As Hemingway almost observed, market cycles end gradually, then all at once. That looks like a fair description of what is currently playing out in the Representations & Warranties (R&W) insurance market.
For several years, the drift and softening have been gradual: pricing eased, retentions compressed and coverage broadened, deal by deal, enhancement by enhancement. Over recent weeks, that has suddenly changed, with several serious capital providers calling time and exiting the market. That is not something the market can simply wave away; a clear-eyed response is required.
A wake-up call, not a crisis
Read in isolation, any single exit can be explained by something specific to that carrier – a change in corporate strategy, alternative distribution arrangements, a book that grew faster than its risk appetite. But taken together, these departures represent something more: a wake-up call for a market many of whose participants have, for too long, chased market share at the expense of underwriting discipline and pricing adequacy and who have not focussed sufficiently on the long-term health of the market.
No one can know exactly what drove each individual decision, but it would be naive to think these exits are unrelated to concerns about the class's long-term profitability. This is a serious issue, but not an intractable one: with concerted action and renewed underwriting discipline, the market can be put back on a sustainable footing. R&W remains a genuinely useful tool for dealmakers, and there is a shared interest in keeping it that way. A market this young has not yet been tested by a full cycle, and these exits look like the clearest signal yet that it now needs to harden if it is to deliver durable, long-term profitability. Capital is mobile – without a market-wide correction, further capital providers may move on in search of better returns elsewhere.
Why carrier longevity is crucial
This matters more in this class than in most. A standard R&W policy typically runs six to seven years from inception. Writing that policy is not just pricing today's risk – it is making a commitment to the insured that the insurer will be there, ready and able to pay legitimate claims for the life of the policy. That commitment is only worth as much as the underwriting and pricing discipline behind it. For it to hold, the product must be capable of being written profitably across the full policy period, not just at the point of sale.
Correcting the imbalance
That is why those with a genuine stake in the long-term health of this market – like Liberty GTS – need to act now. Rate increase and higher retentions are necessary but are only part of the solution. Some of the coverage enhancements and extremely insured-friendly policy wordings that have come to be seen as market standard in recent years deserve the same scrutiny. Our experience is that some of these features are driving material increases in claim frequency and severity.
Different insurers will draw red lines in different places, and reasonable people will disagree on exactly where. Some of these features can be justified on their own merits for the right deal. The issue is not any single enhancement in isolation – problems occur when several stack up at once, without being properly priced. Restoring a more balanced coverage and wording position matters just as much as rate increase in putting the market back on a stable footing.
Price versus value
The recent departures should prompt a moment of reflection for insureds and their advisors when choosing an R&W insurer for their deal. A cheaper policy, generously enhanced, may seem to be the better deal at inception – but these exits serve as a stark reminder that price and value are distinct concepts. The value of an insurer's promise to pay over the long-term is key when selecting a long-term insurer partner. That has never mattered more than it does now.
This wake-up call reinforces what we have been saying for a long time: increasing prices alone cannot be the whole solution; an equal focus on retentions and coverage terms will drive adequacy which is fundamental to a sustainable market. At this inflection point, Liberty GTS stands ready to meet the moment. We are committed not just to the next placement, but to our clients and brokers who will need us in year six as much as in year one. In choosing to partner with Liberty GTS, clients are investing in a policy priced to reflect the risk being assumed, from an insurer with a strong balance sheet and a demonstrable track-record of meeting its long-term commitments to clients and brokers.
