March 01, 2021

Reps and Warranties Insurance: Claims Continue to Increase

Hundreds of practitioners joined together — virtually — in the past month to attend two conferences concerning representations and warranties insurance (RWI), a product aimed at transferring the risk associated with M&A deals. Experts, deal counsel and claims professionals at both conferences all noted one thing: claims are increasing, both in number and in potential exposure.

At the Advisen Transaction Insurance Conference, speakers discussed the impacts of COVID-19, trends in the industry, pricing considerations and the continued expansion of the global market. One panelist commented that 2020 brought an increase in claims associated with renewables, healthcare and tech, given the growth in deals in those areas generally. The speakers noted that due to the increase in carve-outs, there were more claims in that context as well. Additionally, claims in the United States continued to grow.

At Aon’s Global Transaction Solutions Symposium, AIG presented its annual white paper regarding claims trends. That report indicates claims severity continues to increase: nearly one in five claims is valued at over $10 million with the average claim size now reaching $20 million. The frequency of claims notification has also increased at higher deal sizes. AIG attributes some of the increases to the fact that RWI is now a common feature of many M&A deals. The study also indicated larger claims are often reported earlier, traditionally within the first 12 months.

According to the report, the largest claims tend to include alleged financial statement breaches, which panelists at both conferences noted are some of the most common claims. Moreover, given the complexity of the damages analysis and the potential for significant exposure, such claims are some of the most difficult to navigate as well.

Speakers at both events noted that deal activity — which slowed initially due to the pandemic in 2020 — rebounded at the end of the year. While that means more RWI policies issued, it also means that insurers issuing RWI policies can expect that claims will continue to increase in 2021 and beyond.

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