The frequency and severity of warranty and indemnity (W&I) claims have increased, according to new data from AIG.
Claims-notification frequency has shot up by 26% for deals between US$400 million and US$1 billion, while holding steady at 20% across the wider portfolio, according to the fourth annual edition of AIG’s M&A Claims Intelligence Series. The largest and most complex deals are seeing the highest claims frequency, AIG said.
The increasing frequency of claims is not confined to a specific region, but is a global trend – with claims notifications on the rise even in areas where they have historically been steady. However, claims notifications have been driven in large part by the Americas.
Claims severity has also grown, with the most material claims (over US$10 million) nearly doubling from 8% to 15%, with an average cost of US$19 million, AIG reported.
“These numbers show that the claims are real and the claims are material,” said Angus Marshall, UK M&A manager at AIG. “We are seeing the severity of claims on an increasing frequency, and the interesting thing about that is we are seeing them all over the globe. We expect the dynamics of a competitive insurance market for W&I to play out over the next couple of years. With a higher number of larger claims coupled with a competitive market, there’s a profitability challenge. Increasing severity may necessitate higher rates. To remain viable, insurers need scale, experience and to be earning enough premium to cover the significant claims when they come in.”
“There is a tendency to enter into longer-duration contracts, and it is important to remember that there is a long-tail element to this business,” said Dennis Froneberg, AIG’s Europe M&A manager. “The critical period is the first 18 months, because that is when the target company and the new buyers have taken over management of the operation and have gone through an entire audit cycle, which is often when you start to find problems.”