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The Current Corporate Upsurge in the use of Transactional Risk Insurance

In the uncertain world of mergers and acquisitions (M&A), the use of Transactional Risk Insurance for corporates has become an essential strategy, with corporates now increasingly embracing these insurance solutions in a transaction scenario or outside of an M&A situation on a standalone basis.

Historically, private equity has been at the forefront of using Transactional Risk insurance. In the past around 70% of all M&A insurance policies had private equity policyholders, who had a notable comfort and familiarity in leveraging these risk management tools. This tendency can be attributed to several factors, including a higher volume of transactions in their portfolio and a well-established risk mitigation strategy inherent to PE deal-making.

Corporates are now bucking the trend, showing an affinity towards Transactional Risk insurance, primarily Warranty & Indemnity (W&I) and Tax policies. This shift is indicative of a broader industry evolution and the current M&A landscape, with fewer transactions being executed by PE houses due to high interest rates and increased cost of borrowing.

Corporate Emergence: Trends and Observations

In recent years, there has been a noticeable trend amongst corporates embracing W&I and Tax insurance solutions.

In traditional M&A activity the scales are beginning to balance with the split now more even (approximately 50/50) between corporate and Private Equity deals purchasing Transactional Risk insurance. This statistic underscores the growing acceptance and integration of insurance solutions within the corporate sector.

Tax Insurance: Its use by Corporates beyond M&A Transactions

Tax Insurance has traditionally been associated primarily with M&A transactions, offering crucial protection against tax-related risks that may arise during due diligence in the deal process. Also, around 70% of tax insurance requests still originate within the context of an M&A transaction. However, recent trends indicate a notable shift towards utilising tax insurance in a broader range of scenarios beyond M&A.

This shift is driven by the recognition that tax (and also other contingent) risks could exist and harm the ongoing financial health and integrity of businesses outside of an M&A scenario. Insurers and Brokers are actively supporting this diversification of approach from clients, acknowledging the opportunity to address these stand-alone exposures and expand their product offering to clients.

Examples of non-M&A scenarios of where insurance has been helpful include:

• Fund liquidations / cash repatriation
• Group reorganisations (including tax neutral mergers and de-mergers)
• WHT on dividend distribution and payment of interest and royalties
• VAT vs. TOGC disputes

These scenarios highlight the evolving nature of tax and contingent risk insurance and its applicability across diverse business contexts, especially in the current “corporate simplification” strategic approach we are seeing from clients.

Another particularly interesting trend within the Tax landscape is the use of insurance to replace existing escrow arrangements established post-M&A transactions. Typically, parties involved in transactions agree on an escrow to manage potential tax liabilities. Now, sellers are seeking to release these escrows by transitioning to insurance coverage.

This shift from escrow to insurance demonstrates a growing confidence in Tax insurance as a viable and efficient risk management tool. Sellers are recognising the advantages of releasing tied-up capital and transferring residual risks to insurers, thereby facilitating smoother post-transaction processes.

Conclusion

Whilst Private Equity historically dominated the use of W&I and Tax Insurance, the tides are turning.

Corporates are increasingly recognising the value of these risk mitigation tools, driving a more balanced utilisation rate in M&A transactions. This shift underscores an evolving market, where corporates are confident to play an increasingly key role in shaping the future of insurance-backed transactions. The growing familiarity and adoption of these solutions by corporates signal a new era in M&A risk management.

In addition, the use of tax insurance is expanding beyond its traditional M&A-centric role. While M&A transactions remain a primary driver of demand, emerging trends such as escrow replacement and non-M&A tax policies illustrate the increasing versatility and relevance of Tax Liability insurance in modern risk management strategies.

This evolution highlights the dynamic nature of the insurance industry and its capacity to adapt to evolving business needs.