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COVID economic fallout likely to boost M&A insurance claims: Aon


Economic fallout from COVID-19 is expected to result in an increase in claims filed under representations and warranties insurance policies, Aon PLC said in a report Monday.

The prognosis came as Aon reported a steady rise in the use of representations and warranties insurance as a deal facilitator by buyers and sellers and a growing number of claims filed and paid.

Representations and warranties insurers paid out or acknowledged loss on 30% of around 340 claims made on policies placed by Aon in North America between 2013 and 2019, the brokerage said.

More than $350 million was paid out by insurers on policies placed by Aon between 2013 and 2019, the report found.

Claim size trended upward in 2019, with the average payment above the policy retention nearly doubling to $10.7 million, from $5.4 million in 2017, according to the report.

Some 26% of all claims paid in 2019 exceeded $10 million, up from 17% in 2017, the report found.

This was due to larger deal sizes and proportionately larger insurance programs that Aon worked on in 2017 and 2018, the report said.

For the first time in 2018, claims were filed for more than $200 million in loss, and in 2019 claims were paid that exceeded the primary policy limit, Aon said.

Deals valued over $1 billion yielded a slightly higher claim frequency than smaller deals, though only 9% of total claims on these deals resulted in a payment, it said.

Claims were filed on about one out of every five representations and warranties policies across the study period, Aon said.

“We anticipate that we may see a claim rate in the future that is higher than the current average, closer to one out of every four R&W policies being notified with a claim,” Jennifer Drake, vice president, transaction solutions at Aon, said in a statement.

“While the claims filed so far this year have been related to issues pre-existing the emergence of COVID-19, we do expect to see an increase in claim filings as a result of the difficult economic environment caused by the fallout from the pandemic.”

Inaccuracies in financial statements resulted in 13% of the breaches reported during the study period, while 12% were due to failure to comply with applicable laws or governmental authorities, and 11% related to tax matters, Aon said.

Findings were based on an analysis of about 340 claims made on more than 2,450 representations and warranties insurance policies placed by Aon in North America between 2013 and 2019.

More insurance and risk management news on the coronavirus crisis here.