Warranty based insurance moves into the mainstream as businesses seek greater deal and trading certainty

New Global Insurance Law Connect report finds international insurance capacity is supporting growth, but confidence continues to be built locally

Warranty and related specialty insurance products are becoming increasingly important tools for managing transactional, trade, tax and regulatory risks, according to a new report from Global Insurance Law Connect.

The report draws on analysis from GILC members across 25 jurisdictions and examines the development of warranty and indemnity insurance (W&I), tax and contingent risk insurance, trade credit insurance, and insurance cover relating to fines and penalties. It finds that these products are moving closer to the mainstream of dealmaking, credit protection and risk allocation, although growth remains uneven across different markets.

Demand is being driven by pressure in the underlying commercial environment rather than insurance innovation alone. Competitive M&A processes are increasing the need to bridge the gap between buyer protection and seller finality, while insolvency, payment delays and geopolitical disruption are encouraging businesses to seek greater certainty around counterparty risk. Increasingly complex tax, regulatory, environmental and litigation exposures are also creating demand for solutions that can isolate and manage specific risks.

W&I insurance is now embedded in the M&A toolkit in several developed insurance markets, including the UK and Australia. Its use is also growing in countries including Ireland, Italy, France, Germany, Austria, Greece and Poland, particularly in competitive auctions, private equity exits and larger or cross-border transactions.

However, adoption remains constrained in some jurisdictions by limited awareness, local underwriting capacity, transaction size, cost and regulatory uncertainty. International insurers, managing general agents, reinsurers and the London Market continue to play an important role in supporting placements where domestic capacity is limited.

Gillian Davidson, Chair, Global Insurance Law Connect Chair, said: 'The global market for warranty and related specialty insurance has reached an inflection point. These products can no longer be viewed simply as niche tools used only in the most sophisticated transactions.

'Across the jurisdictions surveyed, businesses are increasingly turning to insurance to manage defined commercial problems, unlock transactions and create greater certainty. However, international capacity alone is not enough. Successful placements still depend on local law, high-quality due diligence, clear disclosure and careful policy drafting. The market is globalising, but confidence continues to be built locally.'

The report identifies tax liability and contingent risk insurance as a significant area of opportunity. Demand is developing in response to more complex tax regimes, increased regulatory enforcement, litigation risk, environmental liabilities and the need to ring-fence exposures that might otherwise prevent a transaction from proceeding or require indemnities, escrows or price reductions.

By contrast, insurance for fines and penalties remains legally constrained across many jurisdictions. The report finds that criminal, punitive and administrative sanctions are generally considered uninsurable where cover would undermine the personal, punitive or deterrent purpose of a penalty. Markets commonly distinguish between the direct transfer of punitive sanctions and potentially insurable defence costs or compensatory consequences.

The report highlights that insurers and brokers should focus on education, responsiveness and product flexibility, while insureds should treat insurance as part of the transaction architecture rather than a late-stage backstop. International policy wording should not simply be transplanted into individual jurisdictions without considering local legal concepts, regulation, governing law and market practice.

The Australian position

Australia is one of the most sophisticated warranty and indemnity (W&I) insurance markets in the world relative to deal volume.

While historically deployed to facilitate clean exits and effective management of capital in private equity backed arrangements, W&I is now a common risk management tool in M&A transactions in Australia.

W&I (particularly buy-side W&I) is the dominant insurance product category within the Australian transaction risk market. Tax liability is, however, established and growing, while contingent risk and specific risk products are emerging but bespoke. Trade credit is a mature but a structurally separate market typically transacted through credit insurers and specialist brokers rather than transaction risk teams.

Jon Tyne, Sparke Helmore Insurance Partner, commented that, ‘In recent years the Australian market has been characterised by intense insurer competition (particularly with the entry of a large number of MGAs), an excess of capacity and falling premiums and retentions. The current market cycle is seeing Australian insurers taking a more commercial, insured-friendly approach to underwriting and expanding their risk appetite.’

Cost is the principal barrier for penetration into mid-market and low-value deals. For larger deals and private equity led transactions, the premium, underwriting fee and adviser costs are often a small proportion of deal value. However, for smaller transactions, the fixed costs of traditional W&I can be difficult to justify particularly where the seller is perceived as financially strong and able to stand behind its warranties and/or there are guarantors providing sufficient financial assurance. A number of insurers are providing cost effective solutions aimed at lower value or distressed deals, with a degree of automated underwriting and diligence, and reliance (at least in part) on synthetic warranties. Market penetration is limited at present, but we would expect it to rise

However, in general terms there is very broad and established uptake in these products.

Noted Matt Ellis, Sparke Helmore Regulatory, Risk and Compliance Partner, ‘Key emerging risks in Australia include AI and data governance risks, cybersecurity exposures, complex tax positions, climate and ESG liabilities, and regulatory or licensing uncertainties, all of which are creating demand for bespoke risk transfer solutions beyond traditional W&I insurance.

‘More broadly, increasing transaction complexity, cross-border investment and heightened regulatory scrutiny are likely to drive greater use of specialist insurance products to facilitate deals and manage emerging risks.’