Report Finds Claims Are on the Rise, With $1 Trillion on the Line for Mergers and Acquisitions

AIG’s M&A Claims Intelligence Series reveals increases in the severity and long-tail nature of M&A claims — and an increased likelihood of higher rates.

The fourth annual edition of AIG’s M&A Claims Intelligence Series reveals increases in the severity and long-tail nature of M&A claims that, coupled with a competitive marketplace, declining rates and broadening terms and conditions, could mean serious challenges to profitability — and an increased likelihood of higher rates.

Claims notification frequency as a whole has remained stable at 20%, but for deals in the $500 million to $1 billion range, frequency has increased from 21% to 26%.

The proportion of claims valued over $10 million have doubled year on year, from 8 to 15%, with an average cost of $19 million.

The report quotes Mary Mclvor, global head of M&A claims at AIG, as saying, “We are seeing the severity claims on an increasing frequency and the interesting thing about that is we are seeing them all over the globe.”

Overall Findings

The report looked at data from 2011 to 2017, and policies covering approximately 2,900 deals, with a combined deal value in excess of $1 trillion with more than 580 claims during the study period.

The percentage of deals covered by R&W policies is still relatively small, but it is growing. Many of the policies included in the report are reaching maturity, offering longitudinal insights that have previously been unavailable, including a longer tail than some might have expected.

While 29% of claims are expected within the first six months from policy inception and 74% come in during the first 18 months, the report shows another 9% notified between two and three years and 3% after the three-year mark.

In the Americas

That long-tail is even more pronounced in North America: “The fact that in North America we get nearly half our claims after 12 months is very interesting and contrasts with the international business,” Michael Turnbull, head of M&A for the Americas at AIG, is quoted as saying.

“One of the reasons this is significant for AIG is that on many policies issued in the U.S. and Canada the retention usually drops down to a smaller number after 12 months.”

Globally, the R&W breach types driving the majority of claims notifications remain tax, compliance with laws, material contracts, and the largest type, financial statements, a third of which entail undisclosed liabilities. But the report does reveal certain other regional distinctions.

The Americas see a higher frequency across all deal sizes, and the report speculates that the increase in claims could be due in part to a growing understanding on the part of insureds as to how the policies work and what is covered.

“Clients are becoming more familiar with the way the product works and this is reflected in the notifications,” Turnbull said in the report.

“Savvy insureds will provide adequate supporting documentation early in the claim to allow the process to proceed as efficiently as possible.”

Litigation’s Impact on Claims

Another geographic difference is the extent to which litigation is driving claims: 12% in Asia Pacific, compared to 5% in North American and 8% in Europe.

Darren Savage, Asia Pacific M&A manager at AIG, sees signs of a maturing market in Asia Pacific.

“Notification with respect to policies issued in Asia is on the rise, which reflects the increased use of R&W throughout the region, particularly in markets like Korea and Japan,” Savage said in the report.

He also sees a growing sophistication in notifications in the region, with more detailed quantification of loss: “It is a positive development and shows clients are adapting and improving their understanding of the product and the information they provide with notifications,.”

Tax Breach Claims

The frequency of tax breach claims notifications also varies by region, with 25% in Europe compared to 18% globally.

The report speculates this could be due to the audit regimes of tax authorities in certain European jurisdictions, although it also notes that Asian tax jurisdictions may be even more complicated and lack the unification of a structure like the EU.

For the first time, the report drills down into the types of tax breaches that are driving losses.

Corporate income tax (34%), employment (23%) and sales taxes (17%) form the bulk of claims notifications across the regions, followed by intra-group arrangements; import/export; and deductions (interest, expense, etc.) all at 6%; franchise tax and property/transfer tax both at 3%; and incorrect use of exceptions or reliefs at 2%.

The report concedes 6% figure for claims relating to intra-group arrangements may be deceptively low, as AIG’s R&W policies typically exclude pure transfer pricing risks. &

Jon McGoran is a magazine editor based outside of Philadelphia. He can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.