It was only until two years ago that you could count the number of specialist tax underwriters on one hand. Today, the number of tax insurance specialists worldwide is likely to be nearer 100.
This spike in capacity and competition has driven many M&A insurers to expand their offering. The markets are also reacting to increasing enquiries, led by tax advisers. Insurers started by wrapping known tax matters into W&I policies and offering standalone M&A tax products. Now they are reaching beyond transactions to corporate and debt restructurings, live investigations and liquidations.
Whilst appetite for a broader range of risks has grown quickly, we have also begun to see tax insurers tackling harder, high risk tax exposures that were traditionally uninsurable. In addition to competition and demand, this is primarily a result of in-house tax expertise.
Traditionally, insurers required three elements to insure a tax risk: a third party opinion, calculation of loss and a degree of uncertainty as to the level of tax that is applicable to any one situation. In order to have a good chance of insuring the tax risk, underwriters would typically require a ‘low to medium’ risk assessment by the expert opinion. ‘High Risk’ items have traditionally been too difficult to cover.
The low, medium or high assessment is almost always made by the accountant with the information that has been made available to them. However, due to minimum due diligence budgets, sellers’ lack of cooperation, or simply the idea that warranties will be given to address these concerns anyway, it is not always the case that requisite information has been provided and analysed adequately.
By hiring in-house tax experts insurers are more open to analysing and underwriting the tax risk themselves rather than relying solely on an expert opinion furnished by the insured. During their review, insurers will also look at the chance of challenge (tax authorities in some jurisdictions are more ‘aggressive’ than others) and the defence, if there were to be a challenge.
Whilst some insurers can disagree with the accountant’s ‘low risk’ rating after reviewing the requisite materials, they may also disagree with the ‘high risk’ assessment and offer terms to insure it. This has led to an increase in tax enquiries from both lawyers and accountants, but also deal teams as there is always the chance that these ‘high risk’ tax items, which have been advised are uninsurable solely due to the ‘high risk’ rating, might be coverable.
In summary, whilst low-medium ratings are likely to attract more competition in the tax insurance market, it is always worth exploring higher risk items, as it is not always certain that that these will be uninsurable.
The M&A market continues to grow and if insuring higher risk tax items leads to more business elsewhere (such as W&I and lower risk tax items), they are always willing to consider.