Top 5 Trends – Representation and Collateral Insurance for M&A Transactions | Lippes Mathias LLP

Our Mergers & Acquisitions / Private Equity team recently attended Marsh’s panel on its 2021 Global Trends in Transactional Risk Report. Consistent with what we have seen in the market, industry experts have confirmed that an increasing number of transactions have used representations and warranties (“RWI”) insurance. This article identifies five key trends in today’s market:

  1. Record Setting M&A and its effect on RWI. 2021 represented a new high point for RWI, with records set for both the number of deals closed and overall deal value. At least one insurer said the number of RWI policies it underwrote in 2021 represented a 71% increase over 2020. As new underwriting organizations such as Mosaic Insurance and RiskPoint entered the market and the existing pool of approximately 20 underwriters worked at capacity, by the fourth quarter of 2021 the increase in transaction volume had effectively exceeded the capacity of RWI underwriters to the point that declination rates exceeded 60% for that quarter. It’s unclear if the insanely high deal will carry through 2022, but as long as the M&A market remains as active as it has been, RWI underwriters will continue to struggle to meet customer demand as they attempt to address the human capital shortages that contributed to the high decline rates in 2021.

    2. Increased access to RWI. The expansion of the RWI market has come from various places. While RWI’s initial growth may have been driven by mid-market private equity deals in the US and Europe, deals below $50 million accounted for nearly 20% of RWI policies for 2021, and panelists discussed how the underwriting process has adapted to provide strategies using limited outside resources. advisors, as well as participants in Asia, Africa and the Middle East, have access to RWI policies for their transactions.

    3. A new standard for compensation. For the first time, “no seller’s indemnity” transaction structures were used in the majority (52%) of transactions for at least one US and Canadian portfolio of an insurance company. The maturity of the RWI market and its underwriters, the established precedent of transactions using this structure, and the potential efficiency of interacting with the underwriter claims process instead of a seller and, potentially, the court system all indicate that this trend will continue to grow, making it the new normal in transactions with access to RWI policies.

    4. Supply and demand pricing. As insurance companies struggle to meet transactional demand in 2021, RWI primary rates have increased by more than 40% in the United States and Canada in 2021, a stark contrast to rates steadily declining observed since 2015.

    5. Claims volume and risk. Panelists confirmed that the number of policies written in 2021 has caused RWI underwriters to carefully consider their risk of future claims. 2021 showed a substantial decrease in claims compared to the previous year, however, panelists speculated that this was simply a residual result of both increased financial pressure on businesses resulting in a increase in claims in 2020 and fewer policies placed in 2020 resulting in fewer claims at the start of the policy period in 2021. Panelists expected claims to increase – perhaps significantly – over the next few years. The increase in claims liability could lead to changes in the cost of RWI policies and the underwriting process that insurers undertake with respect to these policies.

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