With an uptick in life sciences M&A on the horizon, demand is rising for Warranty & Indemnity (W&I) solutions. In this article, our experts consider a market that has changed considerably in recent years, and the key takeaways for insurance buyers.
1. Potential upturn in M&A activity
The last 12 months have been a quieter period for life sciences M&A, but the turn of the year brought plenty of optimism. According to EY, leading biopharma players alone hold US$1.3 trillion in dealmaking firepower (opens a new window), in what could be a major driver of dealmaking activity. Biotech, healthtech, and healthcare analytics are among the likely hotspots, as per research by PWC (opens a new window). Growing competition in the obesity (GLP-1) market may also push established brands to expand their capacity. Meanwhile, faced with patent cliffs and supply chain uncertainty, large-cap pharmaceutical companies may look to M&A to fulfil their growth ambitions. If these trends come to fruition, it will fuel renewed demand for W&I insurance.
2. Insurers welcome new business
The insurance market’s approach to healthcare and life sciences transactions has undergone a significant transformation in recent years. Insurers are venturing into the sectors with ever greater frequency – a trend that was unthinkable not long ago.
In large part, this reflects the maturing of Warranty & Indemnity (W&I) Insurance products, combined with growing demand from private equity buyers. Take-up within certain industries, notably pharmaceuticals, has also worked to establish W&I as a critical dealmaking tool.
3. Competition driving lower rates
The rate-on-line for W&I average across all sectors decreased to 0.91% (opens a new window) in the year-end September 2024, a record low. This is the result of a rising number of insurers in the market, which is helping to drive competition for business.
Retentions are also reducing, giving buyers better protection against lower-value claims. With 2025 predicted to bring a higher number of life sciences small deals, in a shift from the megadeals of years gone by, this represents more positive news for investors.
4. New tools emerge to safeguard transactions
W&I is designed to cover unknown risks. But as transactional risks continue to evolve, so products must adapt. Fortunately, transactional risk products are responding to this challenge, with insurers now offering cover for specific risks, including Tax Liability, Contingent and Legal, and Intellectual Property (IP) risks. This is broadening and enhancing insurance cover, helping to overcome potential roadblocks in negotiations.
Within a life sciences context, Tax Liability Insurance has seen a notable increase in popularity over the last year, proving its worth as an effective dealmaking tool. Unsurprisingly, intellectual property (IP) risks insurance has also seen strong take-up among pharma and life sciences M&A, where IP frequently forms a significant component. Insurable risks include gaps in title and ownership of IP assets, complex IP ownership, and third-party infringement, among others.
5. Planning remains essential
Investing in the life sciences sector is not without its challenges. Highly prized assets remain costly, and many have already been subject to acquisition. To be successful, acquisitions must be backed up with a robust capital allocation strategy.
Taking out insurance protection requires a similar level of care. Placing a W&I policy has been seen as disruptive process by some players on market, but it doesn’t have to be difficult. When planned sufficiently in advance, with clear communication lines between all parties (including brokers and insurers), the W&I process can run seamlessly alongside the M&A timetable.
6. Insuring the post-deal
W&I is an essential tool for M&A. But insurance also plays a crucial role after completion, helping to protect the acquired entity from financial risks and ensure a smooth integration process. During the post-deal phase, life sciences firms should consider a full-scale review of their insurances, weighing this against any new risks arising from the acquisition. Sources of new risk may include contractual changes triggered by a ‘change in control’ clause, potential litigation against the acquired company, or cyber and IT risks.
Relevant insurances may include property and liability insurances across any laboratories and manufacturing site, Employers Liability Insurance, and Cyber Insurance, among others. Tail policies may also be required in relation to the previous insurance held by the constituent firms prior to completion.
For more information, visit our Healthcare (opens a new window), Life Sciences (opens a new window), and Transactional Risks (opens a new window) pages.
