High interest rates, geopolitical tensions, regulatory intervention and other macroeconomic headwinds have combined to make 2023 another challenging year for M&A market participants. By the end of Q3, global deal-making activity was at its lowest level since 2013. ‘Mega’ deal volumes were down 42% on a year-to-date basis (smaller deals less so). It has been the second year in a row that M&A by deal levels fell by double digits.

Though interest rates remain high, private equity firms and large corporates alike have managed the difficulties of the last 18 months, and are eager to stay current and competitive by making new investments. M&A is unlikely to make a dramatic return to 2021 levels, but we observed a promising spike in new enquiries in Q4.

It will come as no surprise that the M&A insurance market has been hit hard by this decline in underlying M&A activity. Most insurers increased their capacity and resources (off the back of a very profitable 2021 and early 2022). New entrants have also entered the fray, meaning that competition between insurers has been tighter than ever.

Dramatic premium reductions and coverage innovations have been key themes of 2023. For example, average US premium rates have come down to c. 2.5% rate-on-line (premium/limit), from c. 5% only 18 months ago. Similarly in the UK, not only are rates falling to as low as 0.75% (and 0.5% for real estate deals), various enhancements and tipping retentions are also needing to be offered to win deals. US style enhancements for non-US law deals are now presented as standard, and affirmative coverage for known tax and IP matters is increasingly obtainable.

Insurers continue to expand into emerging markets - we have seen a flurry of enquiries for deals and unprecedented interest in South America, Africa and India. Insurers have budgets to achieve (and insuring riskier deals attracts high premiums). Underwriters are also getting more comfortable with a wider range of jurisdictions, as their experience and relationships with local counsel grow.

It is becoming possible to cover ever-smaller transactions. Several insurers compete for deals under $5m (both on the sell-side and buy-side). Underwriters are able to accommodate more limited DD.

It has been a tough year for the M&A market, but the percentage of deals that are insured continue to rise even though deal volume is heavily down. Insurers remain resilient and innovative as they wait for the market to turn.