R&W insurance - what's the state of the sector?

There has been a sharp rise in representations and warranties (R&W) insurance claims notifications since 2017, driven by breaches relating to financial statements, tax and compliance disputes in the global M&A market, according to a new report by Marsh Specialty.

The study, Global Transactional Risk Claims Report 2022, analyzed more than 1,100 claims notifications made to R&W policies placed by Marsh Speciality globally between 2017 and 2021.

Key findings of the report include:

• While claims notifications rose five-fold between 2017 and 2020, reporting tumbled 28% during 2021 from the previous year. Marsh Specialty attributed the drop to the decline in M&A activity globally during the COVID-19 pandemic
• Three-quarters of R&W claims made between 2017 and 2021 were instigated within 18 months of policy inception
• Financial statements, tax, and compliance disputes remained the most commonly claimed breach types during the reporting period, making up 59% of total claims notifications
• R&W insurers have paid more than US$500 million in claims settlements to Marsh Specialty clients since 2017
• Payments through the first half of 2022 have already exceeded last year’s numbers. Given the likelihood of claims arising from the significant number of policies placed in 2021 and so far in 2022, Marsh Specialty predicts the figure to reach US$800 million by 2024

“The events of the last couple of years have no doubt had an impact on R&W (W&I) claims at a global level,” the report said. “It remains to be seen how the consequences of the COVID-19 pandemic will fully play out, and we continue to anticipate further significant political and economic global changes over the coming years.

“As inflation increases and recession looms in many regions, we are yet to see how this will impact M&A activity and consequently the transactional risk claims market. However, over time, R&W policies have proven to be not only an indispensable tool for deal facilitation, but also a valuable risk transfer mechanism.”