To Cover Risks Involved in M&A Deals
M&A insurance is emerging as a new profit source of non-life insurance companies as the ratio of PEF deals is on the rise in the South Korean M&A market.
The size of the local M&A market amounted to US$33 billion last year. The size, which dropped from US$35.5 billion in 2014 to US$19.2 billion in 2016, is increasing again these days with the ratio of PEF deals rising. Specifically, the ratio jumped from 14 percent in 2011 to 43 percent in 2018.
M&A deals entail complicated matters intertwined with one another and contracting parties face difficulties in dealing with debt-related fact checking and negotiations in many cases. Warranty and indemnity insurance, also called M&A insurance, is to cover such potential risks. In general, this type of insurance has a maximum coverage of 100 billion won or so.
At present, more and more companies are using M&A insurance in global markets. According to the Asia-Pacific business unit of AIG Insurance, claims were made for approximately 20 percent of global M&A insurance contracts last year.
The ratio was 26 percent in the case of insurance contracts for US$500 million to US$1 billion M&A deals. In addition, the ratio of large claims for a settlement of at least US$10 million jumped from 8 percent to 15 percent and the average of paid insurance benefits amounted to US$19 million.
M&A insurance underwriting procedures require a high level of expertise and abundant experience along with sufficient payment capabilities. As such, only a small number of insurers, such as AIG Insurance, Hyundai Marine & Fire Insurance, and DB Insurance, are currently handling that type of insurance in the South Korean market.