Pricing W&I Policies
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There are several elements to the pricing of W&I insurance policies. Insurance premium, which is the price paid for the policy, is directly proportional to the other financial components of an insurance policy which are: the limit of liability, the retention and the de minimis. Changing these three factors will change the premium of the policy. However, there are many reasons why an underwriter would want to change these three components when pricing a W&I policy.
Transaction Size and Complexity
Larger transactions typically attract higher premiums because large transactions frequently feature target companies with large operations and large operations give more scope for a potential claim. In other words, the larger the transaction the more risk. Additionally, sellers of large businesses are likely going to have to give more warranties in the acquisition agreement meaning the W&I insurer is covering more warranties.
However, regardless of size, deals involving multiple jurisdictions, intricate corporate structures, or a variety of asset types are considered more complex. Complexity introduces additional risk factors, such as legal nuances across regions or the difficulty of integrating diverse business operations. Insurers account for these complexities when pricing the policy.
Target Industry
Certain industries are inherently riskier than others, which impacts the pricing of W&I insurance. For example, sectors such as oil and gas, pharmaceuticals, and financial services often carry higher risks due to factors like regulatory scrutiny, pollution/environmental concerns, and rapid market changes. Conversely, industries with stable and predictable environments, like real estate or manufacturing, are less risky so attract lower premiums. Indeed, pure real estate transactions are seen as such low risk they command the lowest premiums in the W&I market.
Geography
Transactions that span multiple countries can be more expensive to insure because they involve navigating different legal and regulatory frameworks. The complexity of managing compliance in multiple jurisdictions increases the risk of breaches and disputes, leading to higher premiums. Additionally, underwriters may choose to appoint multiple underwriting counsel in each jurisdiction which can lead to higher underwriting fees or a higher premium if the underwriting fee is included in the premium.
Some specific jurisdictions are seen as exceptionally high risk due to their political regimes. It’s perceived by most W&I underwriters that businesses in China are exposed to a high level of bribery and corruption which will cause Chinese transactions to be priced relatively high.
Claims History
The claims history of the client seeking insurance does influence pricing. Insurers do keep lists of clients who have historically submitted a lot of claims and will adjust future premiums based on this. Also, how smooth the claims process was with each client is a factor in future pricing too. Clients who are very hostile and combative with insurers may well struggle to get insurance from them in the future.
Underwriting Experience
In addition to the claims history, underwriters are increasingly factoring in how easy it is to work with specific clients to their pricing. In particular, private equity firms that stick to pre-agreed policy wording and don’t try and aggressively negotiate each policy are likely to get lower premiums. Clients who can act commercial and appreciate the underwriter’s view point will always receive better premiums and coverage.