Report

Transactional Risk Global Claims Report 2022

In this report, we examine over 1,100 claims notified from January 2017 through December 2021 to R&W policies placed by Marsh in jurisdictions around the world.

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The ever-increasing use of representations and warranties (R&W) insurance policies — also known as warranty and indemnity, or W&I, policies — as a well-established M&A risk management and deal facilitation tool has led to a corresponding increase in claims activity globally.

In this report, we examine over 1,100 claims notified from January 2017 through December 2021 to R&W policies placed by Marsh in jurisdictions around the world.^[1] During this period there was exponential growth in the use of R&W insurance in M&A transactions, coupled with a maturing claims profile. We also saw the unfolding of unprecedented global socio-economic and political events, including the COVID-19 pandemic, which have affected major economies. Our commentary, both at a global and regional level, focuses on the impact of those recent events on R&W claims, and outlines how we see this claims landscape evolving over the next few years.

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Global snapshot

Claim notifications increased five-fold in the period 2017-2020 a consistent year-over-year increase in claim notifications from 2017 to 2020.
A decrease in notifications followed in 2021, likely as a result of the impact of COVID-19. We expect claim notifications to spike, starting from late 2022.
The percentage of policies that receive a claim has held steady at a global average of 14% to 16%.^[2]
Over US$500 million has been paid to Marsh clients by insurers since 2017.
Financial statements and tax breaches remain the most commonly reported claims under R&W policies.

North America snapshot

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% to 20% for matured policies (that is, transactions closed at least three years ago). Insureds can still report claims arising out of breaches of general/non-fundamental reps and warranties on policies that closed in the 2019-2021 period, so it remains to be seen whether policies from those closing years’ experience a higher or lower percentage of claims. Nevertheless, nearly 20% of policies placed in 2019 have already received a claim, so we expect the final percentage for that year to be slightly higher than the average range.

he number of claims reported in 2020 (256) increased from 2019 (167), but 2021 saw fewer claims reported (155) than either 2019 or 2020. 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.

EMEA snapshot

The picture painted by our previous claims data analysis in 2019 was of an insurance product in early maturation, with a growing and evolving claims market as both insurers and insureds became more familiar with the product and handling of claims under W&I policies. We saw a steep rise in claim notifications in the period 2016-2018, as well as a corresponding decrease in the amount of time it took for claims to be both notified and resolved by insurers. We concluded that W&I insurance was “coming of age”, and was then, by virtue of notified and paid claims, a proven risk transfer mechanism.

The years subsequent to that claims report have been extraordinary in terms of global political, economic, and societal events, as well as for mergers and acquisitions generally. As a result, the insurance market has been looking more closely at exposure management. Our most recent data illustrates the impact of global events on claims activity in EMEA.

Asia Pacific snapshot

Our Asia Pacific clients are seasoned users of W&I insurance and recognize its merits as a deal facilitator that effectively transfers the risk associated with a breach of warranties to the insurance market. The responsiveness of this product in terms of indemnity granted and claims paid, as well as a tried and tested claims management process amongst insurers, has further entrenched W&I insurance as a feature of M&A in the region. Insureds are recognizing the benefits of early notification and a well formulated claims submission with sufficient supporting evidence to substantiate the quantum of loss in paving the way for a successful claims outcome.

In recent years, the number of W&I insurance policies placed in Asia Pacific has increased exponentially. We observed a rapidly growing claims count, with the volume of claims in 2021more than three times the volume in 2017.

^[1] This report does not include data from the Pacific Region for the years 2017 and 2018, which was not available. This report also does not incorporate claims data relating to specific tax risk or contingent risk policies.
^[2] For policies where the notification period for most types of breaches has now come to a close.