Under the Radar: Cutting-Edge Insurance Offerings
The insurance industry has added new products and services for M&A, yet these innovations aren’t yet well-known
Over the last 10 years, M&A representations and warranties insurance (RWI) has increasingly become the norm for most transactions.
It’s now a standard tool used in many deals because buyers, sellers and advisors have become more aware of the benefits of this type of insurance and more carriers offer it.
The expanded adoption of RWI has led to the development of new products and services.
This section of the report is sponsored by io.insure and originally appeared in the Summer 2023 edition of Middle Market Executive.
For instance, some insurers offer customized policies tailored to a specific portfolio company’s transactions, or even for secondary transactions. Others provide policies covering the full value of losses with large seller rollovers.
With all this change, many M&A professionals are unaware of the most cutting-edge offerings in the M&A RWI space, says Nate Stortzum, managing partner of Sydney, Australia-based io.insure, an online mergers and acquisitions insurance marketplace for transactions involving small and midsize enterprises.
“Even the traditional route is more creative than three years ago, and there are unique solutions that exist and that are being done every day that at least they should know about,” Stortzum says. “It’s a more moldable product with more options than what it was even five years ago.”
Tech-Enabled Transactional Risk Products
The traditional path of purchasing M&A insurance is less drawn out but still involves a two-hour call and review of third-party diligence memos, the purchase agreement and draft disclosure schedule, Stortzum says.
“On small transactions, dealing with multiple reports and underwriters’ review of a virtual data room is costly and cumbersome,” he says. “But now you can scrap all that.”
With io.insure’s Mio—M&A Insurance Online—offering, dealmakers can bypass all that work. Stortzum describes Mio as the world’s only data and tech SME insurance solution. It’s a platform that simplifies the underwriting process, designed for deals under $20 million of enterprise value.
The Mio platform allows buyers to answer an online questionnaire, employing yes or no responses, which are used to underwrite the insurance. Since no third-party reports need to be reviewed, it saves buyers 40% of the cost for 90% of the coverage, Stortzum says.
Tailored Coverage for Specific Deals
Sometimes in a deal, a seller wants more insurance coverage for a specific area for an extended period of time.
Typically, RWI offers six years of coverage for breaches of fundamental and tax reps and three years of coverage for general reps.
While many M&A insurance carriers stick to these parameters, some insurance companies like io.insure understand that every transaction is different and insurance should reflect that.
M&A insurance buyers should feel free to ask for a more tailored deal from carriers, Stortzum says.
Likewise, they should try to negotiate for higher deductibles in specific higher risk areas to avoid exclusions.
For instance, if a company has 500 contract employees, that’s a lot of exposure, especially if it’s a smaller deal. A typical deductible for many businesses is between 0.8% and 1% of enterprise value, but most companies don’t employ that many contract employees, Stortzum says, adding that carriers would be open to negotiating a different deductible to better suit the specifics of the deal.
“If there is something unique or different, let’s try to brainstorm and find a solution together,” Stortzum says.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.
