Transactional Liability

From product evolution to synthetic warranties, we offer our international experts’ predictions on the opportunities and challenges that the transactional liability market may face in the coming year and beyond.

Transactional Liability predictions
#1 W&I claims will increase as businesses feel the after effects of the pandemic

After an initial lag in notifications at the start of lockdown, we have seen in the UK a real increase in claims instructions from warranty and indemnity insurers, often involving deals concluded outside the UK, as buyers begin to review their acquisitions with a keener eye in the economic downturn.  Transactions with international elements can make it difficult to determine an accurate picture of a covered loss and law firms that can draw on a strong network of expert contacts that can ascertain the true position quickly will give transactional risk insurers the best opportunity to manage reserves actively.

#2 Transactional risk insurers will continue to evolve their products and develop their claims response to steal a competitive edge

The difficult market conditions mean competition among insurers remains fierce. There are fewer deals but there are still high value premiums to be won as deal makers look for certainty in these uncertain times. We continue to see brokers and insureds press insurers to provide wider, US-style, cover. Insurers will need to remain vigilant with their policy wordings to avoid giving more cover than intended. On the claims side, insureds and brokers demand almost instant responses and insurers can differentiate themselves from the market by retaining experienced and knowledgeable legal advisers.

#3 A German perspective: increase in distressed M&A and synthetic warranties

The COVID-19 pandemic has led to a significant decrease in overall economic activity across the globe and consequently a decrease in M&A activity which certainly affects the transactional risk market. However, there are certain sectors (such as healthcare, IT and renewable energy) that show strong M&A activities again and are likely to develop. It is likely that the main drivers will be distressed and carve-out transactions (the latter because companies will likely refocus on strengthening their financial capacity and return to strategic roots by divesting non-core business units). Corresponding to the expected increase of distressed transactions, the demand for so-called synthetic warranties will increase (i.e. warranties are not given by sellers but are only agreed ‘synthetically’ between the insurer and the buyer in the W&I policy). Further, we expect an increased demand for contingent liability risks (i.e. known risk cover) in distressed M&A transactions.

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