March 14, 2023

RWI Policies in 2023

This Woodruff Sawyer article makes some predictions about the market for rep & warranty insurance in 2023, in light of macro conditions, including the M&A and IPO markets. While acknowledging the difficulties these deals present, they expect trends toward RWI policies in minority investments, secondaries and distressed deals to continue. The article predicts that we will see more distressed deals this year and describes related evolving practices:

These are typified by fast speed and light diligence; these sales have been problematic historically. However, there are some new methodologies evolving to utilize RWI. We have seen policies bound that allow for deeper diligence post-close, with bracketed exclusions at the time of signing. We’ve also seen policies that shy away from the financial aspects but provide coverage for operational issues that are just as likely to cause problems post-close as they are with a profitable business.

Given a seller’s interest in a clean exit, the article notes that sellers’ counsel routinely tried to introduce severability of fraud in RWI policy subrogation rights in 2022. While this push will continue, Woodruff Sawyer doesn’t expect this to become a standard term in the RWI context.

On retention and premium rates, they expect retention rates to stay around 0.75% to 1% and premium rates – following a peak in recent years – to stay low but not go much lower. If they go much lower, these policies may not be worthwhile for the underwriters.

– Meredith Ervine