Global insurer AIG has highlighted an increase in both the frequency and severity of Warranty & Indemnity (W&I) claims across the globe, while the driver of claims notifications remains unchanged.
For deals between $400 million and $1 billion, AIG notes that claims notification frequency has increased by 26%, but remained steady at 20% across the broader portfolio. At the same time, claims severity has increased, with a doubling of the most material claims to 15%, with an average cost of $10 million.
Interestingly, AIG says that the increased frequency isn’t confined to any one region but is truly a global trend, with claims notifications rising in places where this has historically not be witnessed before.
Despite this trend, the Americas remains one of the most significant drivers of claims notifications, which AIG says is partly a reflection of the sophistication of the insureds.
The drivers for claims notifications remains the same, with AIG highlighting financial statement (19%), Tax (18%) and Compliance with Law (15%). AIG continues to note that a significant amount of claims come in after the first two years and that overall, 74% of claims are notified within the first 18 months.
“These numbers show that the claims are real and the claims are material. We are seeing the severity 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 large 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,” said Angus Marshall, UK M&A Manager at AIG.
Dennis Froneberg, Europe M&A Manager, AIG, added: “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. 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.”
