June 1, 2017

R&W Insurance: What’s the Claims Experience?

In light of the continuing growth of rep & warranty insurance, this AIG report on the claims made under those policies makes for interesting reading.  Here are some of the highlights:

– Claims frequency continues to rise. Last year’s report showed claims on policies issued during the period 2011-2014 reflecting a frequency of around 14%, but now approximately 21% of those same policies have resulted in a claim. When 2015 policies are included, overall claims frequency is 18%.

– Big deals had the highest frequency of claims, with 23% of policies for deals north of $1 billion having received claims. Factors that heighten the exposure of these “mega-deals” include “the scale and complexity of diligence required,” as well as “the pressure to complete transactions quickly.”

– The breaches of reps underlying claims varied by geographic region. In Europe, the Middle East & Africa, alleged tax breaches were the largest category, accounting for 31% of overall claims. In the Americas, compliance with laws led the pack with 19% of overall claims – while in the Asia Pacific region, financial statements and material contracts accounted for nearly 2/3rds of claims.

Interestingly, while fewer sell-side policies are issued than buy-side, the sell-policies have a much higher frequency of claims (29% v. 18%). The report also notes that roughly 55% of claims involving amounts in excess of $100K during the period from 2011-2015 incurred a “seven digit” claims cost, and that 7% of claims exceeded $10 million.

John Jenkins