Aon plc, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has released the “Representations and Warranties Insurance Claim Study: An analysis of claim trends, data, and recoveries” analyzing data it has collected with respect to nearly 2,500 representations and warranties (R&W) insurance policies placed by Aon in North America, as well as approximately 340 claims made on those policies during the same period.
The report’s findings show that a consistent percentage of insured deals over the study’s four-year period resulted in a R&W insurance claim and significant claim payments were made:
- On average across the study period, claims were filed on approximately one out of every five R&W policies.
- Aon clients received more than $350 million in claim payments above the policy retention.
Of the 340 claims:
- 30% of claims were resolved, where insurers either paid loss to the policyholder or acknowledged loss within the retention;
- 54% remain active; 12% are inactive; and
- 4% were denied.
There is an expectation of an increase in claim filings as a result of COVID-19.
“After significant growth in policies placed over the past several years, we were excited to analyze our claims data and to see how the figures compared with our anecdotal observations. Our ability to draw on a unique set of data allows us to provide perspective on what is happening with respect to R&W insurance claims and how they are being resolved,” said Stephen Davidson, managing director, Transaction Solutions at Aon.
The Aon study notes that it has seen a 400% increase in the number of claims filed on R&W insurance policies between 2014 and 2018, proportionate with the overall increase in policies placed in that period. It also found that in recent years there has been a slight increase in the claim rate, which Aon predicts will persist in the post-pandemic environment.
“We are still processing new data as it comes in and watching to see how it develops. But based on what we saw in the latter part of the study period, we anticipate that we may see a claim rate in the future that is higher than the current average, closer to one out of every four R&W policies being notified with a claim,” said Jennifer Drake, vice president, Transaction Solutions at Aon. “While the claims filed so far this year have been related to issues pre-existing the emergence of COVID-19, we do expect to see an increase in claim filings as a result of the difficult economic environment caused by the fallout from the pandemic.”
In addition, the study revealed that deals valued over $1 billion yielded a slightly higher claim frequency than deals with a lower enterprise value, although there was not much differentiation found between the deals when the percentage of claims paid was compared.
Not surprisingly, a correlation was found between deal size and the size of claims: larger deals tend to result in larger claims. Further, the study noted a trend over the last few years relating to an increase generally in the size of R&W insurance claims being made. For the first time in 2018, claims were filed alleging more than $200 million in loss, and in 2019, claims were paid that exceeded the primary policy limit. Over that same time period, the R&W insurance claim payment size trended upwards with an average payment of $10.7 million in 2019, up from $5.4 million in 2017.
With respect to breaches being cited most often by buyers, the Aon data showed that 13% of the breaches reported during the study period related to inaccuracies in the financial statements, 12% were as a result of a failure to comply with applicable laws or governmental authorities and 11% related to tax matters. The study asserted that the type of representation or warranty alleged to have been breached can indicate the likely severity of loss that may arise from such breach, as certain representations and warranties are more likely to result in the incurrence of both direct and indirect loss, such as lost profits or multiplied damages.
The study also highlights various other data points and trends, such as claim size, expert participation in the claims process, and more. The full study can be accessed here.