Taking bull by the horn: How 2020 crises unveiled potentials for transactional risk insurance

By Zainab Iwayemi

The rousing of the coronavirus pandemic, which has dealt massively with companies and corporate bodies, households and individuals, also crippled economic activities with several companies in the insurance industry globally and in Nigeria feeling the brunt in their operations.

While the year-long pandemic resulted in an economic downturn, individuals and companies all over the world are still greatly weighed down by its aftermath. However, opportunists have taken the bull by the horn and are re-strategizing and turning the table around in response to the new normal.

In addition to the global pandemic, #EndSARS protest further put the Nigerian economy in disarray. The uncertainty brought about by the year’s crises has unraveled the fact that dealmakers very well need insurance. This has prompted stakeholders to watch the merger & acquisition (M&A) market closely in order to gauge the potential impacts on transactions.

Transactional risk insurance are insurance policies that cover risks related to mergers and acquisitions; including representations and warranties insurance, or warranty and indemnity insurance, tax indemnity insurance, and contingent liability insurance.

The opportunities arising from the year’s crises were clearly spelt out for insurance companies as it threw open an opportunity for insurance companies to demonstrate what insurance is about through providing claims to victims of the year’s crises and individual companies that are unable to survive as a unit.

However, those familiar with the matter have cited that some insurers, rather than taking advantage of the situation to sell product to the public, wasted time whining over the need to postpone recapitalization deadline.

Ekerete Ola Gam-Ikon, management, strategy and insurance consultant in a note to Business A.M said: “I will like to state that the opportunity that arose while the crises prevailed were wasted haggling on recapitalisation.”

On the flip side, some insurance companies have taken to utilizing the opportunities thrown at them. Such is the case of insurance companies like Prudential Zenith Life Insurance, which announced that it has exceeded the capital base requirement by the regulator, the National Insurance Commission (NAICOM) for the first phase, at the beginning of the new year.

From a broader perspective, Joe Castelluccio, a partner in Mayer Brown’s corporate & securities, a global service provider, submitted that transactional liability underwriters, like the dealmakers, quickly adjusted to uncertainties triggered by the pandemic as underwriters suddenly re-adjusted and started re-offering insurance with exclusions for COVID-related business issues.

“Over the past six to eight months, those exclusions have become much more nuanced, tailored, and, in some cases, much more narrow, as different insurers figured out effective strategies to handle the risk. That quick adaptation mirrors a practice that’s happened more broadly in the transactional risk insurance market over the past few years, where underwriters have become incredibly sophisticated.

“Instead of excluding everything possibly related to COVID-19 and a deal from their policies, underwriters started to scrutinize industries and individual businesses much closer, especially regarding their COVID-related risk management and due diligence. For example, we’ve seen increased focus on companies that have taken PPP loans or have touchpoints with the CARES Act or other government-related pandemic responses. Based on answers to those questions, insureds get a policy with coverage that is tailored and specific to their needs, and with a premium that they’re comfortable paying. At the same time, the insurers are comfortable that they’ve not insured a black box of risk,” he explained.