An active year for claims in the transactional liability insurance market in 2024 has increased the focus of insurers and reinsurers on pricing for representations and warranties insurance (RWI) business, prompting carriers to begin a concerted push on rates.
Although underlying M&A activity softened in the first half of 2025, upward rating momentum persisted. However, despite sustained focus on rate adequacy and market-wide price increases, there has been too little discussion about coverage scope and how towers are constructed.
Over the past two years, RWI coverage in the US has become increasingly broad, such that a course correction is now needed if the market is to remain profitable.
Broadening cover and large losses
One major concern about the current breadth of coverage in relation to the sustainability of US RWI business is the recent upward trend in large limit losses. It seems likely that a significant factor in this increase in large claims is that carriers have failed to learn the lessons from recent claims history and have continued to offer ever broader coverage options.
Multibillion-dollar M&A deals typically have very large RWI towers, where the pricing on the excess layers doesn’t always appropriately reflect the level of risk being assumed. There have been a few full-limit losses in the market recently that have burned through those excess layers, resulting in market-wide losses.
On these larger deals, where large RWI towers are being built, the capacity of many of the carriers involved is typically in the “red zone,” attaching well below 10% of enterprise value. However, the pricing of these layers doesn’t always reflect the reality of the exposure (which is more akin to primary in nature on these largest deals).
Applying steep increased limit factors (ILFs) on these towers doesn’t appropriately compensate carriers for the risk they are taking on. Moreover, while carriers generally view their participation in higher excess layers as being well insulated against loss, we have seen several full-limit losses hit the market recently showing that, on these large deals, the potential for high severity losses is a real risk.
A recently reported settlement involving a large private equity firm buying a multibillion‑dollar US telecoms business—said to have been resolved in the $300 million to $400 million range for a condition-of-assets breach that implicated the full tower—highlights the point. When a large claim triggers every layer in the tower and the alleged loss approaches or exceeds the tower’s total limit, an attachment point is effectively irrelevant in a settlement: All insurers across the tower will be drawn into contributing to the settlement. It is questionable whether current excess pricing adequately reflects the fact that ventilation and high attachment points offer no protection in these scenarios.
Separately, another large deal involving the acquisition of an e-cigarette/vaping company by a tobacco company ran into an ongoing patent infringement lawsuit, which has threatened to hit the buyer’s R&W policy with a $300 million full-limit loss if the plaintiff’s case is successful.¹
At the same time, we have seen an increase in carriers offering six-year coverage on all representations in transaction agreements. Rather than solely offering this on fundamental representations, insurers are offering six-year cover for representations that have long tails of exposure, including data privacy, artificial intelligence, intellectual property, healthcare, and environmental—sometimes for no or nominal additional premium, despite the significant change these extensions can make to the overall risk profile.
In light of the above trends, Liberty GTS has been more conservative in its approach than some of our peers in coverage for the condition of assets and intellectual property. As we noted in our 2024 Claims Briefing, claims of this type have increased and, while they only account for 7% of our claims paid, the average claims payment/reserve cost is the third highest of all breach types.
At this stage in the evolution of the RWI product, when carriers are able to access a much higher volume of risk data, we have a real opportunity to inform our underwriting based on claims activity.
A number of carriers and brokers now publish RWI claims studies and, while we all have different portfolios of risks and books of business, the market should be able to pool this knowledge for our collective benefit.
It is encouraging to see more of a focus on rates, but, for the benefit of all those with an interest in the long-term stability of the transactional liability market, the conversation also must focus on coverage as well as protecting the sanctity of the policy and what it is intended to cover.
Deal volume is picking up
While underlying M&A deal volume in H1 2025 has been down compared with previous years, with the first quarter seeing the lowest volume of deals for the past decade, activity is now picking up and submissions for RWI have increased year over year and also month over month. Market participants generally anticipate a strong second half of the year for RWI business.
Compared with the beginning of the year, when competition in the market intensified, now that deal volumes and submissions are increasing, carriers can afford to be more thoughtful about coverage positions and, in contrast to the position taken by some market participants, take a firmer line on terms and conditions.
Meanwhile, recent reinsurance renewals have indicated a strong focus from reinsurers on RWI line size management. If carriers are to continue offering the kind of larger limits brokers and insured parties are looking for, with ceded risks that remain attractive to the reinsurance sector, it is important that the scope of coverage and level of pricing is appropriate, reflecting the risk that carriers and reinsurers are assuming.
We have seen steep ILF discounts applied to some of the excess layers though there is an increasing possibility of full-limit losses. Without more account taken for the true risk of sitting excess within the “burn layer” and the increasing frequency of severe losses implicating entire towers, the RWI market has opened itself up to claims that may not have been sufficiently well reserved for. This runs the risk that, after a loss, some carriers may need to withhold capacity from excess layers, thus reducing the available capacity in the market for these larger deals.
Liberty GTS will continue to take a thoughtful and measured approach to limit deployment, while being a reliable partner in our commitment to pay claims. We are focused on longevity, having built a book that is here for the long haul, ensuring we can serve our brokers and clients for years to come.
