Although there is interest from Indian private equity investors for insurance covers on their deals, it still is a hardsell in the region, said a senior executive from insurance broking house Marsh India Pvt Ltd, part of Marsh Inc.
“The market in India is very cost sensitive and these are expensive policies”, said Tim Allen, vice president, private equity and M&A practice, Marsh. The size of these covers would range between $4 million and $40 million. Typically, the insurance premium on these products is 1%-5% of the sum insured.
Allen said, they were currently working with PE funds and M&A firms on about 3-4 deals for the use of these products. The insurance broker believes that the product has immense value for Indian PE firms who are essentially “minority investors.”
This is because they are always at the behest of the entrepreneur or the companies that they invest in, meaning much more risk and consequently much more need for ‘warranty and indemnity insurance’. The premium for the warranty and indemnity insurance is at around 2-3.5% while for specific tax issues it is 5-8%. The ‘reps & warranties insurance’ helps the buyer when investing in a new or unfamiliar jurisdiction or industry sector.
“These covers respond to the transactions when there are problems and there is mismatch in expectations, be it cultural or financial”, said Allen.
Till now, in order to ensure that a sale or transaction is clean and reduces the contingent tax claims, a popular way has been the tax escrow account which has a limitation of four years. In the event, that the escrow account was not deployed, the money was returned to the seller of the shares. Allen believes that buying a structured product like this will “provide another option to the client rather than opening an escrow account and providing an indemnity”. He added that these policies would also help avoid claw-back of cash raised while exiting.
Apart from providing a more efficient way of freeing cash, Allen added that this also ensures a speeder recovery of money involved in case of any such breach of faith.
“In Indian markets, it takes probably 10-15 years in case of litigations for the final jurisdiction, but with an insurance policy, you can do is that on day one if there has been a breach of law you can make a claim to the insurer and if it is a valid claim, they will pay you directly”, said Allen.
Allen added that these covers need not be on every transaction. These are customised to cover the intended risk in a specific transaction. The policy would defer with every agreement.
A couple of insurance firms are working on these products and are said to have already approached the Insurance & Regulatory Development Authority Of India for its approval.