Warranty and Indemnity Insurance Q&A – Current Trends and What to Look Out For

The Asia Warranty and Indemnity (W&I) insurance market is expanding rapidly to meet demand as businesses and market participants become increasingly aware of the benefits that transactional insurance can offer. The dynamics in this space are everchanging – the incorporation of W&I in deals, insurers' expectations on the level of due diligence, terms of policies and level of coverage provided are all adapting to demand. This article highlights some recent trends we have encountered and factors to look out for in order to seize opportunities in current market conditions.

Specific Questions

1. What are current major trends?

• Insured-friendly policy terms – The increasing number of insurers entering the Asia market, coupled with a slowdown of deal activities amid market uncertainty, have meant insureds are benefiting from notable market advantages such as: competitive pricing, reduced information requirements at the underwriting stage, lower policy deductibles and lower de minimis thresholds. Coverage has also broadened substantially, with insurers extending the scope of cover by removing previously standard exclusions.
  
  
• Increased familiarity with different sectors and markets – A growing familiarity with specific underwriting risks and regulatory nuances inherent in the emerging markets and sectors has meant insurers are more comfortable in offering broader coverage to clients operating in previously unfamiliar or less penetrated jurisdictions and sectors.
  
  
• Underwriting process – The underwriting process is more flexible and less intrusive, particularly where due diligence is robust and focused, and responses to underwriting questions are clear and detailed. In some cases, insurers may even forgo a separate underwriting call prior to policy inception as is now more usual in the UK and European deals we have encountered. 

2. What is current level of due diligence expected?

• Comprehensive due diligence – Insurers generally require comprehensive due diligence to be conducted by the buyer, especially on key risk areas of the target's business. Higher risk areas tend to include tax and accounting, compliance, stock and inventory and conditions of assets. Inadequate due diligence could lead to policy exclusions, further information requests or limiting coverage for specific warranties.
  
  
• Reliance on VDD or internal DD – For low-risk areas, insurers may accept reliance on high quality vendor due diligence but generally insurers would then expect to receive buyer top-up due diligence by external advisors to confirm the findings. Internal due diligence needs to meet required standards (i.e. conducted by suitably qualified and experienced personnel; scope and depth of the due diligence to be comparable to that conducted by external advisors).

3. How long does it take to place W&I Insurance?

• It can be achieved within 7 to 14 days from the submission of due diligence. Complex deals can take up to 3 to 4 weeks or even months, depending on the negotiations between the transaction parties.
  
  
• The timeline is gradually increasing matching the trend in the negotiation timeframe. Factors include regulatory tightening across sectors in Asia Pacific jurisdictions such as China, Indonesia and India and other policy-related uncertainties in the market. 

4. Which markets are growing?

• China – The increase in the adoption of W&I insurance in China is mainly driven by the need for a tool to mitigate risks relating to unfamiliar legal and regulatory environments. This also helps to bridge the gap between transaction parties and expedite negotiations. Opportunities appear plentiful as industries such as technology, logistics and healthcare continue to grow. Increasingly we see underwriting processes with all documents and due diligence in Chinese.
  
  
• Hong Kong and Singapore – Often compared together, Hong Kong (the "Dragon" city) and Singapore (the "Lion" city) have sophisticated insurance markets (across different financial lines) that are pillars of their status as international financial and investment hubs – Hong Kong, in particular, as an international gateway to Mainland China, the "Greater Bay Area" and increasingly regions like the Middle East; and Singapore with a particular South-East Asia focus.  The W&I insurance market in Hong Kong and Singapore is experiencing significant expansion against a background of increased corporate transactions and deals with rising demand for transactional risk solutions.  International and domestic insurers have been increasing their presence in both markets in the past few years and awareness of W&I insurance as a risk allocation tool for transactions and deals increases. This has helped lower pricing and led to more comprehensive W&I coverage options, together with fewer deal-specific exclusions and warranty amendments.
  
