Marsh report highlights sharp rise in R&W insurance claims notifications

Breaches relating to financial statements, tax and compliance disputes in the global mergers and acquisitions (M&A) market are behind a sharp rise in representations and warranties (R&W) insurance claims notifications since 2017, according to Marsh Specialty.

In its Global Transactional Risk Claims Report 2022, the broker says that while claim notifications increased fivefold during 2017-2020, reporting dropped by 28% during 2021 on the preceding year, as a result of the decline of M&A activity globally during the Covid-19 pandemic.

The report analysed more than 1,100 claims notifications made to R&W policies placed by Marsh Specialty globally during 2017-2021. The pandemic and associated shutdowns in 2020 were closely followed by a record year for M&A activity, and for R&W policy placements by Marsh globally (more than 1,900 placements) in 2021.

Marsh says in the report that the percentage of policies that receive a claim has held steady at a global average of 14%-16% for policies where the notification period for most types of breaches has now come to a close. “Due to the consistency of the notification rate for mature policy years, the record number of placements in 2021 and the time lag – or ‘tail’ – between policy inception and notification of a claim, we expect the number of notifications to begin to significantly increase again in late 2022, into 2023 and beyond,” it states.

Financial statements, tax and compliance disputes consistently remained the most commonly claimed breach types during the reporting period, accounting for 59% of claims notifications overall. Marsh notes: “Tax authorities in a number of key jurisdictions – including the UK and Germany – have resumed activity in earnest following a slowdown during the early phase of the Covid-19 pandemic, and as they work to eliminate the backlog, we anticipate that tax issues will be more frequently identified and notified to policies over the next few years.”

The report reveals that R&W insurers have paid more than $500m in claims settlements to Marsh Specialty clients since 2017. It says payments through the first half of 2022 have already exceeded 2021 figures and, given the likely claims arising from the significant number of policies placed in 2021 and 2022 to date, Marsh Specialty expects this figure to reach $800m by 2024.

Looking at North America, the report says the increased use of R&W insurance in M&A transactions has led to a corresponding increase in claim volume. The percentage of policies that receive a claim, however, has remained fairly steady at approximately 18%-20% for matured policies (transactions closed at least three years ago).

The number of claims reported in 2020 (256) increased from 2019 (167), but 2021 saw fewer claims reported (155) than either 2019 or 2020, according to Marsh. The growth in claims in 2020 appears to have resulted from an increase in policies placed, coupled with the negative economic effects of Covid-19. “While 2021 saw a sizeable decrease in claims, we do not expect decreases to continue and instead anticipate the number of claims to rise commensurate with the significant number of transactions insured during the past year,” says the report.

For EMEA, the report says that increased M&A activity in 2021 corresponded with a significant rise in the use of transactional insurance. Across EMEA in 2021, Marsh placed close to 1,000 transactional risk policies for deals with an aggregated enterprise value (EV) in excess of $277bn and with total limits in excess of $35.9bn. The broker says it has seen an increase in market capacity, as well as the resurgence of larger deals with an EV of more than $1bn being insured.

Marsh predicts a surge in claims notified to W&I policies, as well as other transactional liability policies, such as contingent risk and specific tax risk policies, towards the latter half of 2022 and well into 2023, and beyond.

As for Asia-Pacific, Marsh says in recent years, the number of W&I insurance policies placed in Asia-Pacific has increased exponentially, and there has been a rapidly growing claims count, with the volume of claims in 2021 more than three times the volume in 2017.

“The overall increase in claims is largely due to insureds having a more sophisticated understanding of the product, insurers providing an effective and streamlined claims process, and quality advocacy on behalf of insureds. Claims payments in the first half of 2022 have been substantial,” states the report, adding: “With the number of claims notifications trending upwards and W&I insurance becoming an M&A market standard across the Asia-Pacific region, we expect a sustained increase in W&I claims going forward.”