‍By: Aon South Africa’s Zamani Ngidi

Aon Report Highlights Representation & Warranties, Warranty & Indemnity and Tax Insurance Claims Trends

The 5^th Global Transaction Solutions Claims Study from Aon, a leading global professional services firm, unpacks the emerging trends in Representation and warranties (R&W), Warranty and indemnity (W&I) and tax insurance concerning claim size, frequency and severity on policies placed in the North America (NA), Europe (inclusive of the UK), Middle East and Africa (EMEA) and Asia and Pacific (APAC) regions.

In the last three years, Aon’s Mergers and Acquisitions (M&A) and Transaction Solutions teams placed more than 3,000 R&W, W&I, tax and contingent liability insurance programs globally.  In 2023, Aon helped its clients navigate over 150 new claims in North America and 48 new claims in EMEA. 2023 saw Aon assist its clients in resolving the highest ever number of claims resulting in payment and helped clients secure nearly $250 million in loss paid in North America as well as nearly another $50 million in EMEA and APAC.

“We understand the varied complexities of the transaction solutions market. We know that clients are no longer just looking for the policies to provide them solutions on the front end of a deal, but to deliver meaningful recovery when their investments suffer a legitimate loss post-close resulting from a breach of the transaction agreement. Repeat users of transaction insurance solutions products are looking beyond pricing to understand whether insurers are running an equitable, efficient and expeditious claim process. For these reasons, the ability to understand what is happening concerning representations and warranties (R&W), warranty and indemnity (W&I) and tax insurance claims – including key trends, loss drivers and influential risk factors across the globe – has never been more important,“ says Zamani Ngidi, Business Unit Manager for M&A and Cyber Solutions at Aon South Africa.

The Global Transaction Solutions Claims Study highlights the key findings from the EMEA Region:

• Claim Frequency: Approximately 15% of W&I policies issued between 2017-2023 in the EMEA region have had at least one claim notification.
• Payouts: Insurers have paid over $120 million to Aon clients on W&I and tax claims in EMEA, with more than $20 million paid since the last study in 2023. These figures exclude deductible erosion.
• Common Breach Types: The top breach categories remain tax, financial statements, litigation and compliance with laws. Financial statement breaches continue to be the leading driver of loss.
• Claims Activity: In 2023, Aon clients in EMEA submitted 48 W&I claims.

The Aon study highlights the increasing relevance of W&I insurance in mitigating risks in M&A transactions across the globe.

Breakdown of Breach Types and Loss Attribution

“Tax-related breaches continue to be the most frequent in EMEA. This is largely due to the standard practice in several European jurisdictions of conducting tax audits post-transaction, as well as increased scrutiny by tax authorities in the current economic climate. However, while tax claims are prevalent, they often do not result in significant payouts, as many audits conclude without additional tax liabilities. Notably, tax claims account for just 5.6% of total loss payouts under W&I policies,” explains Zamani.

“Financial statement breaches, the second-most common breach type, represent the largest proportion of losses (31%). These claims often impact the purchase price of the acquired company, leading to loss calculations that may be claimable on a multiplied basis. However, loss calculations vary by jurisdiction. For example, in Germany, loss calculations based on company value are typically excluded from acquisition agreements and W&I policies,” Zamani explains.

“Other breach categories, including material contracts, litigation and compliance with laws, also generate losses that exceed their relative claim frequency. Insurers are particularly scrutinising underwriting diligence related to material contract breaches, given the potential for significant financial impact where recurring revenue linked to a terminated or disputed contract was included in purchase price calculations. Litigation-related claims are also rising, often involving substantial defence costs,” he adds.

Caption: W&I by proportion of breach type versus percentage of total paid loss attributable by breach type for the period 2016-2023

Claims Processing Efficiency and Challenges

A survey of insurers revealed several key obstacles to the efficient processing of W&I claims:

• Insufficient Information: 61% of insurers cited inadequate information on the breach or loss as the primary issue delaying claims resolution, while 42% identified it as the second-most critical issue.
• Delays in Providing Information: 31% ranked slow information provision as the top challenge, with an additional 42% identifying it as the second-most significant obstacle.
• Resolution Timelines: The average time to resolve a W&I claim in EMEA between 2020 and 2023 was 12-18 months. The timeline is influenced by factors such as case complexity, the volume of documentation and the responsiveness of insured parties to insurers’ Requests for Further Information (RFIs).

However, insurers affirm that when claims are well-documented and insureds engage proactively with RFIs, claims can progress more efficiently—often proving to be a faster and more reliable alternative to pursuing legal action against sellers directly.  “While tax and financial statement breaches remain prevalent, proactive claims management and collaboration between insureds and insurers are key to expediting resolutions,” Zamani concludes.

As of year-end 2023, the Aon Transaction Solutions Global Claim Team has been involved in over 1500 notified R&W, W&I and tax insurance claims and has facilitated more than $1.4 billion in payments to Aon clients globally.

Access the full report here or visit Aon’s M&A and Transaction Solutions for more information.