The insurance industry has undergone a significant transformation in the past few decades, particularly in the sectors related to mergers and acquisitions, as well as commercial deal structures. The game-changer has been the introduction of representations and warranties insurance which acts as a shield for buyers against unidentified risks. Read more
Recognizing the growing demands and requirements of the corporate world, insurers have expanded their offering to cover specific risks like tax and litigation, and these insurance products have been witnessing notable growth. This growth can be attributed to an increased awareness and rising use within the industry, and current trends suggest continued growth into 2024 and beyond.
Tax insurance is chiefly aimed at transferring the risk of specific tax issues from a company’s books to an insurer. The tax insurance market has seen noteworthy development recently. One of the major indicators for this is the rise in volume and diversity of tax submissions on the market which increased by over 30% in 2023 according to Financial Times.
The success of tax insurance can be linked to the increasing market awareness and its effectiveness in transferring tax risk. As the industry gets more familiar with the benefits of tax insurance, it is likely that the demand will steadily grow in the future.
But volume isn’t the only concern here; the types of risks covered under tax insurances have also broadened. It has evolved from covering a narrow band of tax risks including renewable energy credits and qualification for real estate investment trusts International Tax Review to covering a wide range of risks including domestic as well as international income tax issues, business reorganizations, and nearly any kind of tax problem that might arise in a deal context according to Aon’s Tax Insurance Brochure.
Despite the growing knowledge about tax insurance, its use doesn’t currently correlate to the broader deal market due to limited market penetration. However, this aspect is changing gradually, and other forces such as increased IRS audit activity and changes in tax codes are likely to fuel further growth.
Apart from tax insurance, another form of coverage making waves is that relating to litigation risks, more specifically, contingent risk insurance. This form of insurance comes in two versions: adverse judgment insurance, used primarily to protect a pending litigation’s defendants and ring-fence litigation exposure, and judgment preservation insurance, protecting a verdict from being reversed, reduced, or overruled on appeal.
The contingent risk insurance industry has witnessed exponential growth recently due to various factors including a greater understanding of its utility by the industry. As Woodsford points out, litigation financiers are using this insurance product increasingly, recognizing it as a beneficial tool for litigation finance, and helping it to break into the mainstream.
This upward market trend shows no signs of slowing down, with more companies (including law firms and litigation funders) seeking insurance for a broad spectrum of litigation risks. Furthermore, the future is likely to see an increase in adverse judgment insurance placements as M&A activity continues to rise.
Considering all these factors, it is clear that in the areas of tax and litigation insurance, there are prevailing winds of growth and transition. Fuelled by growing awareness, constant innovation and ever-evolving market needs, these specialty insurance markets are set to see continued expansion in their scope and relevance.