Booming Tax Insurance Demand Outpaces Underwriting Talent. Here’s What That Means for Carriers and Insureds

There remains enough uncertainty about commercial tax exposures that insuring them is a booming business.
By: | April 23, 2019

For all the certainty of death and taxes, there remains enough uncertainty in commercial tax exposures that insuring them is a booming business.

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“We have been active in tax insurance all by ourselves for a long time,” said Gary Blitz, senior managing director, co-practice leader, and head of the tax insurance practice at Aon. “Now some competitors are starting to pay attention.”

With a global market of at least $8 billion, there would seem to be plenty of room.

“We should never bump into each other,” Blitz said. “Globally last year we handled more than $6 billion bound and written, which was double in limits and premium from 2017. This is a huge business.”

Austin Cahill, senior vice president and head of the tax practice at Atlantic Global Risk, suggested that several related recent developments have driven the rapid growth of tax insurance.

“First there was the boom in reps and warranties (R&W) coverage specifically to address unknown risks in a transaction. Identified or known risks [notably taxes] were excluded, and sellers grew weary of providing indemnification for those.”

“We have been active in tax insurance all by ourselves for a long time. Now some competitors are starting to pay attention.” – Gary Blitz, senior managing director, co-practice leader, and head of the tax insurance practice, Aon

That led to a spike in hiring tax experts for mergers and acquisitions as firms saw an opportunity to close a gap. Underwriters were better able to price the risks, and the costs of coverage declined sharply. “Tax insurance used to cost in the high single digits to low double digits as a percentage of the transaction value,” said Cahill. “Now it as low as 2 percent.”

That affordability stimulated demand. Tax insurance went from something that was only considered if necessary, to a modest addition to many deals. While tax insurance is categorized within transaction liability, Blitz noted that it actually preceded R&W.

“I got involved early, in the 1980s, working with a Lloyd’s syndicate. Tax insurance predated R&W, even though it has since been eclipsed. I was the counsel for the first U.S. R&W policy,” he said.
Blitz recalls that while tax insurance initially was thought of as single-risk errors and omissions (E&O) coverage, it was not truly a good fit under those policies.

Gary Blitz, senior managing director, co-practice leader, and head of the tax insurance practice, Aon

“When your tax attorneys make a recommendation on the tax treatment of a transaction, that of necessity makes assumptions. If the tax authorities make different assumptions and the tax ruling is different, it’s not necessarily an error in the recommendation, it’s just different. However, a tax-insurance policy will pay if the intended tax treatment is successfully challenged without regard to there being an error or omission.”

For some large and complex transactions, the parties will often seek a private-letter ruling from the tax authorities. In most cases having that in hand would make tax insurance redundant, but not necessarily.

“Even in a private letter there are assumptions,” Blitz cautioned. He explained that the ruling is made based on the expectations the party has for the transactions. If events are different, the ruling might be as well.

And that is with a letter in hand, which is not always possible or desirable. “The availability of private-letter rulings is not broad,” said Blitz. “There are many areas when the authorities will not provide a letter. When they will, it takes time, which may be tight for a transaction. And then there are cases when a party may prefer not to provide the details of a transaction in advance. In all those cases, tax insurance is preferable.”

All that said, Blitz stressed that tax insurance is specifically for “bringing certainty to sound transactions. It is not in any way to promote aggressive tax schemes.” If anything, there is more scrutiny because the transactions are evaluated by the broker before taking on the placement, and then by the underwriters. Marsh placed more than $1 billion in tax insurance limits in 2018, and brought in a second dedicated broker, to work with Mark McTigue, senior vice president in transactional risk at Marsh, who joined the brokerage two years ago.

“I am 100 percent dedicated to tax insurance,” said McTigue, who has been in the field for about 25 years.

“There has been tax insurance in the transactional practice for many years. I brought in a Rolodex from relationships with the Big Four accounting firms and across the corporate sector, and have been working with the sales force to get the word out about R&W and especially tax insurance.”

Defining the Coverage

McTigue stressed that despite the size and accelerating growth that tax insurance has achieved in the last year or two, there is still a great deal of education to be done — not only on what tax insurance is, but just as importantly what it is not.

“We are not facilitating tax shelters,” he stated. “Everything has to be above board.”

Another area that is a good fit for tax insurance is the booming renewables industry and investment and production tax credits for renewable energy projects, especially solar.

“Some of these developers are thinly capitalized and are using the tax credit to help finance the projects,” McTigue explained. In terms of underwriting capacity, the carriers have kept pace with the growth of tax insurance.

“We work with the normal pool of R&W underwriters,” said Blitz. “About half of those write tax coverage. The sector has made great strides in just a few years. In 2013, we placed a $350-million-limit policy, and it took 14 carriers. These days the limits top out at about $1.5 billion.”

The limit is not limits, but people.

“We are not facilitating tax shelters. Everything has to be above board.” – Mark McTigue, senior vice president in transactional risk,  Marsh

“The biggest impediment from the carriers is manpower,” said Blitz.

“Most carriers are pretty light on staff. They need to be hiring. Although there is a lot of standardization, every policy is for a specific transaction, so has to be manuscripted to identify exactly what is being covered.”

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Of the two dozen carriers that write R&W coverage, it is estimated that slightly fewer than half also write tax insurance. In August 2017, Ascot Group Ltd. created Ethos Specialty Insurance Services as part of its long-term strategy to build a global property and casualty insurance and reinsurance business.

“Ethos Specialty is new to tax insurance,” said Joey Juhn, senior vice president at Ethos, “but the team of underwriters has a strong prior history in tax.” And tax codes can be so very complicated.

“A good faith effort to comply is important,” said Juhn, “and part of that is seeking a recommendation from counsel. Taxpayers work with their outside counsel and insurers work with their outside counsel to ensure that the tax positions being insured are reasonable and defensible.”

Despite the market’s profitability, there are already growing pains. With existing brokers and carriers expanding, and new competitors entering, the segment is in flux.

“I was in the middle of a placement and suddenly the R&W staff at the carrier had to take over because the tax person left. It’s not common, but that was also not the first time. I would urge carriers to hire,” one broker said. &

Gregory DL Morris is an independent business journalist based in North Carolina with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]