Frequency of M&A insurance claims fallens to 16%

A new report from Liberty Global Transaction Solutions (GTS) says that the frequency of M&A insurance claims has fallen after the anticipated post-Covid claims surge did not materialise.

The firm said in its Claims Briefing: Exclusive Insights Guiding Global Decision Making, that the figure for risks bound in 2023 currently running at 16% compared to a historical average of around 21%.

Historically, data has shown that we have received a notification on approximately 21% of all representations and warranties (R&W) risks bound. There are signs, however, that this is beginning to fall slightly.

The figure for risks bound in 2022 is currently running at 16% and, while we would expect this number to increase slightly, it is unlikely to increase materially given that many of these policies are now ‘off-risk’ for a claim in respect of the general warranties and the majority of notifications are received within the first two years of the policy period.

It is too soon to project where the figure for risks bound in 2023 will end up since these risks are still in their relative infancy. However, it is currently sitting at 13.5% as at the end of July this year and, by way of a comparison, the 2022 figure was sitting at 14% as at the end of July last year.

The early indication is, therefore, that the 2022 figure is likely to end up similar to, if not slightly lower than, the 2019 figure. This supports the notion, discussed in last year’s claims briefing, that there has not been a surge in notifications as a result of COVID-19 as some commentators had feared might be the case when the pandemic hit.

Liberty GTS said that there were some notable regional differences in the data.

In EMEA, it said that notification frequency has historically remained broadly consistent at around 20% and that it expected the figure for risks bound in 2022, which currently sits at around 18.5%, to end up at or around that level.

Over in America frequency has been dropping off for the last few years.

It currently sits at around 17% for risks bound in 2023, which is down from approximately 20.5% for risks bound in 2022. This is broadly consistent with the findings in other recent claims reports.

Frequency of M&A insurance claims fallens after post-Covid 2Y

Insurers are, of course, paying close attention to our data in this region given the sharp increase in the number of policies that we have issued over the last few years in the Americas.

However, as things stand, there has been no noticeable change in the numbers since, as at the end of July, the figure currently sits at around 10% for risks bound in 2023 and, by way of a comparison, the figure for risks bound in 2022 was sitting at almost exactly the same level as at the same point last year.

Mega deals over $1bn have the lowest claims notification frequency rate in both Europe, Middle East and Africa (EMEA), as well as in the Americas.

Meanwhile, deals with an EV (estimated value) of $250m or less accounted for 64% of paid and reserved claims by value. Instances of multiple notifications have more than doubled since 2022, rising from 10% to 24.5%. The trend is most pronounced in the EMEA region, primarily due to an increased awareness amongst our insureds around their notification obligations.

Some interesting trends:

  • Tax-related matters continue to account for a large number of notifications: 36% in the Asia/Pacific region, 34% in EMEA, and 17% in the Americas. While most of these are precautionary in nature and are received within 24 months of the policy incepting, there has been an increase in the number of notifications involving large ($10M plus) tax-related issues.
  • Accounting and financial issues make up 29% of high-severity and 32% of medium-severity claims despite only making up only 11% of total notifications over the last 18 months.
  • 48% of non-tax-related notifications involved a third-party claim. The majority of these involve either employee or intellectual property related disputes.
  • Economic headwinds – such as inflation, potential recession and supply chain disruption –  are likely to lead to heightened risks around certain issues such as undisclosed price increases, fraud, and accounts receivables.

This year tax-related issues continued to be responsible for a large number of notifications, but on the non-tax side we are seeing a significant increase in third-party claims.

This is quite likely to be due to the increased litigation threat faced by corporations as businesses explore all means of generating revenue when facing economic headwinds.

Going forward, sellers will need to take into account ESG-related issues as buyers now expect them to give specific warranties on these issues. All parties in a transaction also face challenges from global economics. 

by Nataly Kramer