April 7, 2020

Rep & Warranty Insurance: Aon Releases Study on Claims Experience

Aon recently released a study analyzing the approximately 340 claims made on more than 2,450 rep & warranty insurance policies that it placed in North America between 2013 and 2019. Here are some of the highlights:

– More than $350 million above the policy retention has been paid by representations and warranties insurance to Aon clients in North America. More than $525 million in total loss has been recognized (when factoring in erosion of policy retentions).

– 30% of claims have been resolved, 4% have been denied, 54% are active and 12% are inactive to date (ones in which no correspondence has been provided in over a year).

– Claims were made on 22% of all policies placed between 2013 and 2017; however, the percentage of policies notified of a claim between 2014-2016 gradually increased from 18.6% on policies issued in 2014 to 25.3% on policies issued in 2016.

– Claim size trended upwards in 2019, with an average claim payment of $10.7 million and 26% of all claims paid this year exceeding $10 million, largely due to the larger deal sizes (and proportionately larger insurance policies) that Aon worked on in 2017 and 2018.

– Deals valued over $1 billion have yielded a slightly higher claim frequency than smaller valuation bands, although only 9% of total claims made on these deals have resulted in a payment. This is lower than the average for smaller transactions.

Interestingly, the study found no discernible difference in the frequency of claims for transactions that included a seller indemnity (for breaches of any representations and warranties) compared to ones that didn’t.

Overall, Aon’s study found that claims under RWI policies increased by more than 400% between 2014 and 2018. That increase is largely attributable to the rapid growth of RWI policies over this period, but as noted above, the claims percentage rose from 18.6% on 2014 policies to 25.3% on 2016 policies. Due to the lag between closing & discovery of a breach, Aon says it is too early to determine whether the rise in claim frequency will continue for subsequent policy years.

How has Covid-19’s impacted the R&W Insurance market? For the answer, tune in tomorrow – “same bat-time, same bat-channel!”

John Jenkins