W&I insurance continues to be particularly relevant on sizeable deals. According to several claims studies including our proprietary Howden M&A data,1 large deals generate a higher number of notifications than smaller deals. In light of this, an increasing number of W&I insurers have a preference to deploy smaller policy limits on transactions to actively manage potential exposures, thereby triggering a need to involve several insurers. This means that syndicated insurance programmes (so-called “Insurance Towers” or “Towers”) are becoming increasingly relevant in M&A practice. In this piece, we outline practical considerations for structuring towers and pursuing claims in syndicated insurance programmes.
1. What is a Tower?
Limited capacity of each insurer: The maximum amount W&I insurers can deploy on a single deal is limited.2 Where the insured requires a higher policy limit, at least one other W&I insurance provider will have to be involved to supplement the limit under the so-called “primary policy”. This is usually done by way of so-called “primary policy”. The primary policy (issued by the primary insurer) and the excess policies (issued by the excess insurers) together form a layered syndicated insurance programme (the “Tower”), with each policy sitting excess of the underlying policies: the first layer is the primary policy (which will respond to loss once the retention is eroded), the second layer is the first excess policy (which will respond to loss once the retention and, subsequently, the limit under the primary policy has been eroded), the third layer is the second excess policy and so forth. There is, in principle, no limit to the number of excess policies that can be issued on a single deal.
The level of capacity that insurers can deploy on a single deal is, of course, particularly relevant on large transactions (on which W&I insurance is especially relevant).3 In the current market environment, no W&I insurance provider could insure a transaction with a multi-billion euro transaction value on its own (assuming a policy limit of at least 10% of the transaction value).
Trends towards lower primary limits: W&I insurance providers increasingly prefer deploying smaller primary limits, while potentially offering additional capacity under an excess policy at the very top of the tower (“ventilated structure”). For example, the average limit of all policies issued in the DACH region by AIG has decreased from c. EUR 33m in 2019 to c. EUR 26m in 2021 (a decrease of c. 22%).4 We are also seeing some insurance providers take a more conservative approach to standalone insurance structures (i.e. they increasingly prefer to insure deals in a syndicated insurance program rather than on a standalone basis).
The driver behind this trend is the fact that W&I insurance policies are intended to protect the insured against risks that have a low chance of materialisation but potentially imply a very significant loss. Only c. 20% of large deals attract notifications5 and payments are made by the insurers in 57% of all notifications.6 Only a fraction of the payments will exceed EUR for 10m a single claim but large claims occur regularly.7 Given the premium levels in Europe and the US (and taking into consideration that a sizeable percentage of the premium charged by the insurer will be spent on overhead costs), the premium corresponds to a minuscule fraction of the limit, which means that a single large claim can wipe out a substantial part of the revenues generated by a W&I insurer in more than a year. The impact will be greater for insurance providers with a lower number of policies issued in a year and less (geographical) risk diversification.
So, a single material claim can “make or break” an insurer’s book. Considering this dynamic, W&I insurers in the US have already been implementing lower primary limits and fewer standalone policies for years. It is also common practice globally across other lines of insurance, such as directors and officers liability insurance.