Darren Savage, Asia Pacific Manager - Mergers & Acquisitions
The Warranty & Indemnity (W&I) insurance market in Asia Pacific is evolving and maturing at pace. But at the risk of stating the blindingly obvious, the region covers a lot of ground, so talking about W&I trends across the entire region would be a considerable task. So, let’s just take a look at some key points on how the market is developing and what is driving its increasing maturity.
The maturity of the W&I market broadly stretches from south to north. The Australian market is over 15 years old, and today well over half of all private equity deals have the product baked into the process. From our perspective, it accounts for about one third of the region’s activity.
Moving to Asia, Singapore and Hong Kong have long been the key staging posts for much of the W&I insurance activity in South East Asia and China respectively, however, the real pace of growth is coming from North Asia – China, Japan and Korea lead the field in terms of countries where buyers are increasingly looking for ways to protect their investments and sellers want to reduce their liability after a transaction closes.
The traditional form of deal security, where sellers have held funds in escrow for a given period to make good any damages arising from a breach of the warranties in the sale and purchase agreement, is being replaced by W&I insurance on many deals. Whereas the escrow presents an obvious drawback for any individual, PE houses or corporate looking for a clean exit, the use of W&I insurance can help facilitate a return of proceeds to investors. It’s no surprise then that they are increasingly turning to W&I insurance as a more effective alternative mechanism.
Developing these new markets for W&I is easier when a carrier has a physical presence in the region, with a network that can deliver the in-depth conversations required to talk about what benefits W&I insurance can deliver. Reaching out to advisers and those involved in a transaction is an imperative part of the deal process. You need underwriters on the ground.
You also need to be paying claims. Our experience tells us that the best advertising for the product is getting insured deals done and with it, seeing the full life cycle of a policy and experiencing claims being paid. Asia has now reached a point of maturity where all of this is happening.
In the early years of the product development in various Asian countries, the absence of any claims experience undermined brokers’ and buyers’ confidence in how the product would perform. Time and experience is clearly helping that process, but it is one of the reasons why we published our M&A Claims Intelligence report. The data and insights captured within the series have become a ‘must-read’ for buyers, sellers and their advisers as they seek to manage their transaction risk.
The big trend this year is claims severity. Globally, the proportion of material claims over $10 million has nearly doubled year on year from eight percent to 15 percent. These claims are increasingly frequent and the interesting thing about that is we are now seeing them in Asia, and claim notifications are increasing in places where we historically have not seen many. With claims of this magnitude, buyers are looking for insurers with the scale, experience and financial strength to cover losses of any size, wherever they take place.