W&I Insurance: A Global Perspective On A Growing Product

Warranty and indemnity (W&I) insurance is on the rise. Although there are variances in coverage and forms between jurisdictions, its primary purpose is to transfer, to a third-party insurer, the risks associated with a seller's breach of warranty or liability under an indemnity in an acquisition agreement.

W&I insurance has been around for many years, but we are now seeing its increasing take-up, particularly in Asia Pacific, Europe (notably the UK) and the US.

This article answers two of the more common questions we are asked by participants in key markets: what are the trends in the market, and what does the future hold?

WHAT ARE THE TRENDS IN THE MARKET?

Key markets are becoming increasingly interrelated, with prevalence in the US pushing European insurers to offer certain US-style policy features, and Asian insurance giants looking to support investment in European and US markets.

Australia

The Australian market is now one of the most mature and competitive W&I markets in the world. The use of W&I insurance as security for breaches of warranties and indemnities in Australian deals has surpassed the use of any other form of security and the demand for W&I insurance shows no sign of abating.

While there is a stable of insurers who have been offering W&I in the Australian market for some time, new entrants continue to enter (offering both primary and excess cover) . This has resulted in Australian premiums remaining some of the lowest in the world and enabled insured's to access a broader coverage offering. There is now sufficient capacity in Australia to build a tower that provides coverage of AUD1 billion for a single transaction.

There is a demonstrated claims history in the Australian market with claims in respect of financial statements warranties, material contracts warranties and tax warranties being the highest frequency claims. This claims history is giving insureds more comfort in the product and where W&I insurance was traditionally the domain of a PE buyer or seller, and viewed with some scepticism by industry or founder parties, we see much less reluctance from non-PE market participants in taking up the product.

Auction "sell-buy-flip" processes (where W&I insurance is put on the table by a seller as a non-negotiable part of the deal from the outset) are a relatively common deal structure. Increasingly, insurers are engaging in these processes with a seller from an early stage to provide some sell-side guidance and at times underwriting with multiple bidders in a contested auction so that W&I underwriting runs in parallel with the deal process to facilitate the deal timetable.

As a result of the mature and increasingly globalized market, coverage positions are adapting and we are seeing an increasing number of insurers who are willing to accept more US-style coverage positions (including due diligence reports and data rooms not reading down the...