Navigating the RWI Marketplace in the Age of Increased Transaction Activity

Navigating the RWI Marketplace in the Age of Increased Transaction Activity

The Representations and Warranties Insurance (RWI) marketplace has become less favorable to insureds as of late.  Due to the significant uptick in submissions and limited underwriter capacity, this transition has spawned an increase in premiums, delayed underwriting process, and heightened sensitivity to areas of due diligence.

As we navigate the fourth quarter of the year, the RWI marketplace is seeing a record number of submissions, primarily due to the adoption of RWI in most Private Equity transactions. The popularity of RWI policies has even bled over to strategic transactions and SPACs, creating more competition. We attribute this congestion in the market to three driving factors:

  1. Seemingly endless dry powder and more well-capitalized investment firms than ever before. Along with this, we continue to see more private investors with family offices, independent sponsors, and other off-market investors utilizing RWI to differentiate themselves on the buy-side, protect a return, and limit exposure on the sell-side.
  2. Proposed changes to the capital gains tax rate at the end of 2021 motivate business owners and other entrepreneurs to sell by the end of the year and utilize RWI to protect that exit.
  3. A relatively low-interest-rate environment to borrow money, which helps in leveraging transactions.

The popularity of using RWI in a transaction has also increased as transferring risk to an insurance company can help bridge negotiations to get deals done quicker, limiting the exposure for deal fatigue, increased diligence costs, or loss of exclusivity. Other advantages for the seller include:

  1. A limited escrow requirement allows sellers to return earnings to limited partners or to put that cash to work immediately. In addition, recovery comes from an insurance contract versus the seller’s pocket.
  2. Comfort in knowing there is an insurance contract protecting an exit.
  3. The awkward possibility of being sued by a partner becomes a very unlikely scenario.

Using RWI insurance also provides advantages for buyers, such as:

  1. The ability to recover for three years on general representations and six years on fundamental representations.
  2. Like the seller, the buyer can avoid an awkward situation of trying to recover losses against their management team.
  3. Sellers are often more accommodating on terms when RWI is used.

It is clear that deal volume is up for a multitude of reasons. Because of this quick increase in deal volume, carriers have struggled to keep up while battling staffing restraints. While roughly twenty carriers are writing RWI policies in the market today, each carrier is limited in its capacity because of small underwriting teams.

Carriers also deal with time-sensitive and complex underwriting processes, which are highly dependent on human labor versus the traditional, model-driven underwriting process of other insurance lines. These issues place a heightened focus on submissions, so it is critical to be aligned with counsel and your broker to ensure that when submissions are sent, they are attractive and real, as carriers can never accept the number of deals submitted.

The complexities of the RWI marketplace make it that much more important to work with the right broker who can help you navigate this process. Working with the right broker with credibility in this space and familiarity with underwriters and their expectations is critical in ensuring a sound underwriting process.

Contact us today to connect with an expert on our team who can evaluate your needs and help you get the most out of your RWI policy.

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