Demand for transactional risk insurance solutions in Asia is expected to remain steady in 2023, and may even improve, says Marsh which is the world’s leading insurance broker.
Presenting the outlook for 2023 in its “Transactional risk insurance 2022: year in review” report, Marsh says that premium rates are anticipated to continue to drop from their previously elevated levels in 2021. This is mainly due to the expansion of market capacity for W&I insurance and the arrival of new insurers generating increased competition.
Insurers will also be incentivised to turn to meaningful product differentiation as a way to improve upon and retain their market shares. Similarly, for tax insurance, the use of cover to mitigate tax risk arising from M&A transactions is expected to grow in 2023, driven by a wider understanding of this product in the region in recent years coupled with a rise in insurers’ appetite to insure Asian tax risks.
Developments in 2022 in Asia
In spite of challenging circumstances, including global macroeconomic and geopolitical pressures, transactional risk insurance placements in 2022 remained resilient. The placements in Asia were helped by the continued stability of Southeast Asia’s M&A market and the strength of the market in India.
Overall, closed deal counts decreased only slightly — by 12% — compared to 2021’s record-breaking levels, total limits placed grew by 35.6% over the previous year, and the combined number of primary and excess policies placed by Marsh Asia increased from 197 in 2021 to 205 in 2022.
The average premium rate for Asia increased slightly from 2.25% in 2021 to 2.32% in 2022. This average was a blend of an elevated pricing environment during the earlier part of the year that shifted downwards in the second half. This change was mainly due to reduced deal activity easing constraints on underwriting bandwidth and increased competition between insurers for engagements throughout the region.
Expanding market capacity for Asia W&I risks
Asia has traditionally been relatively underserved, in terms of dedicated W&I insurance capacity; 2022 started with only six insurers having underwriters based in the region and core appetites for Asia transactions. Over the course of 2022, insurers (such as Mosaic Insurance, RiskPoint, and Volante Transaction Services) made new investments in the region, with a view to joining the incumbents on the ground.
At the same time, there was an increase in global appetite (primary and excess) for transactions in Asia. Marsh expects a significant expansion in available market capacity in 2023, with limits in excess of $550m to be generally available for a single transaction, thus reducing the need to turn to non-core insurers in EMEA, whose appetites have tended to be more selective.
Rising interest in fundamental warranties coverage
In 2022, there was increased interest in policies providing coverage for fundamental warranties only (such as title and capacity). When used on a standalone primary basis, these policies can be pivotal deal enablers by providing buyers with increased protection over key risks, such as sellers’ ownership of the target and their ability to enter into the transaction.
Claims
2022 saw the highest number of claim notifications ever recorded in the region, with the total number rising by approximately 30% compared to 2021. This increase, however, was exclusively driven by several deals recording multiple claim notifications during 2022. Analysis of the rate of deals receiving at least one notification on their policy showed that the claims rate remained steady in 2022, at around 10%, compared to 11% in 2021 and 9% in 2020.
Litigation warranty breaches became the leading category of breach across Asian warranty claims filed in 2022, accounting for 55% of all claims filed during the year. For comparison, litigation warranty breaches accounted for around 7% of all claims made between 2017 and 2021. The majority of these filings also related to concurrent breaches of other warranties, including those relating to financial statements and tax.
The catch-all approach of filing a claim under multiple categories of breach, including litigation, featured in half of the claims made in 2022. Therefore, it is too early to determine whether this is a trend or an anomaly, and Marsh will continue to monitor the data.
Among the claims payments made in 2022 was the largest W&I claim payment recorded by Marsh in Asia, concerning an $11m compliance breach in Japan. The breach event and loss were verified, adjusted, and paid within seven months of the date of notification, making the process seamless and efficient for all involved.
