In recent years, the number of insurers offering M&A insurance (known as warranty and indemnity (W&I) insurance) in Asia has doubled.[1] This is ushering in a new era for risk allocation in M&A that is more favorable to buyers and sellers in the region.
For most of the last decade, a small group of international insurers served Asia. However, in the last year or so, eight insurers that are active in London have expanded into Asia. International and domestic insurers are also increasing their interest in and their capability for underwriting policies in local languages such as Japanese and Korean so they can better support domestic M&A transactions in non-English-speaking jurisdictions.
Fierce competition, coupled with slower M&A activity, has driven insurance premiums down — a global trend for M&A insurance. Specifically, premiums used to range from 1.5% to 3% of the policy limit in Asia, depending on the applicable jurisdiction(s), and even exceeded 4% in certain circumstances in 2021, during a busy M&A market. In most of Asia today, average premium rates range from 1% to 2% of the policy limit. Insurers and brokers report more heightened negotiation of coverage enhancements and streamlined underwriting processes, which some call the “Londonization” of Asian W&I insurance.
In this article, we highlight some key points buyers need to understand about M&A insurance and certain other insurance products available in Asia.
Transaction agreements form the basis of coverage
Insurance policies typically cover particular risk areas (such as cyber or environmental risk) that are specified in the policy. M&A insurance typically covers warranties in a transaction agreement that are negotiated between the buyer’s counsel and the seller’s counsel. Coverage is triggered when a warranty turns out to be untrue, subject to any limitations under the policy. Because the buyer must decide which issues to negotiate with the seller, the buyer and its counsel need to discuss how contractual limitations in the transaction agreement may or may not affect the insurance policy and which coverage enhancements make practical sense to pursue when negotiating the policy with the insurer.
Gaps in diligence can cause exclusions
The ability to obtain clean coverage depends on the quality of the buyer’s due diligence. As part of the underwriting process, buyers must share with the insurer copies of all diligence reports commissioned by or made available to them. Material gaps in diligence or in answers to the underwriting questions can lead to exclusions. Discussing the planned scope of diligence and what is sufficient for insurance purposes helps avoid surprises later. When an exclusion comes up, the buyer can try to renegotiate the exclusion with the insurer (typically with additional diligence) or seek specific indemnity or another concession from the seller.
Approaches vary by region
M&A insurance comes in the form of either W&I insurance or representations and warranties (R&W) insurance, depending on the jurisdiction. As explained in a previous article (“Cross-Border Transactional Risk Insurance”), their pricing, underwriting process, and scope of coverage typically are different. The terms and market dynamic for W&I insurance can vary by country. To get a sense of the potential complexity, consider the following actual scenarios:
- An Asian private equity firm buys a business in China from a European private equity owner with an SPA governed by the laws of Hong Kong, and the buyer obtains W&I insurance in Hong Kong.
- An Asian private equity buyer and an Asian corporation negotiate the sale of a European brand, and the buyer obtains W&I insurance in the Nordics.
- A portfolio company backed by an Asian fund participates in the auction of a US-based business with operations in Europe and Asia, and the buyer obtains R&W insurance in the US.
- An Asian company buys a European business via a US-style purchase agreement governed by the laws of the target’s jurisdiction, and the buyer obtains W&I insurance in Europe with US-style enhancements working with its advisors, underwriter, and brokers in five countries.
Just as the buyer and the seller in cross-border transactions must find middle ground between their competing M&A cultures, with understanding of nuances in different insurance products, buyers can seek a middle ground in negotiating insurance coverage options that best fit their circumstances.
It’s not just about buyouts or M&A
W&I insurance can support a variety of transactions, including buyouts, carve-outs, secondaries, minority investments, and real estate transactions. Other types of insurance are also available in Asia to protect against identified tax or other contingent risks, such as the applicability of tax treaties, permanent establishment risk, risk of an adverse interpretation of a law or regulation, and risk of a court judgment or arbitral award in favor of the insured being overturned on appeal.
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Buyers doing deals in countries such as the US, the UK, and Australia have long used M&A insurance to facilitate deals and minimize post-closing claims against the seller. In many parts of Asia (such as Singapore, India, China, and Hong Kong), the use of W&I insurance often starts out as the seller’s requirement, especially if the seller is a private equity firm. In Japan and Korea, corporate acquirers were early adopters of W&I insurance. With a buyer-favorable insurance market, buyers may start to use W&I insurance more frequently across Asia. As M&A volumes increase, dealmakers will be able to take full advantage of the broader underwriting capabilities in the region.[1] In this article, references to “insurers” include managing general agents/underwriters (known as MGAs/MGUs) that issue policies on behalf of underlying insurers.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.
