More M&A deals likely to use insurance during Covid-19

The transaction volume of  mergers and acquisitions (M&A) has decreased in South Korea due to the Covid-19 pandemic but deals are closing and warranty and indemnity (W&I) insurance, also called M&A insurance, continues to be used on many of them.

According to Asia Risk & Insurance Advisors LLC (ARIA), W&I insurance has been widely used in domestic M&A transactions recently amid growing uncertainties over transactions due to Covid-19.

ARIA said that buyers can expect that W&I insurers will want to confirm that the transaction parties have considered the effects of Covid-19 on all aspects of the deal.

Most W&I insurance policies now have a specific Covid-19 exclusion in them but the exclusion wording can be “softened” through proper negotiation.

Interest in W&I insurance for cross-border deals is on the rise. Distressed or insolvency deal inquiries are also increasing but W&I underwriters are expected to review these deals very selectively.

Inquiries for minority investments are on the rise with W&I protection being structured so that minority investors are covered for their pro-rata share of a company level loss.

W&I insurance claims in the country continue to inch upwards but none are Covid-19 related. ARIA expects W&I insurance claim activities to grow across the region as economic realities impact portfolio companies that were covered by long-term multi-year W&I insurance policies.

ARIA is a Seoul-based independent consulting firm that specializes in executive liability and M&A transaction risk mitigation. Eric Hoffman, who has over 30 years of global risk management experience, established ARIA in 2016. Previously Mr Hoffman served as president of AON Korea. (Reporting by Hee-yeon Han)