A rising storm? Uncertain macroeconomic conditions to drive complicated W&I claims

As we enter 2023, the declining global macroeconomic conditions, coupled with relatively strong mergers & acquisitions (M&A) activity in recent years, are likely to compound the frequency and complexity of W&I claim notifications.

Following the stellar performance in the M&A market in the post-pandemic 2021 recovery, 2022 has delivered tougher economic conditions for buyers and sellers. Continued pandemic supply chain issues, inflationary pressures, rapid global interest rate rises, and geopolitical tensions have contributed to M&A volumes shrinking in 2022 from the post-pandemic high.

According to a report by S&P Global, Q3 2022 saw a 56% year-on-year decline in deal volumes. Over the whole of 2022, this has seen M&A activity return to pre-pandemic levels. Notwithstanding tough macroeconomic conditions, this still represents a significant level of M&A activity.

The purchase of warranty & indemnity (W&I) insurance to support deals has continued to increase globally and is extremely common in the Australian market.

Global average claims rates on W&I policies have been around 14% to 16% over the five-year period from January 2017 to December 2021, with the majority of those notified within 18 months of deal completion. We predict that the tough economic conditions will continue through to 2023 and will likely result in a greater volume of W&I insurance claims emerging.

Our expectation is that the difficult macroeconomic conditions (including the inflationary environment), changing trade patterns on the back of Russian sanctions, potential cashflow difficulties faced by target businesses and the withdrawal of government pandemic support measures will create financial uncertainties, and lead to close scrutiny of post-completion valuation and a review of potential W&I recoveries by policyholders.

Those economic conditions may result in insurers reviewing their risk tolerances and pricing to mitigate the increased claims risk in this environment, though any shift towards a harder market will be offset by the increasing availability of capacity as new entrants enter the market, and existing players increase capital deployed. We expect cyber to remain a focus of underwriters, and emerging ESG risks to occupy more attention in underwriting. 

View all our Insurance 2023 Predictions here