Warranty and Indemnity insurance sees uptick during pandemic

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Despite deal count plummeting, the uncertainty of the pandemic has seen new interest in this product

Take up of Warranty & Indemnity (W&I) insurance with regards to mergers and acquisitions (M&A) deals have increased sharply from 6% to 40% during the past five years.

Companies are increasingly racing to win transactions and auction processes.

W&I for buyers and sellers could be more critical for mitigating unprecedented uncertainty in the market caused by the pandemic.

This type of insurance provides the insured seller or buyer with cover for losses suffered from warranty breaches and claims under the general tax indemnity from a sale and purchase agreement (SPA).

Therefore, this type of insurance could become more sought after in the coming months due to Covid-19.

This is according to independent insurance brokerage Lockton.

Rarity

George Apperly, assistant vice president at Lockton’s Global Transactional Risks team has seen several calls from investors about distressed assets as a result of the pandemic.

He said: “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 market.”

“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.”

“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.”

Apperly said that while it’s commonplace in Germany and most of Scandinavia in terms of growth areas, the percentage of W&I deals could rocket in southern Europe following Covid-19.

“France, Italy, Spain, and Greece are going to see major upticks – use is also likely to increase in Poland and the Baltics,” he added.

Financial crash

Originally starting in Australia, W&I products gained traction in the UK six years ago.

“W&I insurance originated during the 2008 financial crash, born out of a time of deep uncertainty which is not dissimilar to the current climate sparked by Covid-19. said Apperly.