Insurance Due Diligence B


Broker Perspective


George Minoprio


Director of the Mergers and Acquisitions Practice and Private Equity Practice


gminoprio@ heathlambert.com


On its own, an insurance report is of limited value; if there is no commentary on the underlying insurable risk it is hard to see how understanding the insurance programme can give any comfort on the levels of protection provided. All too often we hear management commenting that an insurance programme is fine because it has been done that way for years and there has never been a claim.


The Gallagher Heath model is focused more at “risk” than insurance; our process is based on understanding and mapping the insurable risks that a target faces and then testing the insurance programme’s fit around these risks.


George Minoprio, ACII has been at Gallagher Heath for nine years and is an Executive Director of the Mergers and Acquisitions and Disposals Practice. George is also Account Chairman and Account Director on various accounts both globally and in the UK. Prior to joining Gallagher Heath, George worked at Aon where he was responsible for servicing global accounts within the Global Business Unit.


Insurable risk can be divided up in any number of ways:


n Catastrophic and attritional. n General to all businesses or particular to the target. n Process linked or Natural Catastrophe.


In all cases understanding the exposure of the business is critical.


We know that the majority of the business cases analysis and modelling undertaken is financial, it is important to consider the Total Cost of Risk, typically this will include:


n Cost of insurance cover, taxes, fees and commissions.


n The cost of self-insured risks – whether voluntary or imposed by insurers.


n The cost of claims within deductibles. n The cost of risk improvements required to maintain policy cover.


n The cost of rectifying deficiencies in the current insurance.


On carve-out transactions this type of analysis is essential; premium allocations from large deductible group programmes can be small but the cover provided may well be of limited benefit to the target as a standalone business. A properly designed insurance programme is specific to the business and provides a balance between protecting the asset and investment and controlling external cost.


Risk and insurance are not only about annual costs, it is important that buyers are aware of other factors that can impact the value of the target:


n Exposure to deductibles on historic claims and whether or not there are balance sheet provisions for amounts due.


n The impact of TUPE transfers and the ability to trace or access previous employers’ insurance programmes.


n The future availability of certain types of insurance – in particular Natural Catastrophe cover where insurers’ capacity is under continued pressure, even in the UK where Flood and Terrorism aggregations in city centres are seen as a real issue.


n Compliance and Jurisdiction – many legal jurisdictions around the world require policies to be placed with locally licensed insurers; balancing the price, cover and security advantages of a global policy against the possibility of criminal prosecutions of local management.


n The impact of programme design on cash-flow and future exit.


In addition to the risk and programme analysis, there is also a role for the insurance professional in relation to the drafting of the Sale and Purchase Agreement.


In the past Insurance Due Diligence was seen as a “tick-box” exercise required to satisfy banks and other finance parties. In the current climate where margins and multiples are thinner this is a service that has much more to offer.


50 Author Viewpoint


Risk and Insurance in Private Equity and M&A 2012/13


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