The growing popularity of transactional insurance in France

The French M&A market had a bumper start to 2022 followed by a relative slowdown, as did other countries in Europe. Warranty and indemnity (W&I) insurance benefits from the market’s tailwinds but also from gradual changes in the way transactions are structured. Although historically, France has been lagging behind its European peers in the use of W&I insurance, this is evolving thanks to various drivers.

Cultural changes and local expertise fuel growing demand for insurance

A decade ago, most French buyers and sellers did not even consider W&I insurance as an option during a transaction. Instead, the risk has traditionally been allocated through standard warranty terms, often backed up by deposits in an escrow account. This proved an expensive and inefficient way to allocate risk because the sellers remain liable and it ties up capital for long periods of time.

But this is now changing. The use of escrow accounts has fallen sharply to around 40% of transactions last year (compared with an average of around 60% for the period 2010-2020) and we expect this trend to continue. On the flip side, this is bringing growing demand for W&I insurance backed up by the increasing presence of local broking teams. Familiarity has begun to make the product much more well-known amongst lawyers and corporate finance advisers, and we estimate that at least  30% of French M&A transactions are now insured.

Both Brexit and COVID-19 have also accelerated some changes. Insurers and brokers have started recruiting native speakers locally and relocating experts out of London into European markets. It certainly helps bridging the cultural gap and stimulates growth in the local market.

The familiarity with the product and the presence of supportive broking expertise also makes lawyers feel more confident about recommending transactional insurance to their clients. They can now build upon the proven claims track record of renowned insurers such as Liberty Specialty Markets.

‘Stapling’ W&I insurance

A growing long-term trend is the increased use of W&I insurance in auction processes on larger French M&A deals as a requirement stipulated by the seller (known as “stapling”). The W&I policy is instigated by the seller and then finalised with the buyer.

Integrating W&I insurance early in the auction process has considerable advantages, aiming to facilitate a faster and smoother insurance placement tailored to the deal.

Overall, even without the recent boom in M&A itself in France, this market is seeing some beneficial changes to management of warranties around deals. The increase local expertise is delivering confidence in using transactional insurance, and this, along the way, is helping to cut costs and shorten deal times for those involved in French M&A transactions.