At Optio we are always looking for ways to push the Warranty and Indemnity (W&I) insurance product towards an ever-higher level of maturity and sophistication. For instance, insurers have historically insisted on independent third-party due diligence reports before agreeing to underwrite a transaction. However, we have succeeded in adapting our underwriting to make use of due diligence reports prepared by suitably qualified professionals within the insured’s in-house team.

This approach works most effectively when the insured is a trade buyer accustomed to making acquisitions and the target business is within their core area of operations. However, we have also been able to make this work for institutional investors such as private equity houses. In both cases, the key factor is ensuring that the buyer or investor has employees with the necessary technical knowledge to properly understand the target business, such as lawyers, chartered accountants, HR professionals and insurance experts. Internal diligence exercises can give these professionals the opportunity to combine this technical knowledge with their hands-on sector experience, making them well-positioned to identify and assess key areas of risk within the business being acquired.

This flexibility has the potential to streamline the underwriting process for the insured and also allows for a tailored and insightful diligence process.

At Optio, we focus solely on SME transactions (those with EVs of up to £120m, or currency equivalent) and so are well used to working with investors and trade buyers who are keen to obtain the best value for money throughout the M&A process. Our expertise in small and medium-sized deals leads to a sophisticated and knowledgeable underwriting approach enabling us to tailor the underwriting process to align with the overall transaction dynamic (eg. transaction size, the target’s operations, the buyer’s in-house capabilities).

For example, unlike many insurers we do not insist on an underwriting call. We generally ask written questions based on the output of the diligence exercise but are happy to consider being flexible regarding the format of this output. We have in the past adapted our underwriting to make use of short-form reports and even Excel workbooks, provided they are in a written form and demonstrate a thorough analysis of the key risk areas.

We can design our underwriting questions to help guide internal diligence processes and assist internal teams in extracting information, and enabling us to provide the best possible cover. Where appropriate, we will provide feedback on in-house-produced reports, highlighting any gaps or areas where additional detail or analysis could enhance the scope of coverage. This provides comfort to buyers as, if something is overlooked in their initial review, they have a second chance to provide additional detail or analysis. Not only could this lead to enhanced cover, it can also give buyers more thorough insight into the risks associated with the business being acquired.

As the W&I market continues to evolve, the rise and increasing acceptance of internal diligence reports marks a significant step forward, reflecting the market’s growing sophistication and flexibility. Dealmakers within the SME space and regional markets should take note that innovations like this, combined with increasingly competitive premiums, mean W&I insurance is no longer reserved for large deals and institutional investors.