The Value of Reps & Warranties Insurance: A Comprehensive Review Going Into 2019

By: | January 17, 2019 • 3 min read
Phil Norton is the Senior Managing Director of the Management Liability Practice at Arthur J. Gallagher & Co., and is regarded as one of the world’s leading authorities in his field. He has been named a Risk and Insurance® Power Broker® seven times. He can be reached at [email protected]
Topics: Risk Insider

Representations and warranties (R&W) insurance is designed to provide insurance coverage for breaches of reps & warranties made by the seller in a purchase agreement.

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The popularity of this insurance has increased dramatically over the last five years for three basic reasons: (1) recognition of the product as a mainstream way of dealing with indemnification obligations, especially in the private equity community; (2) global M&A volume; and (3) increasing acceptance of the product by corporate purchasers, many of whom are now repeat users of the product.

The R&W insurance product was developed in 1999, but its potential was not evident until recently. (See the charts below on M&A activity and Reps & Warranties insurance placed.) The placement estimates are our own after considerable dialogue with market leaders. Note that M&A volume is up 60 percent in 2014 to 2018 compared to 2009 to 2013. We estimate R&W policy placements up 30 percent in 2018.

Also driving popularity of R&W is the quality of the policy improved, while pricing has declined significantly. With 25 carriers currently in the R&W marketplace, finding committed carriers with proven willingness to address and pay claims is important. For 2019, we expect substantial submission growth over the roughly 4,000 submissions delivered this year.

Although subject to underwriting parameters, such as deal structure, industry, deductible, deal value and types of representations made, most pricing indications begin at about 2.7 percent of limit with a retention of 0.75 percent to 1 percent of deal value — depending on deal size.

Many sellers view the cost of insurance as a preferred option to putting up capital and deferring payments to investors. R&W insurance has been used to facilitate deals ranging in size from $5 million to $5 billion.

R&W Claim Frequency and Severity 

AIG published a very informative whitepaper, Global M&A Claims Study 2018, that included a categorization for the reasons for R&W claims (see the below pie-chart for details), noting that one-third of all claims frequency comes from financial statements and (related) tax issues.  

Information on claim severity is more limited.

The AIG report does give some clues, stating that 8 percent of material claims exceed $10 million in cost. Their charts appear to put materiality at ~$100,000.

We built our own database conditioned on the claim cost exceeding $750,000 (removing more noise from claims typically less than the deductible).

Thus we built a second pie chart based on R&W claim cost estimates:

First of all, yes, there are claim costs in excess of $100 million that have been paid by carriers — we confirmed this with at least two carriers. Second, it is indeed a rare event to exceed $35 million in claim costs.

When measuring the value of R&W insurance for a deal, we need to look at both the “actuarial” value that compares the premium to the probability of a claim above the retention, as well as the intangibles, such as deal facilitation, balance sheet protection and the ability of the insurance to often extend the life of the representations and warranties for up to 6 years.

Traditional escrow arrangements lasting one year would not catch the 40 percent of claims that are reported more than one year after the close.

Our conclusion is to suggest that the sweet spot for this insurance product will continue to be for all size deals, but especially for those with valuations in excess of $50 million. &

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]