Aon Claims Study Highlights in Reps & Warranties Transactions

A new study from Aon on Representations and Warranties in transactions shows that compliance with laws has grown to become the third most significant driver of loss, behind only financial statements and material contracts.

Aon released its Global Transaction Solutions Claims Study this week, which shows through the end of 2023 that R&W insurers paid more than $1 billion to Aon clients in North America and recognized more than $1.5 billion in total loss (including retention amounts).

Mergers & acquisitions market and R&W policy placement remained slowed in 2023 but claims activity remained steady, with Aon clients submitting more than 140 new R&W claims last year, the report shows.

The transaction solutions insurance market in 2023 favored insured parties, characterized by reduced pricing and expanded coverage, according to Aon. According to the report, the way insurers handle claims has become pivotal in distinguishing market leaders.

In 2023, Aon reports helping clients navigate more than 150 new claims in North America and 48 new claims in the Europe, Middle East and Africa, with continued growth across the emerging markets of Southeast Asia. The insurer survey now includes respondents from both North America and Europe, the Middle East and Africa to provide insights into their claims experiences.

This year 18 insurers participated in Aon’s North American Transaction Solutions Insurer Survey and 14 insurers participated in Aon’s EMEA Transaction Solutions Insurer Survey.

Aon Transaction Solutions clients have now received more than $1 billion in claim payments in North America. Aon assisted its clients in the highest-ever number of claims resulting in payment. The firm reports helping clients secure nearly $250 million in loss paid in North America, and nearly $50 million in EMEA and the Asia-Pacific region.

Aon’s data also suggests that loss estimates on claims submitted and claim severity may be on the rise.

Nearly three-fourths (74%) of R&W insurers surveyed about claim size trends reported that loss estimates associated with claims submitted between 2020 to 2023 were higher on average than in 2016 to 2019.

The median claim payment for policies with inception dates with inception dates between 2018 and 2020 was $2 million and the average claim payment was $5.5 million. Those figures rose in the period between 2021 and 2023, with a median claim payment of $2.8 million and an average claim payment of $7.5 million, the report shows.

According to Aon, many claims are still active for more recent years. The report’s authors say insights into the increasing severity of these claims can be found in loss estimates as a predictor for future payouts. The average loss estimate for claims noticed from 2016 to 2019 was $11.7 million, and it increased to $13 million for claims from 2020 to 2023.

The report points to several factors that may be holding claim severity steady and may lead to an increase in claim payments in the future.

“In 2023, the down-market in M&A saw an increase in competition amongst R&W insurance carriers, who attempted to try to win business with lower rates and retentions,” the report states. “In particular, the reduction in policy retentions may result in a greater percentage of claims seeking payment under the policy, as smaller claims, which would previously only generate loss below the retention, could now look to the policy for recovery.”

Additionally, the number of claims that alleging a breach of the compliance with laws representation continues to climb, “and the 2023 data suggests that the severity of the payments on these claims is rising as well,” the report states.