The ROI on Reps & Warranties

Q&A with Toria Lessman, Senior Vice President, Underwriting Leader, QBE North America
Sponsored by QBE Posted on September 22, 2021
The M&A market is setting records for transactions. How is that affecting the representations and warranties insurance market?
The rising activity in the M&A market coupled with the increased acceptance of RWI as a useful tool has substantially increased submission flow to the limited number of carriers active in the market. As a result, carriers are being more selective about what deals to quote, and rates have continued on an upward trend that started in the fourth quarter of 2020. The increased demand has attracted new entrants to the market since 2020, and while one carrier exited, the new entrants still must compete for talent among the pool of experienced underwriters, which hasn’t kept pace with rising demand. Meanwhile, due to steady growth for years before the brief pull-back during the height of the pandemic in 2020, insurers also have the benefit of more claims to evaluate risk and improve the underwriting process. This helps us broaden the industries we can consider. Furthermore, as deal flow increases, so does the need for speed, which gives experienced insurers a competitive edge.
Are there any other trends—economic, legislative, etc., that are affecting this product?
Due to the economic impact of the pandemic, deals involving companies in industries such as hospitality, retail, travel, and leisure will bear extra scrutiny. We are also closely watching trends in litigation. With deal activity especially strong in the technology, media and telecom industries, intellectual property rights have gained much attention for litigation risk. Additionally, ransomware and increasingly strict laws and regulations around privacy are drawing increased scrutiny. The potential for significant changes to federal tax laws and aggressive actions by state tax authorities also have many companies concerned about tax liability risk arising in M&A transactions.
What are some trends you’re seeing in R&W policies, coverage, terms, pricing, etc.?
The current M&A market is thriving and continues to experience record growth without exception. Deal flow remains strong with record numbers of submissions each month. We are seeing a good mix of deals including many large market opportunities. Rates have continued to increase and been favorable to insurers. Proposed coverage limitations have become more detailed and more heavily negotiated at the quote stage.
What key advice would you offer to buyers and sellers when it comes to negotiating R&W?

Strong due diligence has become more important than ever. This covers a significant number of areas. From an insurance standpoint, diligence parameters in almost every deal should encompass general corporate issues, such as capitalization and authority, financial and accounting affairs, tax matters and employment and employee benefits. Additional parameters vary by the industry of the target company. Regulatory issues may take center stage for financial services companies, while product liability and environmental issues could play a more important role for manufacturers. The importance of cyber security and privacy issues can also vary by industry.

It is also important to understand that some parts of the R&W may not be covered. Standard exclusions to coverage include matters such as covenant breaches, forward-looking statements, and purchase price adjustments. If an exclusion exists, buyers and sellers will need to agree on who is liable for the uncovered representation or warranty. Due to the potential complexity of exclusions, buyers and sellers should choose a carrier with a reputation for transparency at every step of the process.

How do you expect transactional risk management to develop in the years ahead? What changes do you anticipate in attitudes, strategies and techniques?

We’re confident transactional liability insurance will continue to be a product in high demand, considering the benefits to both buyers and sellers, such as streamlining M&A negotiations and enhancing deal outcomes. The market has come a long way, and there is still room for growth not only in higher deal volume but also broader acceptance by a greater range of industries as companies become even more familiar with the coverage.

The due diligence process will likely get easier as M&A participants continue to better grasp the diligence needs during the process. The ease of doing business should also improve as technology advances and data becomes more accessible to support a better understanding of risk, but carriers will need to balance the use of technology with a personal touch.

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