The Seller/Buyer Warranty and Indemnity Insurance is a new type of insurance in the global insurance market. The Purpose of this insurance is to against the risks involved in the M&A process, especially those risks generated by the misrepresentation of the parties. The insured target of the Seller/Buyer Warranty and Indemnity Insurance is the representation and warranty provision in the M&A contract.
As we all know, representation and warranty provision, as well as indemnification provision, are the core content of an M&A contract. Generally speaking, both the acquirer and the acquired promise in the representation and warranty provision that it has provided all truthful information it possesses pertaining to the relevant issues to the other party, otherwise it will be liable for any damages caused by its misrepresentations.
Where one party applies for the Seller/Buyer Warranty and Indemnity Insurance, if there are damages caused by the other party, the insured may make a claim to the insurance company to get the indemnification. This will help the insured to prevent from the damages caused by the intentional failure of disclosure and other incidental damages caused by the uncertain factors.
From a global perspective, the Seller/Buyer Warranty and Indemnity Insurance is never the main product for the insurance companies. However, taken the huge amount of the fund which will be involved in the M&A into consideration, the premium of the insurance is still hard to be ignored. The current average premium rate of the Seller/Buyer Warranty and Indemnity Insurance is 1%-3%. In the last 10 yeas, the highest limitation of indemnification is USD500 million.
Now, the Seller/Buyer Warranty and Indemnity Insurance is emerging on the Chinese insurance market: two foreign-invested insurance companies: Chartis Insurance and Zurich Insurance have filed this product to the CIRC. According to the information provided by Chartis, the first policy in China is underway.
The underlying reason for the two insurance companies to import these two insurance companies is to meet the increasing needs of the Chinese giant companies for this product.
Since the financial crisis exerts less influence on Chinese market, and Chinese corporations developed rapidly in recent years, a lot of Chinese corporations have accelerated their steps towards the global market. According to some unofficial statistics, Chinese corporations are parties in over 50% the important M&A transactions in recent years. However, as new player in the global financial market, one of the biggest concerns of Chinese undertakings is that they may not so familiar with the rules and tricks of the M&A transaction. They need a kind of insurance which will cover them from the overall risks involved in M&A. Then, the Seller/Buyer Warranty and Indemnity Insurance is the very choice for these corporations. Many insurance companies, especially those foreign insurance companies, take this need as the new opportunities for their development in Chinese insurance market.
In one word, when more and more Chinese corporation engages in M&A in the global market, the Seller/Buyer Warranty and Indemnity Insurance will have a promising future in china.