Resilience in representation | Insurance business America
RWI continues to thrive in a post-pandemic M&A landscape
Insurance News
By Ryan Smith
While many markets struggled and slowed following the COVID crisis, the world of representation and warranty insurance (RWI) remained surprisingly resilient. Why? A combination of smaller M&A deals and the flexible development of the product to better meet customer needs.
There has been some development in the RWI market since the pandemic, with advances in underwriting capacity. However, it was not without significant challenges and “unsustainably” low interest rates. Speaking to Insurance Business, Phil Casper (pictured above), director at Euclid Transactional, said there had been some innovation in this area too.
“We have really added a lot of capacity in the industry, which allows us to secure most of the large deals in the market,” he said. “[That’s] Multibillion dollar deals, $10 billion deals and more – as well as all the much smaller $10 million deals. Overall, the industry has produced some great innovations.”
Insurance initially gained popularity in private company deals, particularly by private equity sellers who preferred to avoid escrow accounts and other post-closing liabilities. However, there has been a notable shift in requests to insure public company transactions.
“In the most developed countries such as the UK and US, most private companies offer general use insurance and guarantees. Now we’re starting to see growth in the public company space,” Casper said. “It is still not used in most deals, but we are seeing more and more buyers of public companies using the insurance to get the same protection they would get if they bought a private company.”
RWI simplifies negotiations and replaces complex compensation discussions with uncomplicated insurance solutions. This shift not only simplifies the deal process, but also eliminates potential conflicts between buyers and sellers post-closing. And it’s gaining momentum, according to a recent report from Euclid Transactional. In its R&W/W&I Insurance April 2024 Update, Euclid Transactional reported a record first quarter with 247 RWI insurance policies worldwide – up 4% from all previous first quarter records. Additionally, Euclid Transactional received 1,820 submissions during the same period – a significant increase of 18% compared to the first quarter of last year.
“It’s a deal lubricant in a lot of ways,” Casper said. “Another clear proof of value here is deal rescue – [helping] Buyers who purchased a business expected one thing and got something else. We are able to put them in the financial position they expected to be in if what the salesperson told them about the company was true.”
Reflecting on the recent boom in RWI interest, Casper emphasizes that the pandemic has been instrumental in driving more M&A deals. According to Gallagher’s 2023 Representations and Warranties Insurance Outlook, there has been significant interest in smaller M&A deals during the COVID era – with insurers initially setting a minimum deal threshold of $200 million. As a result, the availability of RWIs was limited, leading some brokers to seek out specific markets that would consider smaller trades.
“2021 was a record year in the M&A industry,” said Casper. “In real terms, there has been more volume this year than ever before. In general, the reason the product has become more popular is because of the proof of concept. Early adopters really got used to doing business with the product, and it became more widespread – to the point where I think it’s much more standard than it isn’t, at least in private company deals.”
And nothing will change that quickly. Looking ahead, Casper is optimistic about RWI’s future, particularly in emerging markets and new sectors. The growth opportunities are significant, particularly in certain countries in Asia Pacific and Europe where the company has expanded its presence.
“There is a lot of white space for the use of this product,” Casper said. “We have just opened an office in Paris to take advantage of this opportunity.”
However, there are still significant challenges ahead – particularly due to the changing regulations and pricing environment in the industry – which “really need to be looked at closely”. This pricing issue could lead to a deterioration in service quality if left unaddressed, as insurers may struggle to maintain high levels of service without adequate compensation.
“There used to be a certain level of premiums in the market – insurers had to get enough rates for the limits they set,” Casper said. “At the moment tariffs are probably at unsustainably low levels and I am concerned that if they remain at these levels for an extended period of time we will have to compromise on service levels and ensure customers get what they want really want . This is a really lean, efficient product with really experienced people helping them underwrite their deals.”
The changes in the regulatory landscape impact sellers’ ability to ensure compliance with the law when the way laws are enforced changes so significantly from one administration to the next. And as Casper told IB, this is a value proposition for RWI.
“Uncertainty about who will be in office this time next year could slightly weigh on some mergers and acquisitions this year,” Casper said. “We have expanded our tax liability underwriting team (which is a separate business unit from RWI) to reflect the fact that we expect government incentives to transition to renewable energy to increase. Tax liability insurance protects taxpayers who want to ensure they can continue to take advantage of these tax incentives in the future.”
On a technological level, Casper was enthusiastic about the potential of artificial intelligence (AI) and large language models to revolutionize the RWI field. Ultimately, these technologies could make the underwriting process more efficient and improve the overall service offering.
“The advances we’ve seen in AI and large language models in recent years are quite eye-opening,” he said. “We’ll continue to explore whether this is something that can be used in our space.” I think there are certainly ways these tools will be used in our industry in the next five to 10 years. So we’re definitely looking into that to make sure we’re keeping up with those trends and not lagging behind other people in the industry.”
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2024-06-14 14:39:30
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