The firm noted that take up of W&I insurance in mergers and acquisitions (M&A) deals has already increased from 6% to 40% over the past five years as companies scramble to win transactions in increasingly aggressive and competitive auction processes.
But coverage will likely become even more pertinent for both buyers and sellers as they look to mitigate the unprecedented uncertainty that COVID-19 has brought to the marketplace.
“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.
“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 explained.
W&I insurance originated during the 2008 financial crash, born out 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.
“In particular, we have had several calls from investors about distressed assets as a result of Covid-19,” Apperly continued. “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. 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,” he went on.
“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 insure their furlough schemes have been carried out correctly.”
The number of underwriters in Europe providing W&I more than quadrupled, from 6 in 2014 to 25 in in 2019, which has driven down costs and widened cover across asset classes and geographies.
To date, the coverage has been used extensively in Australia, the UK, and the US, but it is becoming increasing commo place in parts of Europe, most notably in Germany, the Netherlands, Sweden and Norway.
“As W&I has matured, there has been a sharp increase in the number of underwriters offering the product,” Apperly said. “The white heat of provider competition has led not only to price cuts across asset classes and geographies, it has also widened the cover available. W&I insurance now offers broader coverage to a buyer than a seller would have previously agreed to and that’s boosted the take up of these products even further.”