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Insider US in full: Opinion: Is a market reckoning on the horizon for transactional liability?

Recent contingency losses reflect a willingness of the market to go looking for premiums.

For a market which makes up such a small part of the global premium base, it certainly can make a lot of noise.

But a sub-product of the transactional liability (TL) space looks to generate outsized losses which has caused huge market interest and spooked reinsurers.

We reported earlier this week on yet another substantial judgement preservation insurance (JPI) loss facing the TL space, resulting from a $1.6bn overturned judgement in a lawsuit between software companies BMC and IBM. Legal wrangling is still ongoing, but if the final outcome falls against BMC it will result in a circa $700mn loss for insurers.

JPI losses fall in the contingency bucket of the transactional liability space, a niche product alongside the more traditional representation and warranties (R&W) and tax liability offerings. Players in TL tend to write across the three.

However, the loss development in this small sub-class is now becoming so concerning that one seasoned executive went so far as to call it a “cancer” on the wider TL space.

It has been suggested there are four to five large contingency losses of this kind facing the market (including an Amazon loss, previously revealed by this publication) with a combined insured limit at risk of $2bn. If all these losses do indeed crystallise, the total loss bill is said to be miles in excess of the premium contingency business generates.

Reinsurers are said to have jumped on the development and are asking more pressing questions of their cedants. But many in the TL market feel that this wake-up call did not come out of the blue.

In many ways, the TL market was primed for this to happen.

The TL market is somewhat unique in that underwriters navigate between both the insurance pricing cycle and the M&A cycle, which affects supply-demand dynamics in the class.

Since the post-pandemic dealmaking boom, M&A transactions are down – almost to Covid levels - affecting the supply of deals in the traditional R&W space to insure.


As we have previously reported on Insurance Insider US, rates in the R&W space have fallen to as little as 2% of deal value, as competition over fewer deals ramps up.

And there are many mouths to feed in the TL space. It is a class which is written by a substantial proportion of MGAs, with new start-ups seemingly emerging every year. And while every MGA will say they do not write for top line, there is a substantial amount of PE money backing these ventures which is looking for compound year-on-year revenue growth.

Layer on top of this the fact that many TL underwriters come from a legal background with higher salary requirements, and the pressure to maintain and grow premium income is high.

The most recent contingency losses reflect a willingness of the market to go looking for premiums due to low M&A volumes–via broader coverage and increasingly “exotic” underwriting solutions with huge towers attached to risks.

Judgment preservation insurance allows businesses that win significant judgments in a court or in arbitration to monetize some or all of a damage award by buying insurance on it, in the event the judgment does not fall in the insured’s favour.

The amount of underwriting information in these deals is already very thin, sources said. Throw in the wildcards of social inflation and the increasing politicisation of trials in the US, and these risks look more and more like a roll of the dice for underwriters (even if the rate-on-line is substantially higher than in the R&W market).

It is worth noting that this broadening of coverage is not solely happening in the TL contingency space.


As we previously reported, the traditional R&W product is also seeing an increasing number of large losses, including the potential for a ~$1bn claim on an EQT policy to crystallise. Overall, claims severity is rising at a time when rates are stubbornly low.

It will take some time for these losses to crystallize and the true impact on the market to be felt, once the legal to-and-fro on each of these cases comes to an end.

However, the sheer potential of these losses to significantly damage the profitability of the TL space has already sparked the collective market hand-wringing.

Liberty, a market leader in TL, has already paused quoting for new active litigation liability in wake of the losses.

Whether others follow suit remains to be seen. However, for the ongoing sustainability of the class, it feels like far more wide-ranging actions on underwriting need to be taken.

Insurance Insider US provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Request a free 7-day trial for more premium content from Insurance Insider US.

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