Bigger M&A deals mean more insurance claims, AIG finds

Bigger M&A deals tend to lead to more insurance claims, data from AIG showed on Wednesday.

M&A insurance, also known as warranty and indemnity cover, has been a booming market over the past few years, as buyers and sellers seek protection against the chance that problems arise after the deal closes.

The main causes of claims on this type of insurance are problems with financial statements, tax, and compliance with laws.

AIG, which sells M&A cover, analysed 580 claims covering 2,900 deals, and found that larger deals lead to more claims.

For deals worth less than $500m, claims were made on about a fifth of policies. But for deals of $500m-$1bn, that jumped to 26 per cent of policies and for those over $1bn there were claims on 23 per cent of policies.

“Overall, we’ve been in an active M&A cycle for some time. Warranty and indemnity insurance is being used more frequently,” said Mary Duffy, global head of M&A insurance at AIG. “Insurance is covering more deals, so claims reflect a cross-section of deal activity.”

AIG found that there had been an increase in big claims worth $10m or more. When the insurer looked at what it classes as material claims — anything more than $100,000 — it found that a bigger proportion of them are now over $10m.

Ms Duffy said that more insurers were coming into the market, which was helping to keep prices down despite the increase in big claims.

“Growth [in the market] is due to M&A activity booming, and it is supercharged by increased penetration,” she said. “It has become mainstream over the past two or three years. To a large extent we’ve hit critical mass with private equity funds, corporate buyers and lawyers.”

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