals. Insurers require adequate due diligence, though flexibility for smaller deals is increasing. Known issues identified in diligence are typically excluded.
- Cost Considerations: Pricing varies, but Marsh provides 2024 averages: R&W primary rates around 2.9% of policy limits (North America), Tax insurance typically 2-3% of limits, and Contingent Liability highly variable (3-8%). These costs, while significant, often represent a small fraction of the overall deal value and should be weighed against benefits like reduced escrows and liability protection.
- Claims Complexity: While payouts are increasing, Marsh notes the claims process requires specialized expertise due to complex accounting or legal issues.
Conclusion: Broadening Industry Knowledge
Marsh’s 2024 report details a dynamic, evolving corner of the insurance world. While most Massachusetts P&C professionals won’t handle these policies daily, the trends – particularly the expansion into the middle market, favorable buyer conditions, and applicability to sectors vital to the Commonwealth – make this knowledge valuable.
The increasing accessibility of transactional risk products, especially R&W insurance, means they may occasionally interact with the M&A activities of larger clients or even larger regional agencies themselves, especially as agency valuations climb. Understanding these specialized solutions, as detailed by Marsh, may provide some Massachusetts P&C professionals with a broader industry context and reinforce their role as knowledgeable advisors in an increasingly complex marketplace.
The Full Report is Available at No Cost From Marsh
For readers interested in exploring the full details of Marsh’s “Transactional Risk Insurance 2024: Year in Review” report, they may download a complimentary copy by visiting Marsh’s official website at https://www.marsh.com/us/services/private-equity-mergers-acquisitions/insights/global-transactional-risk-report.html.
About Marsh LLC
Marsh LLC is a global insurance broker and risk advisor headquartered in New York City. It operates as a subsidiary of Marsh McLennan, a leading professional services firm specializing in risk management, insurance brokerage, reinsurance, and consulting. Marsh serves commercial businesses, government entities, and individuals in over 130 countries, offering services such as insurance program management, risk consulting, analytical modeling, and alternative risk financing. With approximately 45,000 employees globally, Marsh LLC generated $12.54 billion in revenue, reflecting a 10% year-over-year increase.
Marsh LLC is owned by Marsh McLennan, a global professional services firm specializing in risk management, insurance brokerage, reinsurance, consulting, and investment advisory services. Marsh operates as a subsidiary under the Marsh McLennan umbrella alongside other companies such as Guy Carpenter, Mercer, and Oliver Wyman.
