Increased Use of W&I Insurance in Saudi Arabia Signals Growing Sophistication of the Dealmaking Landscape

While the usage of warranty and indemnity insurance (W&I Insurance) has become widespread across the transactional landscape in the United States, United Kingdom and Europe, its penetration into Saudi Arabia has historically been slow and relatively stunted. Various reasons, ranging from limited allocated underwriting capacity (across both international and local underwriters) to a challenging regulatory environment, have contributed to this state of affairs.

More recently, however, increased deal volume and sophistication in Saudi Arabia, the recent slowdown of dealmaking in the more traditional markets of the United States and United Kingdom, and the increase in in-bound foreign investment have collectively resulted in a clear uptick in the usage of W&I Insurance in Saudi Arabian transactions. As it stands, anywhere between five to 10 insurers are willing to provide coverage for Saudi Arabian transactions depending on the specific nature of the underlying transaction.

The purpose of this note is to explore the several Saudi-specific intricacies of W&I Insurance that should be borne in mind as the local market’s awareness, understanding and appetite for it continues to increase.

• Types of Coverage
  
  Most applications of W&I Insurance that international players are familiar with are available in Saudi Arabia. This includes W&I Insurance coverage for most sectors, transaction values and types of counterparties (public or private) across both majority and/or minority stakes. Buy-side policies are more common, and while sell-side policies are available, their utility and usage are comparatively limited.
  
  There is also the ability to obtain W&I Insurance coverage for non-recourse transactions or hybrid recourse transactions (where the seller provides limited recourse alongside the W&I Insurance). We expect W&I Insurance coverage to become particularly beneficial in Saudi Arabia in transactions involving privatizations of state-owned entities as various stakeholders in the process will likely prefer the primary recourse being sought through the W&I Insurance policy (rather than the privatizing government-affiliated entity).
  
  However, it is worth noting that certain complex products (such as fully synthetic W&I Insurance coverage) can still be difficult to obtain due to limited underwriting appetite from insurers.

• Pricing and Limits
  
  Primarily due to current global macroeconomic conditions and the resulting weakened demand for W&I Insurance, pricing for the product in Saudi Arabia has steadily become more attractive. Depending on the specific nature of the underlying transaction, approximate premiums currently range from 1.75% to 3% of the insured limit. The lower end of the spectrum is unlikely to survive a revival in dealmaking volume globally, but it’s encouraging that very competitive pricing can become available in Saudi Arabia in the right circumstances. It is also worth noting that underwriting legal costs of between $30,000 to $50,000 are generally payable in addition to the premiums.
  
  Policy limits are tied to the financial capacity available for deployment in Saudi Arabia by insurers. While the financial capacity allocated to Saudi Arabia has been steadily growing over the past few years, it still remains relatively low when compared to overall transaction volumes. The rule of thumb remains that, provided the financial capacity exists, higher policy limits can be obtained.
  
  The most common policy limits and coverage amounts remain somewhere between 10% and 30% of the aggregate purchase price depending on overall transaction value, broadly reflecting the position across the United Kingdom and European markets. However, limits outside of this spectrum can also theoretically be explored with, and obtained from, insurers.
  
  In terms of survival periods in the policy, these are typically three years for business warranties and seven years for fundamental and tax warranties (including any tax covenants), again generally reflecting the position across the United Kingdom and European markets. Similar to policy limits, other survival periods could also theoretically be explored with, and obtained from, insurers.

• Exclusions
  
  While several of the common standard exclusions in the United Kingdom and European markets (such as pensions underfunding, secondary tax liabilities, transfer pricing, etc.) apply in Saudi Arabia, there are also a number of region-specific exclusions that are incorporated by insurers from time to time.
  
  For instance, robust exclusions relating to terrorism, sanctions, corruption and bribery are generally included, which are difficult to remove regardless of the amount of due diligence conducted. There are also certain high-risk Middle Eastern jurisdictions (such as Yemen, Iraq and Lebanon) where any meaningful W&I Insurance coverage is difficult to obtain, so any exposure there will be difficult to insure.

• Local Insurers
  
  As a general matter of law and regulation, only insurers appropriately licensed and regulated by the Insurance Authority of the Kingdom of Saudi Arabia (the Insurance Authority) are permitted to directly provide insurance products to beneficiaries in Saudi Arabia.
  
  While the Insurance Authority currently does allow for local Saudi insurers to get approval for, and subsequently offer, W&I Insurance to Saudi-based beneficiaries, the process requires that each policy is approved separately. Due to the transaction-specific and bespoke nature of W&I Insurance, the regulatory approval process typically takes up to a few months, which may not always be compatible with targeted transaction timelines. Additionally, due to the historically low demand for the product in Saudi Arabia, Saudi insurers have not allocated significant resources or capacity to W&I Insurance.
  
  As a result of the above, most W&I Insurance policies in Saudi Arabia (and even the wider Middle East) are currently offered by international underwriters based in the United Kingdom or Europe (usually through special structures or occasionally through local insurers with back-to-back arrangements in place). While Saudi insurers are becoming more open to the possibility of offering the product, fully local implementation remains minimal.

• Governing Law
  
  As the majority of W&I Insurance in Saudi Arabia (and even the wider Middle East) is currently provided by international underwriters, the governing law of the underlying transaction is of key importance.
  
  Many international underwriters will expect that all transaction documents, as well as the W&I Insurance policy, be governed by English (or potentially New York) law. While this may be feasible for a significant number of Saudi transactions, certain Saudi entities (in particular, government-affiliated entities and sovereign wealth funds) are often required to use Saudi governing law, which may result in the non-availability of W&I Insurance.
  
  Notwithstanding the above, there are a number of structural and contractual solutions available in certain situations that can be explored with insurers. It is worth noting that these solutions are only offered by a small subset of underwriters resulting in pricing and terms reflecting the scarcity.

• Jurisdiction of Incorporation of Beneficiary
  
  Another consequence of the provision of W&I Insurance by international underwriters is limitations on the jurisdiction of incorporation of the beneficiary (e.g., the primary policyholder or the “Named Insured” under the W&I Insurance policy). Due to various regulatory, licensing and risk-related concerns (as noted above), international underwriters remain unable to insure Saudi Arabian beneficiaries directly as the primary policyholder.
  
  This has generally not been an issue for foreign investors as they routinely use vehicles incorporated in offshore jurisdictions and are therefore able to obtain W&I Insurance for those vehicles relatively easily. However, local Saudi-incorporated entities participating in the domestic market have found it difficult to directly obtain W&I Insurance.
  
  Again, there are a number of structural and contractual solutions available to resolve the above that can be explored with insurers. It is worth noting that these solutions are only offered by a small subset of underwriters resulting in pricing and terms reflecting the scarcity.

The continuing growth of W&I Insurance in Saudi Arabia is an encouraging indicator of the increasing volume and sophistication of the market. Having said that, it is clear that the application of W&I Insurance is still in its early stages in Saudi Arabia, and, hopefully with time, the issues identified above will be eradicated by all stakeholders. Providing participants with another tried and tested method of risk mitigation can only be beneficial to the overall market, and we look forward to being heavily involved in W&I Insurance’s continuing growth in Saudi Arabia and the wider region.