The many impacts that the coronavirus pandemic has had on the global economy includes the resulting slowdown in mergers and acquisitions across industries. This environment will also potentially reverberate into the related representations and warranties (R&W) insurance marketplace.
“Many deals in process have either slowed or simply been sidelined for the time being,” said Matt Heinz (pictured), senior managing director of Aon Transaction Solutions. “The general feeling is that some of these deals will come back at some point in time, but to the extent that something is not already signed, folks are pushing off the signing date to a later period, hopefully this year, when there’s a little bit more clarity and the dust has settled.”
The deals that are already signed and are waiting to close will meanwhile probably see increased scrutiny around closing conditions, sellers’ ability to satisfy closing conditions, and buyers’ obligation to close given the massive underlying disruption that we’re seeing, added Heinz. Finally, for deals that were in the pipeline, leaders will probably take some time before jumping back into the market because valuations are a challenge right now considering that many industries have shut down.
R&W is designed to cover unknown and unintended breaches of representations and warranties made in business M&A agreements, so buyers that acquired companies recently that are not performing as well as anticipated because of the pandemic might look to these policies as an avenue to ease that pain.
“I don’t know if that necessarily is the correct outcome or the goal of the R&W policies – to turn good deals that have gone bad back into good deals,” explained Heinz, “but certainly to the extent that there are underlying breaches of reps that come to light post-closing and we discover that a buyer would traditionally have recourse against the seller for some sort of misstatement by that seller, then the policy should absolutely respond.”
There are also other implications of the pandemic for R&W insurance that insurance professionals should be keeping an eye on right now. For one, carriers will be thinking about the pandemic impact and potentially imposing exclusions tied to that, according to Heinz, so clients should be carefully evaluating exactly what they’re getting and what they’re not getting, as well as the wording of exclusions and the extent to which those exclusions may apply in their policy. Clients need to work closely with their brokers to make sure that any exclusions are limited to an acceptable extent.
“From an underwriting process, aside from policy language, the other practical consideration is that carriers are going to be scrutinizing this heavily during their underwriting approach, trying to understand the impact on supply chains, impact on underlying worker populations, whether folks are quarantined or able to come into work, whether folks are now working from home who would otherwise be in office, and if there are potential cyber impacts as a result of more information being available online or flowing through the cloud than would normally be,” said Heinz.
As for how he expects the R&W market to develop going forward, the Aon expert says that everybody’s still open for business and that deal flow hasn’t died completely. The fact that the greatest period for growth of R&W insurance was coming out of the Great Recession a decade ago also bodes well and could mean the marketplace is poised for growth again this time around as markets react negatively to the outbreak.
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“Rep insurance is going to continue to be the most likely and efficient alternative to traditional indemnity structures for our clients,” Heinz told Insurance Business. “I think some carriers will likely suffer as a result of a downturn in activity, particularly folks who are newer to the market, but my hope is everybody will weather this and we’ll suffer through whatever decreased activity we see over the coming months, and be well-positioned to rebound when things turn around.”
