There are not many green shoots of hope for the insurance industry amid the coronavirus pandemic. Though many insurers have been able to save on reduced car insurance claims, others have faced a barrage of complaints over issues like business interruption cover – even though they may never have offered coverage for pandemics in the first place.
So then, perhaps it’s some small consolation for the industry that at least one product appears to have received a boost from the pandemic – warranty & indemnity (W&I) insurance in M&A.
According to brokerage giant Lockton, take up of W&I in M&A deals has surged – rising 6% to more than 40% in the past five years with companies “scrambling” to win transactions in what has become an increasingly competitive landscape.
Now, the company suggest that W&I is likely to take on added importance for buyers and sellers to mitigate the uncertainty in the market as the pandemic rolls on. The product can provide cover for warranties and indemnities, and breaches of representation, while providing buyers with certainty that they are backed by an insurer and sellers the chance to limit their liability.
“Back in 2014, W&I insurance was a rarity in M&A transactions,” said George Apperly, assistant vice president of Lockton’s global transactional risks team. “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. 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.
“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.”
According to Apperly, there have been several calls from investors about distressed assets resulting from the coronavirus.
“In these instances, synthetic W&I policies can be a useful arrangement when buying a business out of administration, when the administrators are not usually in a position to give warranties,” he explained. “Further, it enables buyers to steal a march on other bidders in a competitive auction process.
“We are also seeing an uptick in contingent risk insurance that has come into play to meet concerns that fall beyond the scope of standard W&I products. PE houses are making use of these policies to retrospectively insure assets, release funds from their balance sheets and increase levels of working capital which is pertinent given the current cash pressures. We have even seen businesses looking to ensure their furlough schemes have been carried out correctly.”