Market update: Recent trends in the tax insurance market

The growing use of tax insurance in recent years, accelerated in 2024. Recognition of tax insurance as an effective tool for mitigating tax risks from M&A transactions, refinancings, restructurings, and other situations has fuelled significant increase in demand for the product.

In 2024, the rise in use of tax insurance has been mainly driven by five key factors:

Reduced cost of insurance

The London tax insurance market, which support tax insurance placements globally has grown to have over 20 insurers actively participating on placements – often deploying insurance limits in excess of US$50 million. Increased market participation has created a competitive environment between insurers and, as a result, significantly decreased the cost of insurance. Historically, tax insurance would typically cost between 3% and 8% of the limit insured. However, placements are now typically secured at between 1% and 2% of the limit insured – and sometimes lower. Consequently, tax insurance has become a more economic strategy for mitigating tax risks, facilitating transactions, and securing returns from investment activity.

Expansion of tax insurance risk appetite

In recent years, tax insurers have actively hired experienced and knowledgeable tax specialists to assess and underwrite tax risks. As a result, insurers have gained more confidence in underwriting a wider range of complex tax risks across multiple jurisdictions (such as South America, Africa, and Southern Europe). This includes risks already under audit or in litigation – which historically would have been uninsurable. The increased appetite for tax risks has expanded the pool of insurable tax risks – driving considerable development in the tax insurance market.

Rise in seller-initiated insurance processes

Sellers are incorporating tax insurance as a proactive measure that pre-emptively addresses tax issues bidders commonly identify during buy-side due diligence. This approach – a preferable alternative to escrows or indemnities – grants insurers more time for risk assessment and offers clearer insight into tax exposures by utilising sell-side information. This strategy bridges the gap between the opposing risk allocations of sellers and buyers by ring-fencing the issue, benefitting both parties.

Use of tax insurance outside of an M&A transaction

The use of tax liability insurance has significantly increased in non-M&A scenarios, such as group restructurings, refinancings, releasing balance sheet provisions, incentive programmes, and mitigating potential VAT and sales tax risks. Using tax insurance separate from M&A activity can enable organisations to accomplish their business strategic objectives. This can include reducing potential tax risks and providing certainty that there will be no unexpected financial setbacks that could erode shareholder value – while maintaining the integrity of the balance sheet and creating liquidity.

Increase in tax investigations and audits

Across the world, governments are facing large budget deficits in the aftermath of the COVID-19 pandemic and tax authorities are addressing this issue by becoming more aggressive and assertive in their approach to taxation. Consequently, taxpayers – who already feel they have appropriate tax strategies in place – are increasingly turning to tax insurance for effective mitigation of their tax related risks.

The tax insurance product has evolved tremendously over previous years to become a valuable tool for managing tax risks. The themes and risks that have driven the increase for tax insurance in 2024 may not abate and could be just as relevant as we move toward 2025. It would be prudent for private equity firms to consider tax insurance to effectively manage risks in multiple situations and scenarios.

If you would like to find out more about the topics raised here, please contact the Marsh Specialist Tax Insurance Team.

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Article

Market update: Recent trends in the tax insurance market

In 2024, the rise in use of tax insurance has been mainly driven by five key factors:

Reduced cost of insurance

Expansion of tax insurance risk appetite

Rise in seller-initiated insurance processes

Use of tax insurance outside of an M&A transaction

Increase in tax investigations and audits

Our people

Leon Steenkamp

Leon Mixios

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Market update: Recent trends in the tax insurance market

In 2024, the rise in use of tax insurance has been mainly driven by five key factors:

Reduced cost of insurance

Expansion of tax insurance risk appetite

Rise in seller-initiated insurance processes

Use of tax insurance outside of an M&A transaction

Increase in tax investigations and audits

Our people

Leon Steenkamp

Leon Mixios

Related insights

Facilitating the bankability of energy transition projects: Risk management and insurance considerations

Transactional Risk Global Tax Bulletin

Risk in Context Podcast: Focus on sustainability transforming private equity investment strategies

Map: Tax risks in emerging markets