Navigating the complexities of representations and warranties insurance
RWI helps facilitate smoother transactions by transferring transaction-related risks to insurance carriers.
In today’s dynamic business landscape, mergers, acquisitions, and other corporate transactions have become commonplace strategies for growth and expansion. Representations and Warranties Insurance (RWI) plays a vital role in facilitating corporate transactions by mitigating unknown risks and enhancing deal certainty for buyers and sellers.
What was once a cumbersome and lengthy process, underwriting an RWI policy is now more streamlined and efficient because the broker, the buyer (typically the insured under an RWI policy), the buyer’s advisors (i.e., law firms, financial advisors) and the underwriter better understand the scope of diligence necessary to verify the representation and warranties in acquisition agreement. Improved underwriting has resulted in better outcomes for the insured both with respect to speed of execution and breadth of transactions insured.
RWI is a specialized form of insurance designed to protect buyers and sellers involved in mergers, acquisitions, divestitures, and other corporate transactions. Unlike traditional insurance policies that focus on protecting against future risks, RWI primarily addresses the risks associated with the target company’s historical financial and operational exposures as outlined in the representations and warranties made by the seller in the acquisition agreement.
RWI benefits
Both buyers and sellers can benefit from the use of RWI in corporate transactions. By providing financial protection against potential breaches of representations and warranties, RWI helps facilitate smoother transactions by transferring transaction-related risks to insurance carriers, thereby protecting their balance sheets and preserving capital for other strategic initiatives. In addition, the availability of RWI can streamline negotiations between buyers and sellers by providing a mechanism to address indemnification issues more efficiently.
Improved underwriting, broader coverage
The scope of coverage under an RWI policy is predicated on the buyer’s ability to demonstrate the accuracy of the representations and warranties made by the seller through its due diligence on the company that is the subject of the transaction (the target company). If the representation is not supported by adequate diligence, coverage for that representation is typically excluded.
In recent years, the RWI market has matured to the point where buyers and their third-party advisors understand the type of diligence required to obtain fulsome coverage for a transaction. Experienced brokers play an integral role in the maturation of the RWI market by advising the buyer whether and to what extent a particular risk can be underwritten and placing the deal with an underwriter that is capable of providing a seamless underwriting experience.
RWI underwriters have also become adept at quickly and efficiently underwriting transactions. The efficiency of RWI underwriters, along with skilled advice from brokers and their third-party advisors, allowed the RWI market to facilitate thousands of transactions during the pandemic M&A boom of 2020 – 2022. As a testament to the smooth functioning of the RWI marketplace, these transactions were often underwritten in accelerated time frames to accommodate short windows of exclusivity granted to buyers in a competitive M&A market. The quick turnarounds did not necessarily result in narrower coverage due to the quality of the diligence and the underwriters’ ability to quickly get comfortable with complicated issues.
Emerging trends
In the post-pandemic era, underwriters are more willing to underwrite transactions in segments that were previously more difficult to insure, including healthcare, financial institutions and life sciences. Much of the past resistance to underwriting these types of risks stemmed from insurance company loss experience in these segments under policies that protected against future risk. The expanded appetite is due, at least in part, to the increased adoption and acceptance of RWI, claims experience and an understanding that RWI is truly backward-looking and defined by the scope of the representations and warranties.