  
• Japan – Strong M&A activity has been driven by divestment of Japanese conglomerates (including selling their underperforming subsidiaries, businesses or assets) and increasing business succession needs. W&I insurance is gaining popularity in the market as transaction parties need sophisticated risk management solutions to increase deal certainty and provide a clean exit.
  
  
• South Korea – There has been an uptick in the adoption of W&I insurance in transactions in the past few years, particularly for private equity firms in South Korea in outbound M&A and also in auction deals where sellers want to make their sale offers more attractive.
  
  
• Malaysia – In the last few years there has been a marked increase in the awareness of W&I insurance across different business sectors in Malaysia. Given increased trade flows with e.g. Singapore (particularly, across the Johor-Singapore Special Economic Zone) we expect the W&I insurance market to grow following increased deal activity.

5. Which types of businesses / sectors are more likely to use W&I Insurance?

• Sectors with high industry-specific risks – For instance, transactions in the infrastructure sector face issues such as title to real estate/leases, regulatory compliance, environmental risks, planning and licenses. For the technology and intellectual property sectors, risks lie around IT systems, data privacy and compliance and intellectual property ownership.
  
  
• Private Equity Deals – PE sellers can exit their investments with limited or no ongoing liability, while providing buyers with more robust financial protection against unforeseen risks that may arise after deals close.  

6. What are challenges of W&I Insurance in Asia in general?

• Market-specific nuances – Asia comprises multiple jurisdictions, each characterised by distinct market practices, legal and regulatory frameworks, as well as different languages and cultures. Insurers frequently encounter due diligence materials and transaction documents presented in local languages.  This, coupled with limited access to information in certain markets and comparatively limited experience in developing economies, poses challenges for insurers in assessing risks and defining coverage parameters.
  
  
• Lack of familiarity with W&I products – Despite gaining popularity in some jurisdictions in Asia (such as Hong Kong, Singapore, Japan and South Korea) in recent years, awareness of the use and benefits of W&I insurance is still in its nascent stages for local participants in some other jurisdictions and smaller domestic enterprises generally in Asia. This poses challenges for insurers as they will encounter a lack of standardised practices and longer underwriting timelines due to back and forth on communications with insureds in order to assess the risk exposure.
  
  
• Increased competition – The influx of new W&I market participants has intensified competition. This has generally driven lower premium rates, flexible underwriting process and reduced exclusions (for now). 

7. How to overcome challenges?

• Engagement in local market – Developing a nuanced understanding of local transaction dynamics and business practices and keeping up-to-date on the region's changing legal and regulatory landscape assist with the identification of potential risks. Efforts have also been made by insurers and brokers to demystify the operation and value of W&I insurance, and regular presentations can be found where they introduce their roles in risk allocation, explaining policy terms, coverage, scope and the underwriting process and managing insureds' expectations.
  
  
• Proactive communication – Regular and early engagement with the deal team allows insurers and brokers to understand the insured's needs and the target's business, industry and market, and to identify specific challenges, so that any potential risks are considered and discussed at the earlier stages of the underwriting process. 

8. What is current W&I market outlook?

• Deal activity plunged in the first quarter of the year as global investors tread carefully amid (for example) geopolitical challenges and tariffs or levies introduced by the U.S.A. and some other countries.
  
  
• These developments present both challenges and opportunities for the W&I market.  While the ramifications remain to be seen, W&I insurance is showing itself to be a valuable tool for risk allocation between sellers and buyers. Insurers are looking at tariff-specific and other political risk exclusions and related due diligence.

Contact Us   
RPC has a dedicated W&I team and we provide vetting counsel to underwriters as well as acting on claims. Please contact Andrew and Heidi if you have any queries or related disputes regarding the issues raised in this article or if you wish to consider any commercial insurance matters in Hong Kong.  

Samantha Cheng assisted with the preparation of this article.   

This publication and suggested answers/comments are intended to give general information and assist with an understanding of the subject matter. This publication is not a complete statement of the law or practice. This publication does not constitute legal advice and is not intended to be relied upon nor to be a substitute for legal advice in relation to particular circumstances. Specific circumstances require legal advice based on applicable laws.