W&I Premiums
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The premium is perhaps the easiest part of a W&I policy to understand. The premium is how much the insured will pay for the W&I policy. All the different coverage elements such as limits, retentions, de minimis, enhancements, exclusions and overall risk factors within the target company being bought are what decide what the premium will be.
Unlike other lines of insurance where premiums are paid on a rolling annual or monthly basis, W&I insurance premiums are paid as a one off to buy the policy as a whole. Payment is usually due after the transaction has closed and therefore can occur a few months after the policy has incepted and on risk. For especially large premiums or for transactions where closing may be many months from the date of inception, the insurer can require a small percentage of the premium is paid up front as a deposit. This will cover the insurer’s underwriting costs as well as any costs from claims submitted before closing has occurred.
Premiums can be expressed as a “rate on line” which is simply the premium as a percentage of the limit of liability. For example:
Limit = £10m
Premium = £100,000
Rate on Line = 100,000 / 10,000,000 * 100 = 1%
For policies issued within the EMEA region (noting deals in the Americas are priced differently), standard premiums will have rates on line of anywhere between 0.7% and 1.5% for a 10% limit. Some insurers have specific thresholds of rate on line that they cannot go below such as 0.7%. The rate on line is an easy way to compare premiums for deals where the actual monetary values might vary considerably.