De-Risking the Deal: The Critical Role of Risk and Insurance Due Diligence

Mergers and acquisitions (M&A) are complex undertakings that involve significant legal, financial and operational risks. Amid the scrutiny of financial statements, legal liabilities and operational metrics, one critical area often overlooked is insurance due diligence. Yet, insurance can serve as both a shield and a signal: a shield against post-closing liabilities and a signal of the target’s risk management maturity. Proper insurance due diligence not only helps to mitigate future liabilities but also ensures the continuity of coverage and the identification of potential deal-breakers.

What is Risk and Insurance Due Diligence

Risk and insurance due diligence involves a comprehensive review and analysis of a target company’s insurance policies, claims history and risk management practices. The goal is to evaluate issues, such as gaps, risk exposures, or high claims experience, that may impact a M&A transaction or future operations. This review is used to customise recommendations for an optimal risk management structure in the form of a practical roadmap to enable the implementation of recommendations.

The typical services provided under a Risk and Insurance Due Diligence workstream includes:

Identification of uninsured historical, current and future risks
Commentary on adequacy of existing policy coverage for the target company
Benchmarks of policies’ limits and premium competitiveness against local market and industry standards
Evaluation of insurance claims history
Estimate of budgetary costing for the insurance program post-completion and ensuring continuity of coverage
Understanding change of control provisions
Commentary on the sales and purchase agreement (SPA) on insurance related sections (if necessary)

Why Insurance Due Diligence is Critical in M&A Transactions

Heightened Risk and Liability Exposure
Businesses today face a broader and more complex set of risks – cyber security breaches, environmental liabilities, ESG-related exposures and more. Inadequate or outdated insurance coverage can expose buyers to unforeseen liabilities that materially impact the value of the deal.

Rising Insurance Costs and Market Hardening
The global insurance market has seen rate increases and tighter underwriting standards across many lines of coverage, especially cyber, directors’ and officers’ liability, and property insurance. Insurance due diligence helps buyers assess whether the target’s premiums, limits and coverage structure are sustainable, or whether future costs could erode profitability.

Increased Usage of Warranty and Indemnity Insurance (W&I)
W&I has become a common feature of M&A transactions. The underwriting process for this insurance typically requires thorough insurance due diligence, conducted by an external advisor, to satisfy the insurance warranties in the SPA and avoid exclusions.

Post-Close Integration Risks
Post-close, integrating the acquired company into the buyer’s insurance and risk management framework can be complex. Carveout transactions add another layer of complexity where the target might have to obtain separate standalone insurances moving forward. Early due diligence helps ensure smooth transition and avoids duplicated coverage, gaps or missed renewals.

Aon’s Approach to Risk and Insurance Due Diligence

Aon’s risk diligence evaluates past, current and future risk exposures to provide information on how to mitigate risk and address associated costs. Our process comprises of the following steps:

Past	Review the adequacy of historic insurance program and risk exposures Uninsured risks Hidden liabilities Insolvent insurers
Present	Review adequacy of current insurance program Risk profile vs coverage (benchmarks) Uninsured losses vs reserves SPA recommendations and potential for insuring identified matters (tax, ongoing litigations, environmental issues, etc.)
Future	Identify future threats to the balance sheet and recommend solutions Project pro-forma cost of risks Integration and implantation advice

Effective Tool for Mitigating Risk Exposure

Insurance due diligence is a key risk mitigation tool in M&A transactions, as it helps identify potential liabilities, coverage gaps and historical claims that could impact the deal. In addition, it helps to assist W&I insurers to gain comfort on providing clean coverage for insurance warranties under the SPA, or to do away with standard exclusions such as cyber, product liability and medical malpractice.

This process ultimately supports informed decision-making and protects the buyer from unforeseen financial loss.

Aon’s Global Integrated Approach Across the M&A Lifecycle

Aon’s M&A and Transaction Solutions (AMATS) approach, from due diligence pre-signing, confirmatory due diligence, integration planning and preparing for Day 1, to post-close execution helps to deliver positive results throughout the deal lifecycle. We pair scalable and proven methodologies with tailored approaches to solve unique and wide-ranging issues such as retaining talent while integrating the people of distinct businesses, to facilitating transaction negotiations between parties during a deal. Globally, we have advised on thousands of transactions on an annual basis, helping firms realise deal success.

Comprising senior M&A and tax lawyers, senior corporate development and investment banking executives, experienced risk and insurance analysts, health and benefits professionals, and cyber security and intellectual property professionals, we bring a depth of knowledge and passion for developing tailored solutions to your complex deal risks.

We know firsthand that the timing and sensitivity of a deal are paramount to its success, and we work closely with your deal team and our insurance providers to advise and execute solutions that help improve your deal outcomes.

With our passion for developing new and creative solutions and globally coordinated teams, we can help you assess and manage deals across industries and across the globe at every stage of the deal lifecycle. Equally important, we are fully dedicated to 24/7 responsiveness for every client. We work with other stakeholders to help ensure risks are found, evaluated and protected. With Aon, you have an experienced, trusted partner to help you do what you do best — maximising investment returns in today’s rapidly evolving markets.

For additional information about Aon’s M&A Transaction Advisory Services, contact:

Lee Xianwei
Head of Aon M&A and Transaction Solutions, Asia
[email protected]

Jamie Wan
Head of Transaction Advisory Services
Aon M&A and Transaction Solutions, Asia
[email protected]

Blossom Lim
Growth Leader
Aon M&A and Transaction Solutions, Asia
[email protected]