In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for warranty and indemnity insurance.

Key developments in 2022

Although global M&A activity in the first half of 2022 was strong, economic and geopolitical events in the second half of 2022 have caused a reduction in both global deal value and deal volume. Despite the slowdown, the demand for warranty and indemnity (W&I) insurance has remained relatively stable in circumstances where cautious dealmakers are seeking to protect their positions further.

Alongside cyber risk (which we discussed as an emerging risk in last year's Annual Insurance Review) environmental, social and governance (ESG) risks are now also at the forefront of M&A, and in turn, the W&I underwriting process. ESG both broadens and alters the scope and reporting of due diligence. As such, underwriters are now seeking to ensure that deal advisers have undertaken a more detailed analysis of areas that are generally covered by traditional due diligence (such as supply chain issues) as well as analysis on newer areas, such as diversity on boards. In addition, ESG has also impacted transaction fundamental, and underwriters are now paying closer consideration to how ESG risks impact target valuation (how, for example, an ESG breach might be "valued") as well as the breadth of certain warranties (whether these are general "compliance with laws" type warranties or more specific ESG warranties). In circumstances where ESG is a relatively new area of focus, there is little data available in respect of how ESG impacts claims made under W&I policies, although we expect this information will become available in the coming years.

What to look out for in 2023

Global M&A is likely to face a number of challenges in 2023, including rising interest rates leading to higher cost of acquisition financing, as well as general economic uncertainty associated with a global recession. That said, there are still likely to be some drivers for M&A activity, such as the availability of undervalued or distressed targets as well as the amount of "dry powder" in the private equity space. As in 2022, the demand for W&I insurance is likely to prove resilient.

From an underwriting perspective, we expect that cyber, compliance and ESG risks will continue to be key areas of focus. From a claims perspective, we expect 2023 to produce a material uptick in W&I claims due to a combination of three factors – the high number of policy placements in 2021; the tail between policy conception and notification; and the reduction in the number of claims notifications made during the COVID-19 pandemic.

Going forward, the use of W&I insurance more generally is likely to expand across new regions such as the Middle East, where the demand for W&I insurance is increasing as a result of familiarity with these products.

Outside of the "traditional" W&I offering, 2023 is likely to see the W&I market continue to evolve with an increase in the number of synthetic and stapled W&I insurance products, more niche offerings (e.g. W&I insurance for SME deals or the private equity secondaries market) and even the potential use of W&I insurance on commercial transactions outside of M&A.