Covid-19 crisis prompts uptick in W&I insurance
Warranty & Indemnity (W&I) insurance is likely to become more sought after in the coming months as a result of Covid-19, according to Lockton, one of the world’s largest privately held independent insurance brokers.
Take up of W&I insurance in M&A deals is up from 6 per cent to over 40 per cent in the past five years as companies scramble to win transactions in increasingly aggressive and competitive auction processes.
“Back in 2014, W&I insurance was a rarity in M&A transactions. But in the last five years, W&I insurance products – and buy-side policies in particular – have become better known and much more widespread across western markets,” said George Apperly, assistant vice president of Lockton’s Global Transactional Risks team, who has seen several calls from investors about distressed assets as a result of Covid-19.
“The product’s usage is likely to continue to rise and potentially at a faster rate in response to Covid-19 as investors want even more certainty,” he added.
W&I for both buyers and sellers will become even more pertinent to mitigate the unprecedented uncertainty in the market as Covid-19 continues.
Having started in Australia, W&I products gained traction in the UK six years ago. “W&I insurance originated during the 2008 financial crash, born out of a time of deep uncertainty which is not dissimilar to the current climate sparked by Covid-19. While deal volumes have fallen as a result of the pandemic, this product continues to be in demand for the deals that are going ahead due to the added protection it provides in such uncertain times,” continued Apperly.
W&I insurance policies provide cover for breaches of representation, warranties and indemnities, made by the seller in a share or business asset sale and purchase agreement. The product gives certainty to buyers that an A+ rated insurer is standing behind the liability of a breach of warranty.
For sellers the product allows them to limit their liability often to a nominal GBP1, thereby allowing them to walk away from a transaction with no ongoing liability.
While it’s commonplace in Germany and most of Scandinavia, in terms of growth areas, we are set to see the percentage of W&I deals rocket in southern Europe in the aftermath of Covid-19, according to Apperly. “France, Italy, Spain, and Greece are going to see major upticks – use is also likely to increase in Poland and the Baltics,” he said.