Claims notifications spike, though not fueled by pandemic as once predicted: Liberty GTS report

Though COVID-19 has fundamentally changed the M&A risk landscape, it has surprisingly not caused the spike in claims once predicted, new data from Liberty Global Transaction Solutions (GTS), the M&A insurance division of Liberty Mutual Insurance, suggests.

While claims notifications rose 40% year-on-year and the speed of notifications increased, COVID-19 has not let to the predicted surge in ‘buyer’s remorse claims’, according to the recently released Liberty GTS 2021 M&A Claims Briefing.

The claims briefing examines M&A insurance claims by industry, region and cause, offering detailed insights about trends, types of deals and from which industry claims are most likely to emerge.

“Through better data and deeper analysis, our claims briefing enables more informed decision-making for our brokers, clients and law firms,” says Jonah Goldberg, Head of Canada for Liberty GTS.

Goldberg says what surprised him most about the research was the lack of impact from COVID-19 on claims so far. “Most of the predictions for larger claims have not yet occurred,” he says. “However, the pandemic has rebalanced the nature of the risks that underpin M&A deals, and we expect to see long-term impacts from that rebalancing playing out in the next few years.”

According to the data, claims processes for deals are becoming increasingly institutionalized. “We’re seeing a real change in approach from M&A professionals in terms of post-deal reviews, active study of where claims might fall and earlier reporting of claims”, Goldberg says. “For us, this is broadly beneficial. It means our clients are engaged, making full use of their cover and making themselves aware of risks, what is covered and what is not.”

Claims made quicker, severity remains unchanged

While claims notifications rose 40%, Goldberg says this figure reflected a corresponding increase in the size of Liberty GTS’s M&A book. “The percentage of claims to risks underwritten remains consistent,” he added.

According to the data, claims are being made more quickly after policy inception. Just under 60% of notifications were made within the first year of the policy period in 2020, a significant increase from 48% in 2019.

“Many claims notifications are precautionary in nature,” Goldberg added. “Just 25% of notifications will result in a request for payment.”

Claims severity has remained largely unchanged year-on-year. Medium ($1m to $10m) severity claims were Liberty GTS’ fastest growing type of notification in 2020, with the number of claims falling into this category almost doubling compared to 2019. “We saw a slight fall in the number of high ($10m plus) severity claims in 2020, but those that we did receive were for higher amounts,” Goldberg says.

Claims drivers

According to the data, common claims drivers include:

• Accounting and financial issues make up 41% of “high” severity claims. Many of these involve stock control or revenue recognition issues.
• Cyber claims, claims relating to failed IT projects and claims around class-action wage disputes are all increasing in frequency. “This reflects the critical importance of digital infrastructure to all types of business today,” Goldberg says.
• A number of “high” severity claims involved ‘founder’ sales, and some of these have involved suspected fraud. Overall, the most common type of fraud involved management fabricating revenue to boost the bottom line.

Post-pandemic impact

Whilst the predicted spike in claims due to COVID-19 has not materialized, Goldberg says the rapidly changing environment disrupted underwriting norms, “fundamentally changing the nature of some previously well-understood industry risks”, like travel, hotels and real estate.

“We expect new COVID-19-related claims trends to emerge in the next few years as a result,” Goldberg concluded.