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Insurance due diligence: A critical building block in M&A transactions

Insurance due diligence provides critical insights on insurance coverage, risk profiles and liabilities, facilitating a smooth transaction for both buyers and sellers.
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By Samantha Scarlato , 

Head of Transaction Advisory, Pacific

01/07/2024 · 3 minute read

Mergers and acquisitions (M&A) involves multiple sophisticated entities, and can be challenging, intricate and risky. In the fast-paced and evolving world of M&A, due diligence plays a crucial role in facilitating a smooth transaction. Among the various types of due diligence, insurance due diligence  has proved to be a critical step for parties involved in a transaction.

The M&A market has experienced volatility recently after years of steady growth and the record-breaking level of activity seen in 2021. Potential deal parties are expressing caution due to a variety of factors, such as high interest rates, valuation concerns and political uncertainty.[1] Global deal values halved in just two years to US$2.5tn in 2023 from their peak of more than US$5tn in 2021.[2]

Despite this, the current environment also presents opportunities and signs of optimism, however, investors are likely to require greater levels of due diligence to gain the comfort they need to sign and successfully close deals. 

Locally, stabilising macroeconomic factors are providing greater certainty to both potential buyers and corporate sellers considering strategic divestments. M&A activity in Australia has been boosted by international capital with investors from the US, Japan and Europe contributing to some of the largest transactions in Australia in 2023 and the first half of 2024.[3]

For private capital, many funds have waited out this cycle, which has left record levels of capital available for deployment. Australia’s dealmakers are demanding greater certainty in order to transact, with high quality advice and thorough due diligence being essential elements to the successful execution of M&A deals

The role of insurance due diligence in M&A transactions

Due diligence is a critical step in any transaction, with insurance due diligence forming an integral piece of the overall diligence strategy alongside legal, financial and tax diligence.

Insurance due diligence is a vital building block for any transaction (buy-side, sell-side or debt-side) as it helps to identify potential risks that could impact the success of the transaction. Importantly, insurance premiums typically constitute a material cost for any business. The detailed insurance analysis and recommendations provided through the insurance due diligence process delivers valuable input into the financial modelling process and purchase price negotiations of a transaction.

Overall, insurance due diligence can provide meaningful insights into the target company’s insurance coverage, risk profile and potential liabilities. For a buyer, it assists in negotiating specific insurance provisions or verifying insurance warranties being offered. It also helps mitigate risks associated with the transaction, allowing the buyer to make informed decisions about their risk strategy and go-forward insurance planning.

For a seller, it demonstrates transparency and enhances the credibility of the target company, facilitating a smoother transaction process.

Lenders and/or financiers also often rely on insurance due diligence to ensure that assets are adequately protected and lenders are making informed decisions regarding loan terms and conditions.

What does insurance due diligence involve?

The scope of insurance due diligence will be tailored depending on the nature of the transaction and the client’s role in the transaction. Typically, the process would encompass the following:

Buy-side insurance due diligence:
  • Pinpointing key insurable risk exposures,
  • Establishing the total cost of insurance,
  • Reviewing insurance provisions in the sale agreement,
  • Assessing the target’s loss history.
Sell-side insurance due diligence:
  • Providing a value issues report summarising key issues,
  • Advising and assisting with preparation of the project data room,
  • Participating in Q&A sessions with bidders,
  • Reviewing insurance provisions in the sale agreement.
Lender insurance due diligence:
  • Reviewing and commenting on the allocation of risk under principal contracts,
  • Conducting a risk review of the project,
  • Ensuring insurance procurement regulatory compliance,
  • Commenting on the current and future availability of insurance,
  • Advising on appropriate insurance requirements and insuring clauses within the financing agreement.

Why Marsh?

Specialist expertise: Marsh's Private Equity and M&A practice (PEMA) comprises of specialist insurance advisors who are dedicated exclusively to working on M&A transactions. Our Transaction Advisory team helps to enhance the client and deal team's understanding of the insurance and risk management framework of the target company/asset. The team works closely with Marsh’s industry specialists to bring sector insight and expertise to every deal.

Collaborative approach: By partnering with clients and their advisors, Marsh ensures that the insurance purchasing strategy is optimised and that key transaction documents provide robust insurance-related protection. This collaborative approach drives better and more resilient outcomes for the target company/asset post-close, reducing the potential for surprises.

Track record: In 2023, our PEMA practice advised on more than 100 successful transactions across the Pacific region. Our team's expertise spans various industries, including real estate, renewable energy, power & utility, and media, telecom & technology.

[1] 2024 Mid-Year Outlook: Global M&A Industry Trends, 25 June 2024, Brian Levy, PwC

[2]  Ibid 1.

[3] The Australian M&A Outlook 2024, PwC 

If you have any questions or need assistance in navigating the complexities of insurance in M&A transactions to ensure a successful deal outcome, please contact our PEMA team here.

Contact us

Our people

Samantha Scarlato

Samantha Scarlato

Head of Transaction Advisory, Pacific

  • Australia

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Chris McDermott

Head of Private Equity, Mergers and Acquisitions, Marsh Specialty Pacific

  • Australia

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This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modelling, analytics, or projections are subject to inherent uncertainty, and any analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. LCPA 24/338