Payouts for claims made under Warranty & Indemnity (W&I) insurance are growing in both frequency and severity, according to AIG intelligence. The proportion of material claims over $10 million doubled year on year from eight percent to 15 percent. The average claim side within that band was $19 million, reflecting the material nature of such claims.

The claims numbers for policy years 2011-2017 show that frequency remains highest for the largest, most complex deals. The story of growing claims frequency and severity is however set against a backdrop of several years of rate softening for R&W cover.

This is a trend that cannot continue in light of the meaningful loss experience, according to Dr. Dennis Froneberg, Head of M&A Europe at AIG. "With a higher number of large claims coupled with a soft market there's a profitability challenge," he said. "Carriers need scale, expertise and to be writing adequate premium in order to cover the significant W&I claims when they arise."

One reason for the rising W&I claims frequency and severity is the sophistication of insureds, their familiarity with W&I insurance and understanding around what breaches constitute a claim under the policy. "We find our insureds are now more likely to provide adequate supporting documentation early on in the claim process, reflecting the knowledge and experience of buyers and their counsel," said Dr. Froneberg.

Taxing times for European deals

Europe dominates in the overall frequency of tax breach claims notifications, which are responsible for a quarter of all notifications made in EMEA. For the first time in its 2019 M&A claims intelligence report in 2019, AIG gave insight into the types of tax breaches that are resulting in losses. It found that corporate income tax, employment and sales taxes were responsible for the bulk of claims notifications in Europe.

The audit regimes of tax authorities in a number of European jurisdictions are one potential source of claims. In countries where there are regular tax audits, claims notifications in respect of M&A transactions become more likely.

Meanwhile, cross border transactions are inherently more complex, given the need to diligence multiple tax regimes. "Deals bring significant one-off transaction costs and authorities will want to make sure they have been taxed appropriately," said Dr. Froneberg. "Authorities always want to consider corporate income tax and we expect this to continue to dominate our loss payments for tax covenant breaches."

"Overall, we are seeing a high volume of claims notifications across a variety of tax types in Europe and therefore the need for well scoped out diligence by buyers on tax is very important," he added.