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Once a niche product used predominantly for large-cap transactions, W&I is now being utilised with increasing frequency across a far broader range of deal sizes and geographies in the region. Coverage terms have broadened, retentions have fallen, and underwriting processes are being continually refined to become increasingly streamlined.

Much of this is a welcome development as the ability to maintain a commercial mindset and offer efficient underwriting processes are key considerations for insureds.

Greater competition has fuelled improvements in underwriting speed and increased willingness among insurers to adapt to client needs which have, in many cases, improved the overall client experience. Price competition and responsiveness have also helped to make W&I insurance more accessible, particularly among mid-market and small cap deals in the region.

At the same time, some of the drivers of this growth also mean that these developments are not built on entirely stable foundations. The rapid influx of new underwriting capacity in 2022 coincided with global economic headwinds hitting the region, creating a surge of aggressive competition for a shrinking pool of deals.

Underwriting discipline

In the resultant race to win mandates, premiums have been driven to historic lows, while coverage has simultaneously been expanded rapidly, often without corresponding price adjustments or sufficient risk assessment. Individually, each of these pressures undermines the long-term sustainability of the market; together, they converge to create the perfect storm as these are the conditions which are likely to induce a contraction in capacity, spur hard market corrections and trigger uncertainty in settlement in the future.

The erosion of underwriting rigour in recent years is a prime example. In the broader context of an M&A transaction with its myriad moving parts, it can be tempting to see fewer questions and looser engagement with diligence as a boon.

In truth though, disciplined underwriting is not the burden it appears to be. Balanced underwriting is not about slowing a deal down but rather about enhancing the clarity and certainty of coverage. When commerciality is balanced with careful underwriting, coverage is better aligned to the real risk profile of the deal without unduly slowing down the underwriting process. This means fewer grey areas that could otherwise serve as breeding grounds for disputes down the line.

Conversely, when underwriters race to bind without giving due consideration to the nuances of the risk, the chances of the insurer being surprised or defensive upon a claim arising increases, which could affect the speed and efficiency of the ultimate claims experience – a dynamic that benefits no one.

Rate adequacy works in much the same way. Competitive pricing is certainly beneficial to insureds to a large degree. However, if pricing consistently fails to reflect the actual risk and loss experience, the consequences in the medium to long term are likely to be stark: capital flight, hard corrections in the market by remaining insurers in both rates and coverage, and potentially more fractious settlement as each claim is felt more keenly within the portfolio.

Mission critical

Sustainable pricing, on the other hand, allows insurers to remain committed to the product in the long term, to respond confidently to valid claims, and to keep offering competitive terms consistently over time – all of which are critical for long tail products like W&I insurance.

This is especially pertinent in the current environment as the M&A insurance market is facing heightened scrutiny following an increase in paid claims and rumours of several potentially significant payments on the horizon, which makes capacity quality a particularly key consideration.

Carriers with their own capacity may be exposed to line size contractions if their reinsurers look to manage down their exposures, but they have ultimately still made the long-term investments in infrastructure and resources to stand firm through market cycles.

Conversely, providers relying on third-party capacity may be able to deliver excellent service during underwriting but are far more exposed to capital flight if claims ratios deteriorate or profitability wanes.

In the context of W&I insurance, where claims could arise years later, this is a particularly pertinent risk as the insurer at inception may not be the one making the decisions when you need it most.

In W&I insurance, the value of a policy is tested not at signing but years later, when the claims arrive which is why these fundamentals still matter. Markets chasing short-term victories may be able to offer cheaper, quicker solutions today, but in a long-tail class, the only metric that truly matters is certainty when it counts.

That certainty comes from having a durable partner who is in it for the long run — one who can respond decisively when the claim arrives and who remains committed to doing so for years to come.

Keshaya Yap is a senior underwriter and Southeast Asia lead at Liberty Global Transaction Solutions

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