Meritz Fire & Marine Insurance has given up on acquiring MG Insurance. If a new acquirer does not appear, the remaining options are contract transfer and bankruptcy. In the insurance industry, there are predictions that if the financial authorities prioritize consumer protection, they may push for contract transfer, which causes less damage compared to bankruptcy. Contract transfer refers to dividing MG Insurance's contracts among several insurers, allowing policyholders to maintain their current insurance coverage. In contrast, bankruptcy would force the termination of contracts, making damages unavoidable.
Meritz Fire & Marine Insurance announced on the 13th that it would give up on acquiring MG Insurance. Meritz Fire was selected as the preferred bidder for MG Insurance last December, but was unable to even conduct due diligence due to opposition from the MG Insurance labor union. The union physically blocked those trying to conduct due diligence and refused to cooperate by providing materials, citing concerns over trade secret leaks. The union insisted on a merger and acquisition (M&A) that acquires both assets and liabilities, rather than a transfer of assets and liabilities (P&A), which does not have an obligation for employment succession. The union did not attend the acquisition-related meeting scheduled for the 12th, and Meritz Fire returned its status as the preferred bidder the next day.
With the failure of the fifth sale, MG Insurance must now wait for a new acquirer. However, considering factors such as acquisition costs and the refusal of the union to proceed with a P&A acquisition, there is a high likelihood that a new acquirer will not be found. The solvency margin (KIX) ratio of MG Insurance, an indicator of its soundness, was 43.4% in the third quarter of last year, falling short of the legal standard of 100%.
If no acquirer appears, the financial authorities have two realistic options remaining. One is to transfer MG Insurance's contracts to several insurance companies and then force MG Insurance into bankruptcy, while the other is to provide compensation of up to 50 million won to policyholders in accordance with the Depositor Protection Act and forcibly terminate contracts.
Option 1: Forced termination of contracts followed by bankruptcy… damage amounts to 175.6 billion won
The Korea Deposit Insurance Corporation, the sale's managing agency, stated that if the acquisition by Meritz Fire fails, it would consider liquidation alternatives, including bankruptcy. The financial authorities also mentioned in a press release distributed after the sale's failure that they plan to respond in accordance with laws and principles. However, the insurance industry predicts that it will not be easy for the financial authorities to decide on bankruptcy, where damages to policyholders are clear.
According to U Yong-ha, a member of the National Assembly from the People Power Party, the number of MG Insurance customers, including individuals and corporations, is 1,244,155. Among them, 11,470 policyholders exceed the compensation limit of 50 million won under the Depositor Protection Act. The amount that would not be protected in the event of bankruptcy is 73.7 billion won for individuals and 101.9 billion won for corporations, totaling 175.6 billion won.
Customers whose contracts are forcibly terminated must enroll in products from other insurance companies. If they have a history of illnesses during this time, they may face high premiums or, in the worst case, be denied enrollment. Moreover, policyholders of coverage insurance with low surrender values will receive compensation that is ridiculously lower than the premiums they have already paid. This is because compensation under the Depositor Protection Act is based on the surrender value. This is why it is pointed out that the actual damages in the event of bankruptcy will exceed 175.6 billion won.
Option 2: Transfer of contracts to another insurance company followed by bankruptcy… financial authorities need 'influence'
For this reason, there is a possibility that the financial authorities may choose contract transfer to protect policyholders. Unless a new acquirer emerges, this is currently a way to minimize damages. In fact, after Regent Insurance was designated as a failing financial institution in 2001, when the sale fell through, it transferred contracts to five insurers, including Samsung Fire & Marine Insurance and Hyundai Marine & Fire Insurance, and went bankrupt in 2003 following a court ruling.
However, there is a burden in that the financial authorities' 'influence' must come into play for contract transfer to proceed. There are no laws or regulations that compel other insurers to take on MG Insurance's contracts. The financial authorities can only recommend contract transfer, and each insurer must voluntarily comply. The financial authorities must persuade insurers that are unwilling to take on loss contracts.
A source from the financial sector noted, 'During the Regent Insurance case, the financial authorities' influence was at play, but as a result, five insurers received the contracts in a recommended form.' They added, 'This is a thing of the past, and much time has passed since then, so whether contract transfer is possible remains uncertain.'