Published by Tray Traynor, CIC
As 2020 begins, we wanted to provide an initial RWI broad market update. We expect 2020 could be a year of change for RWI, so we will keep you posted with any meaningful developments as they unfold. Please let us know if we can be a resource for you on a deal, or otherwise.
2.5 – 2.75% is the current market for most deals. Some market-leading carriers were able to actually raise rates for the first time in years in December due to broader insurance market capacity constraints and RWI claims activity – a development we will be monitoring closely. On the low end, rates can get to 2 – 2.25% for very attractive deals, or deals with higher limits relative to EV. On the high end, rates can get to ~3% for large deals where towers of limits are built, on unattractive deals, or on smaller deals that bump up against minimum premiums.
Sub 1% retentions are now available, vs. the historical 1%. We are seeing retentions range from .75bps up to .95bps on approximately 50% of eligible deals – if you know how to ask for it. Typically, larger deals have a better chance of getting a sub 1% retention. Another option is to buy-down the retention for additional premium consideration. You can also bifurcate the retention on certain reps if the specifics of a deal calls for it. If rates do end up increasing due to overall insurance market capacity, expect retentions to tighten as well.
The Material Contracts rep is coming under much scrutiny due to high claims activity in 2019, of which some were very public in nature. Underwriters are requiring a higher level of confirmation from buyers that they understand the dynamics with the seller’s key customers and vendors. There has also been some increased scrutiny and tightening around Cyber reps, which will only continue to tighten due to the CCPA which took effect Jan. 1. More specifics to come on these areas in future DYK’s.
By all accounts, the use of RWI increased 30-40% in 2018 over the prior year. The 2019 data is not available yet, but the expectation is the numbers will reflect a continued increase in market penetration in 2019, with similar expectations for 2020 as well. Part of the increase is coming from strategic buyers which more recently entered the market, but now represent ~45-50% of the total RWI marketplace.
There has been a meaningful increase in the number of stand-alone tax policies being utilized. These policies are a proven effective tool when a known tax issue exists that both parties want to ring-fence in order to transfer the liability away from either party to the insurance carrier post-close. More specifics on stand-alone tax policies to come in future DYK’s.
Interim Breach Coverage:
There are now three carriers int the market that will offer coverage for interim breaches. It comes with significant additional premium charges and a limited time period restriction. Despite the demand, most carriers will not offer this coverage because there’s no effective way to underwrite the exposures. It’s most often seen on real estate and renewable energy deals.
The appetite for healthcare deals continues to expand. Rates and retentions tend to be a tick higher for “heavy” healthcare reps/deals, and more thorough diligence is required to obtain meaningful coverage vs. general M&A. Certain subsets of healthcare such as hospitals, hospice, and senior living – while sometimes still tricky – have recently seen broader coverage and looser underwriting requirements. We expect the increase in healthcare RWI to be substantially accretive to overall RWI market penetration in the next 2-3 years.
We do expect a limited number of established carriers to potentially and officially announce a broader appetite for domestic Cannabis deals sometime in 2020, which would mark a significant change if it came to fruition. More specifics to come on this in future DYK’s, and keep your eye on the SAFE Banking Act currently in the Senate.
There has been an expansion of appetite for deals in historically difficult jurisdictions, such as parts of Africa and India. More details to come on the international RWI market in future DYK’s.