- Under one fifth (17%) of global private equity firms’ report a comprehensive knowledge and awareness of the insurance market and use cover for capital efficiency.
- Findings from research amongst global PE firms, commissioned by Gallagher’s specialist M&A insurance broking team, found that one fifth (19%) of PE firms are unsure what insurance their firm has in place.
- One fifth of global firms buy insurance for acquisitions on an individual, deal by deal basis.
- Less than a third (27%) of global private equity firms buy insurance via a dedicated risk manager.
However, private equity firms’ knowledge of the insurance market and strategic use of cover remains relatively limited, according to research undertaken by Gallagher, one of the world's largest insurance broking, risk management and consulting services companies.
In Q1 this year, just 17% of firms reported a comprehensive knowledge and awareness of the insurance market and use of cover for capital efficiency. Comprehensive knowledge levels were similarly low among US and UK-based firms, falling to 13% for Asia-based firms. A higher proportion of respondents from larger funds (28%) reported higher levels of knowledge.
Just half (51%) of the global private equity firms are aware that there are specific policies providing cover against long-tail transitional tax risks.
Structuring insurance cover
Given the wide variation in investment approaches, time horizons and governance structures across the private equity industry, there are significant differences in the way firms purchase and structure their insurance cover.
More than half (56%) of global private equity firms buy insurance at fund/firm level, and on behalf of portfolio companies.
- Just under one third (31%) of firms buy insurance at firm/fund level only, with underlying portfolio companies responsible for structuring and purchasing their own cover. This trend was higher in US and UK markets (32% and 33% respectively) versus 26% among Asia-based firms.
- A higher proportion (33%) of growth equity firms buy cover solely at firm/fund level, versus 24% among buyout firms, reflecting the likely differences in ownership with buyout firms generally taking majority stakes in their portfolio companies.
- One fifth of global firms buy insurance for acquisitions on an individual, deal by deal basis.
When it comes to buying insurance cover at firm level, more than half (53%) of global private equity firms’ insurance is bought by Chief Financial Officers or Finance Directors, rising to 63% in Asia. Less than a third (27%) buy insurance via a dedicated risk manager, rising to 38% in the UK and falling to just 15% in the US.
Type of cover purchased
The most common types of cover bought by global private equity firms were property (41%) and warranty & indemnity (36%), closely followed by public liability (35%), professional indemnity (34%) and directors & officers’ (34%) insurance. US-based firms placed relatively greater importance on buying standalone cyber cover (28%) compared to UK (26%) and Asia-based (24%) private equity firms.
When asked which insurance policies private equity firms assessed during the due diligence process of an acquisition, UK-based firms looked most closely at employer liability (44%), firms based in Asia prioritised property (56%) and public liability (46%), whereas US-based firms, aside from property and employer liability, paid most attention to assessing directors’ & officers’ (34%) insurance compared to their UK and Asia-based counterparts.
Comment from Charles Russell, Head of Transactional Risks, Gallagher said: "While it is encouraging to see that the majority of global private equity firms have some understanding of the insurance market, there is some way to go before the use of insurance as a strategic tool becomes widespread.
"In today's uncertain landscape, with illiquidity and balance sheet exposure a concern for both general and limited partners, improving deal certainty, enhancing a negotiating position, or mitigating certain financial risks should be prioritised.”
Gallagher commissioned a survey of 258 global private equity firms in March 2020 by Censuswide. Of the firms surveyed, 100 firms were based in the US, 104 in the UK and 54 in Asia. The size of firms surveyed ranged from £100m AUM to over £500bn AUM.
