REPS AND WARRANTIES
Reducing Friction for M&As
The reps and
warranties market is
growing rapidly, but
some newer players
may have taken on
more risk than they
By Rodrigo Amaral
As the R&W market grows, carriers are competing to offer more attractive terms and conditions.
Strong demand and booming capacity are driving the market of representation and warranty insurance, which is used by companies to transfer to underwriters risks of future liabilities originated from the acquisition of another firm. In the past few years, the number of carriers who offer this
coverage has increased from half a dozen to more than four times as many. As
a result, terms and conditions have become much more favorable to insurance
buyers, while premium rates have gone down consistently.
Even so, they remain significantly higher in the United States than in Europe
or the UK.
More importantly, however, in the current market, it is possible for companies
to buy coverage for virtually any kind of liabilities arising from an M&A deal. This
includes tax liabilities and risks that, not long ago, markets were leery of, such as
intellectual property infringements, Medicare and Medicaid billing, product recall,
product liability and even environmental risks.
On the other hand, the explosive pace of growth in this market also means
higher loss ratios and raises concerns that some new arrivals in the segment may
not be fully prepared to face the challenges of the product.
“There are more underwriters who want to get involved in this segment than
there are people with the skills required to underwrite the risk,” said Emily Maier,
group leader of Transaction Solutions, Woodruff Sawyer & Company.
For a couple of decades, R&W coverages were mostly a tool deployed by
private equity investors to unblock M&A deals by taking off the table the risk that
liabilities unknown at the time of the transaction would cause significant losses to
the buyer in the future.
It has gradually replaced, in a growing number of transactions, a demand that
sellers deposit a share of the price paid into an escrow account — for several years
— to show their confidence in the veracity of the R&W included in the sales and
purchase agreement (SPA).
The insurance coverage makes the deposit unnecessary, liberating sellers to fully
dispose of the capital raised immediately as they see fit. As a result, in a competitive
M&A market, investors have increasingly purchased the coverage to make their bids
more attractive to sellers of coveted assets. It also helps to reduce the risk of friction
between the new owners and the talent acquired along with the physical assets.
Jonathan Gilbert, senior managing director, Crystal & Company, estimates
Brian Benjamin, global head of
that, while not long ago one out of every 20 transactions was covered by R&W
“I have seen sell-side policies where the seller is much smaller than the buyer,
and so it does not necessarily have as much bargaining power,” she said. “There
are also situations where international buyers come from a jurisdiction where
the market is not as familiar with this
product and do not feel comfortable
Demand has attracted a growing
number of insurers and MGAs to
the markets, and prices have fallen
M&A Insurance, XL Catlin, estimates
that rates dropped 10 percent in 2017,
reaching between 2.8 percent to 3. 5
“There are more underwriters
who want to get involved in
this segment than there are
people with the skills required
to underwrite the risk.”
— Emily Maier, group leader of Transaction
Solutions, Woodruff Sawyer & Company
• The number of carriers offering
R&W has quadrupled in recent years.
• Rates are higher in the U.S. due
to litigation risk and more
• Entrants new to the market may
have underestimated the potential
losses in the line.