Southeast Asia braces for Warranty and Indemnity revival

Insurance brokers anticipate rising demand for warranty and indemnity (W&I) insurance in Southeast Asia on the back of a resurgence in mergers and acquisitions across the region.

W&I insurance, a relatively new product to Southeast Asia, really began to take off in the region in 2021 on the back of a sudden influx of capital.

Many of these acquisitions in the region are funded with money from Europe or the United States, two markets where the use of W&I insurance is commonplace. Buyers from either place often insist on some form of insurance being in place before they are prepared to finalise a deal.

However, since 2021, the amount of coming into the region has declined, as confidence in the global post-pandemic recovery faltered.

This has dampened enthusiasm for the product.

“W&I insurance has always been seen as a bit of a niche product in Southeast Asia,” says Carmel Green, a Singapore-based partner at RPC, a law firm. “The region has been trying to catch up with countries like Australia, the US and the UK, where the product is widely used, but it hasn’t really had the chance to do so because of the decline in M&A activity that we have seen across key markets in Asia in recent years.”

She adds that “the transactional market is ever optimistic about a change in the tide”, but for now it is still a case of “wait-and-see”.

“The region has been trying to catch up with countries like Australia, the US and the UK, where the product is widely used.”

Carmel Green

Partner at RPC

Picking up the pace

One cause for optimism could be that many of the policies purchased three years ago, at the height of the last surge in M&A activity, are starting to run off.

“What this will likely do is generate a ream of notifications prior to expiry, some of which will be entirely benign, while others may be far less benign,” says Green. “So while we are waiting for the issuance of W&I insurance to catch up with the rest of the world, claims activity on those products already in the market will start coming through and this will help raise awareness of the product.”

This would be a welcome relief to insurers, who have had to deal with excess capacity flooding into the market even as M&A activity has dipped.

“More competition means lower premiums and better coverage positions from all the insurers, which is obviously great for clients,”

Jamie Wan

Director of Transaction Solutions in Asia at Aon

Market participants estimate that there are between 14 and 16 insurers now doing business in Singapore, although not all have an onshore Monetary Authority of Singapore (MAS). Some still write their Singapore business out of London. Recent additions to Singapore’s W&I market include Risk Point, Ryan Transactional Risk and Euclid Transactional.

“More competition means lower premiums and better coverage positions from all the insurers, which is obviously great for clients,” says Jamie Wan, Director of Transaction Solutions in Asia at Aon.

Wan estimates that over the past few years, premium on W&I products has fallen by around 50%. While this may be good for clients, it is less so for brokers such as Aon, who earn the commission based on the amount of premium that insurers charge.

Breaking cultural barriers

One of the things that continues to hold the W&I insurance market back in Southeast Asia is a cultural reluctance among firms to include the policies as part of their M&A negotiations.

“People are reluctant to bring up the question of W&I insurance to avoid insinuating that there is a lack of trust between buyer and seller,” says Wan. “Similarly any claim under the policy is likely to raise uncomfortable questions such as: why wasn’t adequate due diligence done beforehand?”

Aon, and other professional services companies in the region, have been stepping up outreach efforts to educate clients about the value of this type of insurance.

The return of large deal sizes to the market, and more private equity money coming in from Europe and the US, will help.

“Access to capital across Asia is better than it has been and debt is reasonably cheap – particularly with the growth of the private debt sector,” says Tom Platts, a Singapore-based Partner for Stephenson Harwood who specialises in facilitating inbound investment into the region.

“Buyers are therefore looking at this part of the world much more keenly to see where they can pick up potential opportunities, which may not have seemed so during the so-called Asia Pacific ‘funding winter’.”

Platts estimates that last year the firm worked on around 30 M&A transactions in Southeast Asia, with 10 of these covered by W&I insurance. A number of other covered deals are in the pipeline for this year, and Platts remains upbeat about the potential for the future.

“Buyers are therefore looking at this part of the world much more keenly to see where they can pick up potential opportunities, which may not have seemed so during the so-called Asia Pacific ‘funding winter’.”

Tom Platts

Partner at Stephenson Harwood

He says that the rise in the use of W&I products across Southeast Asia has been led initially by the mid-tier private equity funds, who have themselves looked to the success of the product within their connected and associated Asia Pacific funds.

“This has led to a greater understanding, aided by sophisticated brokers helping to place the product,” he says. “Having W&I insurance in place often allows parties to execute quicker and with less ‘hassle’ – this strengthens bid-terms particularly when it comes to competitive auction processes.”