The M&A insurance market has become increasingly crowded in recent years due to the significant growth in the number of specialist MGAs (managing general agents) looking to capitalise on the increased appetite for the product and strong deal flow.
These MGAs, under pressure to establish market share, try and differentiate themselves both on pricing and scope of coverage. It is important, however, for a prospective insured to step back and consider, before making a decision, how its claim will be dealt with if the deal does not go as expected.
The key point for insureds to understand in this context is that MGAs are not the risk-taker for the purposes of the policy and will usually have little or no authority to settle a claim, instead needing to refer settlements back to the panel of insurers that provide their capacity. Some of these insurers might be completely new to the market, meaning that they have no prior experience of handling M&A claims and no track record of paying M&A claims. Some might only stick around for a short period before exiting the market entirely, or deciding to provide capacity to a different MGA. They are able to do this with relative ease because they have not invested in the people and infrastructure necessary to write the business directly for their own account. This means that an insured can sometimes find that the entity handling its claim no longer has any ongoing interest in the MGA that wrote the risk and is more inclined, therefore, to take technical points. The risk is that this can all combine to result in a protracted and unpredictable claims process, which is the last thing an insured wants when it is looking to recover and move forward as fast as possible following a loss.
It is essential, therefore, for an insured to give proper thought at the outset to which insurer or entity will be sitting behind its policy. Making the right choice at this stage can save time and money down the line in the event that it becomes necessary to make a claim on the policy. This is particularly the case in the event of a large loss. An established carrier writing the business directly for its own account will have been through a claim of this nature before – it will understand the challenges involved and its claims handling team will be well equipped, therefore, to deal with them. In addition, an insured will only have to deal with one decision maker throughout the claims process – a key consideration bearing in mind that both speed and clarity of response can be critical in this scenario.
There are increasing signs that the mindset of insureds is changing, with many placing an increasing amount of emphasis on the value of claims service when selecting which insurer to partner with. This is especially noticeable for insureds who have already been through the claims process because they understand better than anybody that the failure to do so may result in buyer’s remorse. This is no surprise – after all, the true value of a M&A policy lies in the ability of the insurer to deal with claims promptly when they arise and to honor them whatever their size.