Private equity deal volume is expected to rebound in 2024 after slowing last year, and that means your PE clients can expect to see their insurance rates — particularly for liability and indemnity (D&O and R&W) — decrease or flatten in step.
“Mimicking the slow market in transactions, the cost of representations and warranties (R&W) coverage — an essential element in risk management for PE firms — has fallen, with a drop in premiums and lower retention amounts,” Hub International wrote in its 2024 Private Equity Outlook for Canada.
“Rates fell significantly in 2023, as increased competition for a smaller number of deals led to discounting,” Hub wrote.
That said, the expected rebound in M&A means premium increases for PE will be flat to moderate in 2024.
But, if deals do rebound this year as expected, the R&W insurance market will harden, with insurers applying greater restrictions and retentions to their coverages. In response, PE firms will have to remain diligent about their risk management efforts.
When it comes to D&O, premiums and retention amounts have “followed the same pattern,” Hub said. Overall, the report said PE clients can expect flat growth and possibly rate reductions for their D&O coverage. “For the most part, financial institutions will see an accommodating insurance market.”
Rates are likely to be flat for private financial institutions’ D&O insurance. For public companies, rates for D&O coverage will be flat in 2024 after premiums declined in 2023.
In particular, private insureds can expect little to no rate increases (+5%) or even slight decreases (-5%) upon renewal. “Those with claims or significant exposure changes will see a modest premium increase. Note that financially challenged accounts will have a difficult time finding D&O insurance,” Hub said. The same goes for PE firms with financial institutions in their portfolios.
Overall, PE firms will see their portfolio companies experience pressures on profitability due to an inflationary economic environment and elevated competition for talent.
“That means PE firms focused on improving operations — those with best practices in insurance and risk management for [portfolio companies], as well as those with thoughtful representations and warranties (R&W) and directors and officers (D&O) insurance strategies for acquisitions — will be best positioned for success,” Hub said.
When it comes to other coverages, financial institutions can expect general partnership liability coverage to decrease as much as 10%, since Canada has only a handful of carriers in this segment.
Cybercrime insurance rates are flat for smaller financial institutions especially, or for primary layers, Hub said. For excess layers, rates are falling 20% to 30%, or more.
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