IQ-EQ’s Head of Real Estate for Luxembourg, Tamas Mark, sits down with Aon’s Helen Chapman and Harriet Clarke to discuss insurance in the context of real estate investing.
Aon is a leading global insurance broker and Helen Chapman, Executive Director, and Harriet Clarke, Director, are part of its M&A and Transaction Solutions division. Both qualified lawyers, Helen is an insurance product specialist, while Harriet specialises in insurance solutions to support buyers and sellers in M&A transactions, with particular focus on the real estate sector.
In their conversation with Tamas, Helen and Harriet share insight into a range of insurance-related trends within the real estate space, including the most popular insurance solutions to positively influence deal timelines, the impact of Covid-19 on transaction insurance and insurers’ appetites, and insurance products that can create real value for clients as opposed to just downside protection. They also discuss how insurance fits into a typical real estate transaction, as well as key due diligence considerations.
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Hello and welcome to IQ-EQ Real Estate Focus, our dedicated podcast series where we hear from industry experts on the latest trends and hot topics within the real estate sector. I’m Tamas Mark, IQ-EQ’s Head of Real Estate for Luxembourg, and your host for today. In this episode, I am delighted to be joined by Helen Chapman and Harriet Clarke from leading global insurance broker, Aon, to discuss insurance in the context of the real estate investing. Hi Helen, hi Harriet!
Helen and Harriet work in Aon’s M&A and Transaction Solutions division. Both qualified lawyers, Helen is an insurance product specialist, while Harriet specialises in insurance solutions to support buyers and sellers in M&A transactions, with particular focus on the real estate sector. Thank you both so much for joining me today. Now, let’s dive straight in with our first question. Harriet – given your focus specifically being on real estate transactions – could you explain how insurance fits into a typical transaction and how it benefits the parties?
Absolutely. So the use of insurance solutions can essentially de-risk aspects of the transaction, benefiting both the buyer, who will have recourse against an insurer rather than the seller, who, I suppose, given typical real estate SPV structures might have limited covenant strength, but also benefiting the seller who doesn't need to be concerned with their ongoing future liability. So there are a range of products that can be utilised in a real estate transaction – from W&I, which takes care of the unknown risks in response to a breach in warranty, to tax policies, which are incredibly relevant in real estate transactions. These look to cover the known tax risks, particularly where complex rules may be open to interpretation.
And a lot of the transaction solution insurance that Harriet's mentioned deal with unknown risks that the buyer might be facing when they purchase a property or an SPV holding a property asset. But obviously, and very commonly, we see known risks emerging during a real estate transaction. And these can also be dealt with via insurance, particularly title insurance, which is available from the title insurance market. And at Aon we look so far as we possibly can to combine these different types of insurance into one product and we've developed a particular product, the Aon Real Estate Solution, which does exactly this and is tailored to those unknown and known risks emerging on a real estate transaction.
We see on the market that it has become a priority for both buyers and sellers to close deals as quickly as possible. What are the most popular solutions to positively influence deal timelines?
Yeah. So if I perhaps take it from a seller perspective first. Whilst W&I, probably 95% or more of the time, is taken out on the buy side, it can be very beneficial for a seller to stipulate that insurance should be used, particularly where they require a clean exit and they can actually commence this process, particularly if there's an auction process in mind. The reason being, they can put what's known as a sell side staple in place. So this is essentially the seller lining up the insurance in advance. And it avoids each bidder having to go through their own process of getting insurance quotes, which can be time consuming, and enables the bidders to focus on deal critical issues. So that's a really useful tool to speed up the transaction process right from the onset, particularly where there's an auction.
Yes. And from a timing perspective, it's useful to remember this insurance is a risk transfer solution. And so, from both parties’ points of view, rather than spending time negotiating where the risk in a transaction should lie, both the seller and indeed the bidder can work to put an insurance solution in place, which will ensure that any risk of an unknown matter is transferred to the insurers. Um, and that can speed up the negotiation of a transaction.
Thank you, that's great, and very interesting. What due diligence would you still typically recommend to your client to perform before acquiring an asset?
