In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for warranty and indemnity insurance.
Key developments in 2021
2021 has seen a huge increase in deal volume and in overall demand for warranty and indemnity (W&I) insurance. Aside from the traditional buyers of such insurance, 2021 has also seen an uptick in the purchase of such policies by corporate buyers. From a claims perspective, certain trends from previous years remain largely unchanged; such as notification frequency (at a rate of approximately 1 in 5 policies) and breach type (tax; financial statements and accounting; material contracts).
However, one marked development in the last year has been policyholders' increasing familiarity with W&I as a product. This is particularly reflected by the significant increase in the number of notifications made within the first twelve months of a policy period, suggesting at least in part that policyholders are now getting better at identifying and notifying risks.
In last year's review, we focused on the impact that COVID-19 could have on underwriting in 2021, flagging that underwriters would likely place more weight on the due diligence process. This has certainly been the case, although the underwriting process has been further complicated by the fact that the state of flux that many companies have faced has meant that due diligence quickly becomes outdated and difficult to rely on as an indicator of "known issues". From a claims perspective, perhaps a little surprisingly, COVID-19 appears to have had very little impact on claims to date and in particular, has not yet led to the wave of "buyer's remorse" claims that some commentators predicted. However, the COVID-19 pandemic is far from over and there are some areas which we consider are likely to result in claims in the future.
What to look out for in 2022
The market has yet to be materially impacted by COVID-19 related claims. However, we consider that, over the next year or so, at least two claims trends are likely to emerge. Firstly, reports in the press about widespread fraudulent claims for furlough or other wage support schemes provided by national governments will likely translate into claims made under W&I policies. Secondly, and in an effort to increase tax revenues, we expect that tax authorities will open up more tax investigations and pursue these more aggressively, which may well lead to an uptick in tax claims made under W&I policies. We expect that underwriters will be keen to limit their exposure in respect of each of these areas.
COVID-19 aside, one of the emerging risks in the W&I market which we see as becoming increasingly prominent is cyber. The global wave of data breach and ransomware attacks over 2021 is only set to increase in 2022 and cover for cyber claims is consequently likely to be a key issue in the W&I market in 2022. While some underwriters are taking the view that cyber cover should be excluded in its entirety (on the basis that target companies should purchase standalone cyber cover), other underwriters are offering limited cover and this may well be an area of competitive differentiation for underwriters going forward.