Euclid Transactional’s Head of APAC Alice Ho and Head of EMEA Tax Chris Waddington spoke with Financier Worldwide Magazine to discuss trends in transactional risk insurance in the Asia-Pacific market. See below for the full article.
Managing transactional risk & insurance in the Asia Pacific market
FW discusses the management of transactional risk and insurance in the Asia Pacific market with Alice Ho and Chris Waddington at Euclid Transactional.
FW: How would you describe the Asia Pacific (APAC) region’s adoption of M&A insurance?
Ho: There is a fast growing realisation that having a safety net is a smart move – the industry has paid billions in claims and users understand that the product works if and when there is a breach of warranty. Nowadays, M&A insurance is no longer a novelty in Asia but is quite commonplace in some markets, and even a necessity in certain sale processes. While there is still plenty of room to increase the market penetration of this product compared to North America, the UK and parts of Europe, the product has definitely gained traction here. Both users and advisers are now more aware of the benefits that M&A insurance brings to transactions, and they have become savvier in deploying the product.
Waddington: In relation to specific tax insurance, the key trend is growth. Tax insurance is increasingly seen as a complementary product to be considered alongside warranties and indemnities (W&I) insurance on every deal, as a potential solution to manage risk and unlock deal value.
FW: Could you provide an overview of the key trends currently shaping the APAC transactional risk insurance market?
Ho: The transactional risk insurance product in Asia Pacific (APAC) is evolving with global innovations while becoming more localised. Transactional insurance is a mainstream product in North America and Europe where the product has developed in a user friendly and flexible way. All of these features are available in APAC, which has a very diverse array of transactions. Underwriters must understand local market practices and handle non-English transactions and be able to look at transactions in Asia with an unbiased perspective. The demand for insurance is not just for insuring targets headquartered in Singapore or Hong Kong, but also for those in Association of Southeast Asia Nations, or ASEAN, countries like Indonesia, Thailand, Philippines and Malaysia. India is a very active and sophisticated market for M&A insurance. There is also significant demand for M&A insurance for targets in Japan and South Korea, each of which are considered very active and advanced markets for the product as well. While deal volume in the People’s Republic of China has not fully rebounded, there is still consistent demand there. Of course, there has always been a mature market for investments in each jurisdiction in Asia and many of these transactions are conducted in the local language and use the local governing law. Asian buyers, with strong purchasing power, require ‘local paper’ and global service. Australasia remains a mature market with sophisticated users, yet new opportunities arise in complex deal structures.
Waddington: There is now a broader range of different tax issues being considered for insurance, a greater degree of complexity to those issues and a higher number of APAC jurisdictions that can be covered than ever before. Adoption of tax insurance as a solution has historically been slower in the APAC region than for W&I insurance, but that is rapidly changing as insurer appetite and client and adviser awareness grows.
FW: Could you outline the general benefits of transactional risk insurance as a tool for buyers and sellers to offload risk in M&A? To what extent is use of M&A insurance helping more APAC deals to get over the line?
Ho: For some parties, M&A insurance is like the secret sauce that is helping more deals close successfully. For buyers, it means peace of mind and smoother negotiations. For sellers, it is a clean exit without lingering liabilities and reduces anxiety and friction on traditional negotiation processes. Brokers hard at work in this region over the past decade have done a great job in showing deal parties that M&A insurance can help bridge the gap on so many fronts, and allows them to reach agreement quickly to close deals. Insurance requires paying for something which may or may not happen, but it is about investing in peace of mind – and in the case of M&A transactions, it helps to reduce friction and maintain good relationships.
Waddington: Tax insurance can be a vital tool for counterparties to unlock negotiations, resolving tax sticking points by taking low to medium risk items off the table and onto the insurer’s book.
FW: Can you give some examples relevant to the dynamics of this region?
Ho: Like anywhere else, the insurance allows private equity (PE) sellers to quickly return proceeds to investors and enables corporates to reinvest without worrying about lingering liabilities. Many PE houses now make it standard to purchase insurance on acquisitions or require buyers to do so when they are selling. In APAC, where transactions often involve minority investments or joint ventures, M&A insurance helps maintain good relationships between buyers and sellers by avoiding contentious negotiations over W&I insurance. It also avoids awkwardness in the relationship after closing if the buyer does discover a breach because the buyer can claim under the policy instead of against its business partner. It also preserves social standing and relationships with large conglomerates on the sell-side. Founders can exit businesses confidently with less acrimony. If a claim ever arises, buyers will find it easier to claim against insurers than navigate arbitration or legal systems on their own, and the product has a proven history of making billions of dollars in payments to make buyers whole for breaches of warranties. Insurance also mitigates counterparty risk, ensuring protection where there is some doubt whether the seller will still be around when a claim arises.
