MONTH-IN-BRIEF (Feb 2021)
M&A Reps and Warranties Insurance to Cost More in 2021
In a recent podcast posted by Liberty GTS, one of the leading insurers that offers representations and warranties insurance (RWI) policies to protect against breach of representation in acquisition agreements, Rowan Bamford, President, and Gareth Rees, Chief Underwriting Officer, spoke about the factors that are likely to drive rate increases for RWI in 2021.
Based on the claims data Liberty GTS had collected, generally one in five policies received claim notifications, which is in line with data previously seen in the RWI market. While the majority of those claim notifications were precautionary, 25 percent of them resulted in real claims. The interesting part was that Liberty GTS saw an increase in the number of claims coming out of smaller deals. This is likely due to the fact that more sophisticated diligence teams are employed for larger deals and more funds are spent on diligence for the larger deals, uncovering most of the skeletons in the closet. For smaller deals, typically those under $50 million in enterprise value, diligence budgets are smaller and not as much effort is put towards looking for possible issues. These findings will likely cause insurers like Liberty GTS to refuse to take on as many smaller deals as they had in the past and to increase their minimum retention and premium requirements for the smaller deals.