Fierce competition in the warranty and indemnity insurance market has driven price reduction, coverage enhancement and genuine innovation over the past few years. Today the product is regularly used to protect the financial interest of both buyers and sellers on real estate transactions.
What have been the key developments in the real estate warranty and indemnity insurance market?
MB: The real estate sector has been a huge contributor to the W&I insurance market’s growth in recent years. This growth has been further accelerated by fierce competition among a growing number of insurers.
Real estate W&I’s unique risk profile, together with an increasing number of policies, has allowed real estate to create its own subsector within the W&I market.
NP: We have seen rates for real estate W&I reduce by roughly 50%. Coverage elements such as nil seller recourse, nil excess, affirmative coverage on certain low-risk tax issues are now routinely offered on real estate transactions and valuable policy extensions such as knowledge scrapes are readily available at an attractive cost. It is certainly a buyers’ market and this is unlikely to change in the near future.
What changes are you seeing in the market?
GM: The makeup of the market has definitely shifted as it has evolved. A lot of early entrants operated within managing general agent (MGA) models, which allowed capital providers to participate on a relatively small scale. A lot of the coverage innovation has been driven by these players. The scope of cover provided on a real estate transaction is generally far broader than that available on a normal commercial transaction as there are less moving parts for underwriters to worry about and real estate deals typically present a different claims profile.
MB: The market has definitely matured. As an increasing number of policies are underwritten, analytics become more robust, particularly in respect of claims trends and deal risk profiling. This encourages a more sophisticated underwriting process and helps to attract a different type of capital provider.
Some leading name insurers who already write significant amounts of general insurance business for the real estate sector are starting to enter the market in a meaningful way. Their brand, product and overseas networks can be a very attractive proposition to certain types of investors.
Are buyers’ needs changing?
GM: The ability to achieve a clean exit is the most common driver for the purchase of W&I. The seller will typically initiate the W&I process and the policy will flip to the buy side as the transaction progresses.
These factors are unlikely to change, but scale is definitely becoming more of a differentiator. The ability of some insurers to commit significant lines (often in excess of £100m on a single risk) and provide coverage across multiple territories – aligned with an ability to provide a consistent reliable service, often within demanding timescales – makes it increasingly difficult for some capital providers to compete in a maturing market. Increased scale also allows wider risk diversification and potential price advantages.
MB: Competitive pricing and wider coverage is largely a given these days. Execution risk has definitely become a key consideration for most investors when deciding which insurer to use. Buyers are rightly looking to partner with insurers that have the depth of resources to provide high-quality service and support at all stages of the process. This is particularly important on large and potentially complex transactions.
NP: More policies, broader coverage and a nil excess inevitably mean more claims. The commercial W&I market has seen a definite upswing in both claims frequency and quantum with the majority of claims emanating from warranties relating to financial statements, tax and compliance.
From a real estate perspective, material contracts and tax risks drive the majority of W&I claims and the market is definitely seeing more claim notifications. These trends are prompting buyers and sellers to focus more on claims and risk management services, which provide insurers with further opportunities for differentiation.
What does the future hold for real estate W&I?
MB: That’s an interesting question. We have seen a number of capital providers exit the market, withdraw or reallocate capacity. As mentioned, this has been offset by a different type of new entrant. I think this trend will continue and smaller providers will become increasingly niche.
Buyers and sellers worry about those risks, which have the potential to materially impact asset values and investment performance. Recognising this, I think insurers will develop products that provide broader, more cost- effective solutions to a range of risk issues – as brokers, we continually push the product boundaries and drive innovation and this is not going to stop.
GM: In my opinion, as long as there is plenty of available capital, we are a long way from seeing rating increases or coverage restrictions in real estate W&I, but I think we will see insurers getting increasingly sophisticated around the pricing of individual risks and buyers.
For instance, it is now normal practice for a client to be asked how many W&I claims they have had on previous transactions. This sort of data is starting to inform underwriting strategy and pricing.
NP: The whole underwriting process has become much more streamlined and efficient. In certain instances, underwriters are much more relaxed about in-house due diligence than they used to be. These trends look set to continue; for smaller transactions, I think we will see more commoditised product options based on a fixed warranty schedule.
From a market perspective, this type of product can provide wider risk diversification and also help grow overall premium volumes as minimum premium levels have been a barrier to using W&I on smaller transactions.
What opportunities does this present for real estate investors?
MB: It is definitely a buyers’ market and this is unlikely to change in the foreseeable future so it’s all good news from an investor’s perspective. A mature W&I insurance market allows both buyers and sellers of assets to think more strategically about their disposal/acquisition plans and risk transfer requirements.
Insurers are there to write business and are happy to look at an increasingly broad range of transaction-related risks. High-impact, low-to- medium-probability risks are ideally suited to insurance. These are the type of risks that may fall outside an investor’s appetite or where buyers and sellers may have fundamentally different views on the risk exposure – in these circumstances, insurers are increasingly willing to put the time in to properly understand the risk and provide a risk transfer solution.
What impact is Brexit likely to have on the W&I market?
GM: To a large extent this will depend on how the real estate market reacts to Brexit. Transaction volumes drive W&I demand and this will largely shape the market from a European perspective.
A lot of underwriting expertise is focused on London, but the majority of insurers and brokers have well-developed contingency plans for all Brexit scenarios.
Depending on what happens, there may be a bit of short term uncertainty. But people will still be able to access the London insurance market easily, irrespective of where they are based or where the underlying assets are located.