Trends
1. W&I pricing at a historic low
Underwriters’ appetite for transactional risk insurance remains extremely strong, and market conditions are soft following a slow period for mergers and acquisitions (M&A). This has created an attractive environment for warranty & indemnity (W&I) insurance buyers. The average rate on line for W&I insurance decreased to 0.91% in 2023-24, a historic low.
As ever, pricing does vary according to risk. Asset-backed, property-heavy sectors such as renewable energy and real estate are deemed a more benign risk and, as a result, are likely to attract lower rates. Meanwhile, highly regulated industries tend to require increased scrutiny from insurers, and attract higher rates. This is echoed in Lockton data: real estate deals had an average rate on line of 0.6%, substantially below the portfolio-wide average. By contrast, financial services (0.97%) deals saw some of the highest rates, albeit less than deals in infrastructure (1.12%), transport and logistics (1.12%), and tech, media, and telecommunications (TMT, 1.05%).
Average W&I rate-on-line
(UK businesses, UK-only targets, Buy-side policies)
The average rate on line for W&I insurance decreased to 0.91% in 2023-24, a historic low.
2. Improving capacity meets broader coverage
The W&I market saw capacity increase in the last year, with new offerings from several managing general underwriters (MGUs) and company markets, including Aviva, Chubb, and Devonshire. Distribution is not always even, however; given the increased scale of the market, certain insurers are looking to differentiate themselves by underwriting more complex risks that attract a higher rate, and shying away from those with a lower risk profile.
In parallel, coverage within the W&I market has improved. Insurers are offering increasingly generous terms, with the broadest cover awarded to sectors deemed to have a lower risk profile.
3. Tech, media, and telecommunications lead W&I demand
The last year saw broad sector take up for W&I insurance. TMT accounted for the largest proportion of bound deals, consistent with 2022-23, while industrial and logistics real estate deals were also unchanged. The reasons for these are various, and partly reflect wider M&A trends. In the case of real estate and digital infrastructure, an explosion of artificial intelligence tools and tightening regulation around data retention is driving the growth of data centre transactions. Meanwhile, favourable rate conditions are making W&I more attractive, especially for small-to-medium (SME) transactions. The figures may also reflect strong product penetration: most corporate M&A deals in the real estate sector now utilise W&I.
Manufacturing saw the biggest uptick, moving up 8 spots in our data. Multiple factors are likely at play here, including a more stable macro environment boosting investor optimism, and more companies seeking to spur growth via the acquisition of new technologies. Energy deals also featured among the top 5 sectors for the first time, off the back of high demand for clean energy projects across the UK and Europe. W&I insurance provides a valuable tool to mitigate the high risk associated with renewable energy investments, including wind, solar and BESS, and is now a given for most transactions. The insurance market continues to respond to this growth, with condition of assets and capital allowances coverage now widely available.
Most bound deals by sector
Energy deals featured among the top 5 sectors for the first time, off the back of high demand for clean energy projects across the UK and Europe.
4. Private equity opting for US-style cover
In 2024, Lockton saw an increase in the number of European insurers offering US-style reps and warranties insurance, even where transaction documents lack US-style disclosure mechanisms. This follows a notable increase in the number of US-based sponsors and corporates looking to acquire European assets, backed by the relative strength of the US economy: there were 84 such deals in 2023-24, compared to 52 in 2022-23 (a 61.5% increase). These RWI policies are broader in scope than traditional European W&I policies, with less information deemed disclosed under the policy. Although pricing for RWI policies is higher than for typical W&I policies (usually 2.5–3% of the limit), US clients are now frequently opting to take this more comprehensive cover where available.
Broader private equity appetite for traditional W&I insurance remains strong, with deal volumes picking up – particularly in the mid-market – and timetables shortening. Insurers remain keen to differentiate themselves by offering broader coverage and additional enhancements, with several insurers now willing to combine data room and due diligence scrapes in the same policy. An increasing number of insurers now offering new breach cover on operational transactions, previously more common on real estate deals. It remains to be seen how UK businesses will react to the Autumn Budget, but we still expect private equity deal flow to pick up as investors seek to return funds to investors and deploy unused capital. Rates may start to slowly increase, driven in part by some larger claims in the market – but will likely remain relatively low.
5. New specialities emerge in the secondaries market
Secondaries transactions involve the sale of interests held in private equity funds during a fund’s lifetime, thereby providing liquidity to the private equity fund and exiting investors. Lockton saw very strong appetite for W&I insurance solutions for secondaries transactions in 2023-24. This is prompted by the overall strength of the secondaries sector (the market is estimated to be worth $150bn, and is predicted to reach $1trn by the end of the decade) and strong product awareness. Particular trends include higher levels of coverage for fundamental warranties and excluded obligations.