FW: Could you explain the specific applicability of representations and warranties, tax liability and contingent risk insurance policies in the M&A context?
Ho: W&I insurance is an accident policy for M&A transactions – in the event a seller warranty or indemnity is breached, the buyer can claim for its loss arising from such breach under the policy instead of against the seller. This provides peace of mind for unknown facts that are not disclosed or uncovered before the deal is signed. Claims studies show that substantial claims can arise despite comprehensive due diligence having been conducted and despite audited financials, highlighting the product’s importance in safeguarding against investment value loss and enabling more efficient claim payouts compared to claims made directly against the seller.
Waddington: Tax liability insurance is designed to protect against specific tax risks that could arise from transactions, reorganisations or other taxable events. It provides coverage for potential losses if a tax position is challenged by tax authorities. This type of insurance can be a vital tool in M&A deals to unlock negotiations, where the sticking point to the deal going ahead relates to a tax issue identified in diligence which is excluded under a W&I policy. These tax issues are often low probability but high severity in nature and can therefore significantly impact the transaction’s success. Tax insurance allows companies to have more financial certainty going forward, but also helps streamline negotiations by reducing the need for price adjustments, indemnities or escrows.
FW: As the M&A insurance market in the APAC region evolves and matures, what changes are you seeing in terms of coverage, exclusions, pricing, claims and payouts?
Waddington: Coverage is trending toward being broader in relation to a specific tax issue with fewer exclusions outside the market-standard exclusions, which typically relate to change of law, fraud and misrepresentation.
Ho: We are seeing more underwriters entering the market in APAC that want to provide commercial solutions to clients. Policies are becoming more tailored toward clients’ needs. We collaborate with broker partners and clients to determine fair coverage positions based on target risk profiles and due diligence. In APAC, there is growing demand for some of the more advanced features and product enhancements being offered in the North American and European markets.
FW: To what extent are you seeing an increase in the volume of claims and payouts? How would you compare transactional risk insurance claims seen in APAC with those in other regions across the globe?
Ho: Although claims notification rates in APAC have historically been lower than other regions, claims can arise from any deal, even those that seem the ‘safest’, with the most sophisticated deal parties and advisers involved or even where accounts are audited. In Asia, which has seen growth in the number of deals insured, brokers and insurers are predicting that there will be a corresponding increase in claim notifications and claim payouts, but that these will be in proportion to the deal volume insured.
FW: What essential advice would you offer to buyers and sellers when evaluating the options for transactional risk insurance?
Waddington: It is essential to engage a broker and insurers early in the process, and ensure that there is a thorough advice note detailing the risk, as well as being organised with documents likely to be required, which will save significant time in underwriting.
Ho: Do not just choose the cheapest option. It is important to purchase the insurance from someone that can commit to deliver on the execution on the deal timeline and who will be around to provide support if a claim is required further down the road. Engage a broker and insurers early in the process. Additionally, consider the insurer’s ratings and, for managing general agents, check their regulatory status and carriers.
FW: Looking ahead, do you expect to see rising interest in transactional risk solutions in the APAC market? What factors are likely to propel this market?
Ho: The increasing complexity of deals and need for certainty are likely to boost demand for these solutions in APAC. The sophistication of the M&A markets in APAC, as well as the savviness of advisers and users here, position the region for significant growth in transactional insurance. It is important to work closely with broker partners to ensure users have positive experiences and successful outcomes, even on challenging transactions. This helps convert more users to the benefits of transactional insurance. Convincing people to purchase insurance can be challenging, but brokers are bridging gaps by educating users and advisers. Early involvement of brokers and clear communication from sellers can streamline the process and highlight the value of insurance.
Waddington: We expect to see sustained growth in the use of tax insurance in the APAC region, not only as a way to reallocate tax risk in a live M&A transaction, but also as a faster alternative to obtain certainty of tax treatment than applying for a binding ruling from the tax authority. We expect tax liability insurance for certain risks, such as withholding taxes, to become a standard and expected feature of most transactions in the future, much like W&I insurance.
Alice Ho is head of APAC and underwriter at Euclid Transactional, where she and her team focus on providing transactional insurance solutions across the Asia-Pacific region, and she is on a mission to grow the market alongside broker partners. Before this role, she spent over a decade advising private equity firms and corporates on international and regional transactions as counsel at a leading international law firm in Singapore and she was singled out several times in the Legal 500 directory.
Chris Waddington is head of tax (EMEA) at Euclid Transactional, where he is responsible for leading Euclid’s tax insurance offering in EMEA and the Asia-Pacific region by developing specific insurance solutions for a wide range of tax matters. Prior to joining Euclid Transactional, he underwrote specific tax risks at a global insurer and prior to that practiced as a tax solicitor in London for over a decade at various international law firms.
