Don’t dabble: the growth of W&I insurance in SME M&A

Warranty and indemnity insurance (W&I) has undergone a remarkable evolution in the past decade, transitioning from being a niche product used only on the biggest deals by sophisticated advisers to something that could soon become integral to any mergers and acquisitions (M&A) deal, right down to single-digit million-dollar deals.

That was the consensus of three experts in this space, speaking on a webinar dedicated to this topic on July 13 titled “Don’t Dabble: Shaping Warranty & Indemnity Insurance for Smaller Deals” and featuring Bryan Dressler (pictured right), head of warranty and indemnity, Markel; Jonathan Clarke (pictured centred), partner, DLA Piper; and Rupert Newman (pictured left), director, Paragon. The full webinar can be  viewed here.

“Advisers and parties in all parts of the M&A process need to understand the product.” Jonathan Clarke, DLA PiperThe event mapped the development of this sector to around a decade ago when Markel, along with certain key individuals, helped in its early evolution to the present day, where more than 35 carriers now write this business and its benefits to small and medium-sized enterprises (SMEs) are increasingly understood. But in parallel with that growth have come other challenges and risks for all parties.

Dressler, who joined Markel in this role in June 2022, explained that a key attraction of the move to the SME space for carriers was the ability to underwrite on a more portfolio-led basis. “We had good start as Markel had been operating in W&I for some 10 years prior, but we have increasingly moved down the spectrum to underwrite a lot more SME business.

“This makes sense for us. We are a balance sheet insurer in the game of putting together a balanced portfolio of risks. It can be better to do that on smaller deals, where you can manage your line size and you achieve diversity across different sectors and jurisdictions. You end up with a position where you approach the risk from a higher perspective,” he said.

“The sophistication is in figuring out what and what not to care about in smaller deals.” Bryan Dressler, Markel“It’s not one-off underwriting. You can be much more focused on core operational risks as you would when writing D&O business. The sophistication is in figuring out what and what not to care about in smaller deals. It is different from larger deals. And that’s where you can achieve a lighter-touch process that our underwriting model is built on.”

An innovative market

Newman, commenting from a broker’s perspective, described the W&I space as an innovative market, and stressed that it’s the lower to mid-market end in particular where brokers and underwriters can add value by running a well-structured and efficient process.

“We have taken an opportunity to improve the process and to target what was historically an underserved market on SME transactions,” he said.

“SME-focused insurers have some of the best results in the market.” Rupert Newman, Paragon“Historically, the costs were too high not only on the insurance side, but on the advisory side. Perhaps there were also some ill-founded concerns around the quality of advisors on the smaller transactions. Fast-forward to today, and I think it’s fair to say that SME-focused insurers have some of the best results in the market. They’ve been rewarded with bigger policy limits that they can deploy on a transaction.”

Clarke agreed with much of this, noting that when the market first developed in 2015/16 it was private equity-driven, and the market was unsure on how to price it or what claims to expect. “Fast-forward to 2023 and insurance is starting to become integral to M&A transactions. There was a real gap in the market for SME deals, and that’s where companies like Markel have stepped up. I would say that the growth of W&I has been one of the biggest developments in the insurance market in the last five years.

“The biggest development in 2023 is people beginning to move into SME deals. And the beauty there is you’re doing a volume of transactions and you can diversify,” he said.

Newman added that the goal now for all parties is to make the process as light-touch and as easy and as cost-effective for clients as possible without sacrificing on coverage. “That allows advisors to focus on the things they’re ultimately being paid for—getting the deal done.”