This nascent market is seeing the emergence of new specialities, including credit and real asset secondaries. Meanwhile, sovereign wealth and private capital are encouraging the influx of new limited partners.
6. Growing appetite for non-transactional tax policies
Appetite for tax insurance is significant at the moment, driven by pricing being at a historical low, and a wider understanding among professionals of the benefits of being insured. The effect of low prices, combined with an influx of new insurers to the market, has also seen well-established insurers expand what they are willing to cover both jurisdictionally and risk profile wise.
Notably, there has been a significant increase in the appetite for tax insurance outside of transactions, with these non-transactional policies now becoming more prevalent than when purchased alongside W&I. We expect this trend to continue, with tax case law driving clients to look at potential protections should their position be challenged – all in non-transactional scenarios. Tax insurance is likely to become a significant feature in the business lifecycle. The US market has already expanded dramatically, with bespoke cover available to protect against specific pieces of legislation.
Tax insurance average rate on line
(UK businesses, UK-only targets, Buy-side policies)
Tax insurance is likely to become a significant feature in the business lifecycle.
7. US losses demonstrate value of Contingent and Litigation Risk Insurance
Contingent and Litigation Risk Insurance (CLRI) continues to be an opportunistic market. Clients are often put off by the price of CLRI, and consider they are better placed self-insuring or agreeing risk transfer mechanisms with relevant counterparties. Litigation funders have also faced a challenging market in recent years, resulting in fewer opportunities from funders, although this could change in the coming years. That being said, recent high-profile losses in the North American CLRI market have demonstrated the value and use of the product to entities in Europe. This has encouraged a growing number of risk enquiries, particularly relating to regulatory risks in southern Europe, and litigation risks relating to investments in class actions.
In the short-to-medium term, we anticipate that the impact of US losses is likely to drive higher pricing. Insurers will offer lower limits, up to an expected maximum of USD 15m on any single risk, but more likely between USD 5-10m. The maximum market capacity for a single risk will be circa USD 100m, and building a tower above USD 50m will be challenging. There is also potential for capacity to be pulled from the market when insurance binders come up for renewal, although one new market entrant is on the horizon.
8. Intellectual Property deals poised to increase
IP rose up deal makers’ priority lists in 2023-2024, increasing demand for solutions for identified IP risks in M&A, and for specialist W&I solutions for transactions where IP forms a key cornerstone of the target’s asset base.
Particular drivers of this interesting trend include: (i) private equity (and other sources of capital) investing in sectors where creativity and technical innovation are core, and where future outputs and revenues are less certain; (ii) increasing interest in M&A insurance solutions for life science transactions, which usually have at their root innovation protected by trade secrets and patent portfolio; (iii) the rapid pace of technological innovation and convergence of technologies even in ‘legacy’ sectors; and, (iv) the uncertainty brought by changes in the IP legal landscape worldwide.
In terms of deal types, there has been an increase in demand for innovative transactional solutions for music rights and music catalogue businesses, pre-commercialisation life science transactions and a steady flow of deals involving software and in particular, big data analytics companies with a potential route to artificial intelligence (AI) integration.
Aside from these W&I focused enquiries, we have also seen a significant growth in appetite for insurance solutions for IP issues arising in due diligence, and which may become indemnities or price chips. These enquiries have tended to arise in software deals, where it is common for open-source license non-compliance and gaps in chain of title issues to arise .
9. Claims
Tax breaches accounted for 32% of claims notifications in 2023-24, displacing financial statements (24%) as the source of the greatest volume of claims. Compliance with laws (16%) was another common breach type.
Transactional risk insurances assume a low-volume, high-severity impact from claims. This is demonstrated by the rate on line we have seen over the past five years, the continued decline in these rates, and the increased capacity in the market – notwithstanding the broadening of coverage. As a result of the reduced rates, insureds are increasingly taking out policy enhancements, including indemnity measure of damages and removing general disclosure of the data room/due diligence reports. We expect this to result in more streamlined claimed processes.
Claims by breach type 2023-24
(UK businesses, UK-only targets, Buy-side policies)
Transactional risk insurances assume a low-volume, high-severity impact from claims.
Outlook
As we approach 2025, market fundamentals remain sound. There is a considerable volume of capital waiting to be deployed, as buyers have patiently waited for values to decrease, and for interest rates to fall; as they do, we only see deal flow picking up. A number of closed-end structures are also coming to the end of term. With the dollar strengthening after the US election result, Europe will also continue to be an attractive market for US buyers.
Coverage is likely to remain relatively stable. However, recent months have seen signs of upwards rate movement from the historic lows of earlier in the year. This is largely inevitable; despite capacity increasing with new entrants, there is little room for further downwards movement as growing loss ratios begin to impact the profitability of insurers’ books. Uptake of digital and AI solutions is likely to continue, as insurers look to streamline and expedite workstreams, and ultimately enhance user experience.