M&A claims surge and W&I market grows to record levels – HWF study

Claims related to mergers and acquisitions (M&A) have surged in recent months, matched by a surge in demand for warranty & indemnity insurance (W&I), according to a broker study.

HWF Partners said W&I “grew to record levels” during the first half of 2024, based on a study of European insurers.

At the same time, claim numbers under W&I policies, which have become an established feature of M&A transactions, have increased alongside payments to insured parties.

“We’ve seen claim numbers increase rapidly over the last 12 months and have been involved in substantial settlements on behalf of our clients,” said David Wall (pictured), managing director of HWF Partners, who authored the study.

A W&I policy pays out for loss a buyer is contractually entitled to claim against a seller for unknown and unforeseen risks which materialise following the completion of an M&A transaction.

For instance, a post-acquisition discovery that the acquired company had under-declared its VAT to tax authorities, or not disclosed contractual obligations to a third party, or if there were title deficiencies in a real estate transaction.

Wall said: “Policies frequently cost less than 1% of the maximum payout limit, and the recovery rate is material for something designed for unpredictable circumstances, with claims paid out on over 4% of policies. That flow of capital back to insured parties isn’t showing any sign of slowing down.”

HWF’s W&I Market Claims Study analysed claims data from 22 European insurers, which between them have written 15,080 W&I policies since 1 January 2016.

The study found sustained levels of claims. Insurers received claim notifications on 11.64% of policies across the review period.

The data also shows that claims are more likely on larger transactions, with deals with an enterprise value over £1bn showing a 19% notification rate.

Ultimately, claims were paid out on 4% of policies across the review period, HWF said.

The speed in which claims are being settled is another takeaway from the report.

A quarter of successful claims were paid within six months, and some 73% of claims were paid within 18 months.

As a product, W&I is intended to give an alternative to uninsured transactions where such claims would be made against sellers, and it’s commonly acknowledged that claims would be unlikely to be settled in such relatively short timeframes.

The report also gives practical feedback to users of W&I insurance. For example, subrogation – the ability of an insurer to pursue a seller to reclaim their payout if a seller has acted fraudulently - is rare, occurring in just 1.85% of claims where there is a payout to an insured, suggesting in practice the prospects of sellers being pursued is quite limited.

Wall added: “It’s vital that all parties involved in M&A transactions can have confidence in a W&I insurance product. Historically there’s been limited visibility on claims in our market, so it was important to us to lead on this report and give clients an objective set of data that should give comfort in using W&I.”