I. Introduction

Warranty and Indemnity (W&I) insurance has become an integral part of the merger and acquisition

(M&A) landscape in South Korea since its rapid growth in the mid-2010s. As we close on 2023,

it is necessary to take stock of the current trends and developments in the W&I insurance market in Korea as well as its implications for M&A stakeholders.

II. Continued Growth in W&I Insurance Transactions 

W&I insurance has become increasingly popular in M&A transactions worldwide. This insurance product serves as a crucial risk management tool by providing protection to both buyers and sellers against potential breaches of warranties and indemnities made in a transaction agreement.

Albeit continued downturn of M&A deal flow in the first half of 2023, the second half of 2023 has

experienced a more optimistic volume of deal activity. Compared to what began as a novel concept in the early 2010s, the use of W&I insurance in Korean M&A deals has now firmly established itself as a standard practice in 2023. Both buyers and sellers have come to appreciate the benefits that W&I insurance offers, contributing to its continuous growth.

III. Premiums 

As new players enter the market and vie for market share, the imperative to provide competitive pricing has never been more apparent. This, coupled with reduced deal volume, have intensified

competition among both existing and new insurers, causing a fall in premiums for W&I insurance policies in Korea in 2023. They now sit between mid-1% and mid-2% of the policy limits, a notable

drop from the pre-COVID range of 2% to 3%. While this may initially appear as a challenge for insurers, it may present a unique opportunity as lower premiums can incentivise greater client

interest and engagement. Embracing this trend by offering competitive pricing could not only attract more clients but also foster stronger relationships within the Korean M&A ecosystem.

Such development has the potential to drive growth and solidify insurers’ presence in the Korean W&I insurance market.

IV. Evolving Coverage Scope 

For instance, unlike previous years where pollution and cyber risks were almost universally deemed as standard exclusions, today, 

we see a willingness among insurers to entertain the possibility of covering these areas contingent upon adequate due diligence. 

This shift not only reflects the evolving risk landscape but also underscores the adaptability and innovation within the W&I insurance sector, 

as insurers and underwriters are more attuned to the unique needs of their clients in an ever-changing M&A environment in Korea.

As for specific Korean law related risks, whereas potential liabilities arising from underpayment of ordinary and average wages and illegal dispatches were previously seen as challenging to address, 

such risks are now being considered for coverage subject to rigorous legal due diligence and satisfactory underwriting responses. 

Conversely, the introduction of Korea’s Serious Accidents Punishment Act (SAPA) in January 2022 has placed heightened responsibility on businesses for safety. 

Violations of SAPA, such as the failure to implement safety measures causing a serious or fatal accident to occur, can result in severe penalties including imprisonment for up to seven years, 

a KRW 1 billion criminal fine per violation, and punitive damages of up to five times the actual damages incurred. 

Due to the lack of established case law, W&I insurance coverage for SAPA-related risks has typically been excluded unless thorough legal due diligence on compliance is confirmed. 

This has underscored the importance of addressing SAPA related liabilities in the underwriting process in 2023.

V. Governing Law and Dispute Resolution 

For Korean deals, a consistent pattern has emerged in the choice of governing law and dispute resolution clauses in W&I insurance policies. 

In most cases including those involving numerous insurers and managing general agencies (MGAs), the governing law of policies has been Korean

law and the dispute resolution forum has been Korean courts.

In Korea, all W&I insurance policies for M&A transactions have been typically governed by Korean law for several key reasons. First, the underlying M&A transaction agreements are commonly

governed by Korean law due to the nature of ownership, transfer restrictions, and associated rights and obligations concerning shares in Korean target companies, as stipulated in the Commercial Act of Korea. 

Second, regulatory requirements necessitate insurance policies to be governed by Korean law, as there are filing obligations to the relevant authorities regarding the insurance products offered in the market. 

Further, aligning the governing law of W&I insurance policies with that of the underlying transaction agreements is a prudent and logical practice.

As for dispute forum, however, there have been some instances where certain insurers sought to incorporate international arbitration clauses into their policies, albeit resistance primarily from the insureds. Interestingly, these buyers in our experience were all Korean entities. 

This raises an intriguing possibility: in cases involving foreign buyers, it might be worthwhile exploring the negotiation of arbitration clauses on a case-by-case basis. Such a tailored approach could potentially align with the preferences and expectations of foreign entities, thereby fostering smoother and more internationally adaptable W&I insurance arrangements in the Korean market.

VI. W&I Insurance Claims 

VII. Outlook for 2024 

In 2024, the M&A landscape in the Korean market is poised for an intriguing shift,  as a confluence of factors impacts deal volume and the W&I insurance market.  Whereas the persistently high interest rates have driven buyers towards smaller-scale transactions in 2023, confidence in large-scale transactions may be regained with the expectations of an interest rate hike freezing in 2024.

Concurrently, investment focus is expected to shift towards clean energy and the energy transition sector, reflecting Korea’s commitment to sustainable development and reduced carbon emissions. Furthermore, 

as a result of a recent slowdown in deal flow, private equity firms may face an anticipated investment horizon expiry on their existing targets, potentially triggering a wave of exits and divestitures in 2024. 

In this evolving landscape, W&I insurance is expected to play a pivotal role in facilitating transactions, offering risk mitigation solutions to both buyers and sellers in an increasingly complex and dynamic M&A environment in the Korean market.