August 26, 2024
RWI Claims Trends
Woodruff Sawyer recently released the 2024 edition of its “Guide to Representations & Warranties Insurance.” This edition of the guide covers a variety of topics relating to RWI, including an overview of RWI and its users, the key elements of an RWI Policy, the five main exclusions contained in the typical policy, and insights into current market conditions. Here’s an excerpt from the Guide’s discussion of claims trends:
From mid-2020 through mid-2022, we saw a large uptick in the number of policies and limits bound, and so it stands to reason that the number of R&W claims received by insurers has increased in the past year. Statistically, claims are most likely to arise within the first 12 to 18 months after a policy is bound since the first audit cycle of the target company’s finances may bring to light certain breaches—leading to the current increase in claims.
The two largest categories in which claim payouts were made continue to be breaches of (1) financial reps, and (2) customers and contracts. Those two categories account for almost two-thirds of claim payments, with compliance of laws coming in at a distant third. Most claims tend to arise within the first 12 months of the policy period, and the earliest reported claims tend to result in severe losses since these material matters are often discovered shortly after the deal has closed.
Transactions involving targets with audited financials (versus unaudited financials) often result in greater losses and a higher likelihood of claims alleging financial rep breaches. Payments for financial statements claims involving targets with audited financials averaged 41.4% of the policy limit, whereas this figure is only 22.1% for payments involving companies with unaudited financials.
The Guide says that most of the action is at the smaller end of the food chain, with deals involving less than $250 million in enterprise value resulting in 60% of claim payouts. These smaller deals have a higher incidence of breaches of compliance with laws reps and reps relating to operations, while bigger deals more typically see breaches of intellectual property and tax reps. Not surprisingly, claims for breaches of financial statements are high for deals both large and small.
– John Jenkins