I think it's really important to note here that insurance is not a substitute for full due diligence. So W&I is for the unknown risks, so those that have not come to light through the proper DD process. So insurers will want to see full diligence – so that’s legal due diligence covering both the property and the corporate vehicle (although the latter should be relatively straightforward in your average real estate SPV deal), but also the financial and tax side and technical diligence on property as well.
And it should be remembered that if due diligence does throw up known risks, it is possible to get insurance for those, particularly in the title market, in the context of a real estate transaction.
And now that hopefully we are approaching the end of the pandemic. I'm curious to know how has this pandemic has impacted transaction insurance and the insurers’ appetites?
Yes, it's been an interesting journey from the beginning of the pandemic. At the beginning, we were seeing insurers, really with a knee-jerk reaction, placing general COVID-related exclusions onto policies. As the matter has developed, we've seen insurers more prepared to underwrite the particular pandemic-related risks coming out of any type of transaction, but particularly real estate, where it’s perhaps easier to assess COVID-related risk.
Yeah, I think we've seen some insurers generally reconsidering their appetite for certain sectors as a result of COVID. And they're really keen to understand the viability of the target and particularly the tenant profile, particularly where the certain real estate sectors have been materially impacted by COVID. So thinking about office, student accommodation, et cetera. But as Helen was alluding to there, I suppose, once we're into underwriting, where the target's not an operating company and it's your real estate SPV deal, we are seeing insurers taking a sensible approach, where the warranties are your standard suite of warranties that you'd expect in these deals. So there's no warranties, for example, focusing on performance of contracts, employees and future rental income. In those scenario, as Helen was saying, they can really underwrite around the COVID-related risks.
Thank you. And I would be keen to hear your opinion: is there a product in the market that can actually create value for clients as opposed to simply providing downside protection?
Yeah, I think on the buy side, the suite of transaction insurances available in the market really do enable deals to go ahead that might otherwise fail due to risks arising that the buyer can't get comfortable with. So I think, from a buy-side perspective, it does enable deals to go ahead quite often. On the sell side, transaction insurance is a really useful tool to prevent a proportion of the purchase price being tied up in escrow or perhaps deferred. But it also enables the seller to go ahead and distribute monies post-completion without a concern of future claims. So I think that that really helps create value by enabling these distributions.
Yes, and that really, really is an advantage in particularly distressed scenarios or reorganisations where the corporate wants the ability to free up proceeds of the transaction and make distributions. So that can add value in accelerating access to the proceeds. Um, another product, which we've mentioned already, which is the Aon Real Estate Solution, is something which can deal with both the unknown risks in a real estate transaction, but also protects any, both unknown and known risks coming to light or affecting future development prospects. And that's something that we've developed last year and has come into its own in the last year. And it's been particularly used by investor-developers.
Thank you. One final question and it's related to Brexit. We cannot avoid this topic! Britain finally exited the EU at the start of this year. From your experience, how has Brexit impacted real estate transactions?
Well, we’ve been reflecting on this a lot, and it's quite hard to divorce Brexit-related issues from pandemic-related issues from normal market cycles. So it's fair to say that from our perspective as insurance brokers, we have seen a slight downturn in the number of real estate transactions, although that is now picking up. And we are anticipating a sustained market for real estate transactions, given the changes which had to be brought about by Brexit in terms of group reorganisations and logistic issues required because of Brexit.
I think the real estate sector is really facing the same challenges as other sectors in relation to Brexit more generally, say workforce issue, supply chain, et cetera. For real estate specifically, I think it'll be really interesting to see if there'll be any change in regulations, say environmental health and safety or those areas that are typically driven by EU law. Um, and to see if changes will happen as a result of us leaving Europe. So I think that's to be seen.
Helen, Harriet, thank you so much for taking your time and sharing your insights with us today. I think it's been a really interesting session.
It's been a pleasure. Thanks very much for having us.
Yes, great. Very great. Good to speak to you. Thank you.
And thank you to everyone who has tuned in to listen to this real estate focus podcast. We hope you have enjoyed it till next time.