A growing number of insurers have recently stepped back from the transaction liability (TL) market, prompting a natural question from clients and advisors: is this the beginning of a broader contraction?
Our view, informed by advising clients in this market since its infancy, is no. What we are seeing, and likely will continue to see in the near-term, is a healthy recalibration after an unusually long stretch of insured-friendly conditions, not a retreat from a product class that has become an important part of the dealmaker’s toolkit and should remain so.
Not Every Departure Tells the Same Story
It is worth resisting the urge to read every recent exit the same way. Some reflect circumstances specific to a carrier’s distribution arrangements or book of business rather than a broader judgment about transaction liability. In certain cases, capacity has shifted from a third-party managing general underwriter or intermediary to an affiliated platform owned by the carrier. Other changes have occurred in the ordinary renewal cycle for capacity relationships.
Those developments are fundamentally different from capital leaving the market altogether and, importantly, do not generally affect the obligations of departing carriers under existing policies.
That said, several retrenching and departing carriers have pointed to real concerns about profitability and volatility. Those concerns deserve a clear-eyed explanation, and the arithmetic is relatively straightforward.
Why the Market Is Firming
Transaction liability is cyclical, like every other line of insurance. What has been unusual about TL is how little meaningful hardening it has experienced during the decade in which these products became ubiquitous. Outside of a brief capacity crunch in late 2021, driven by unexpectedly robust M&A activity during the COVID-19 pandemic, pricing has moved steadily in favor of insureds while coverage and underwriting appetite have expanded.
That combination has a predictable effect on carrier economics. All else equal, if pricing falls by half while claims experience remains unchanged, loss ratios double. And underlying risk has not remained static as coverage and appetite have broadened.
Carriers are now recalibrating how they price risk, construct portfolios and deploy capacity. That points to a firmer market ahead, but not a shortage of capacity for the vast majority of transactions or a wholesale retreat from the space.
Why Departures Do Not Signal Dysfunction
Carrier exits can look more significant than they are due to the visible nature of such departures. But insurance capacity is not static. Capital naturally moves to and from particular risks as expected returns change, and individual carriers will reach different conclusions based on their own portfolios, claims experience and strategic priorities.
What ultimately should matter to dealmakers is whether well-capitalized capacity remains available on workable terms and less whether every incumbent remains in the market. Today, we continue to see that healthy capacity, supplemented by several new entrants over the past 12 to 18 months.
It is also worth remembering that material paid claims, and the resulting reevaluation by carriers, do not mean the TL market is broken. In fact, it is quite the opposite: paid claims demonstrate that the product is doing what it was designed to do—protecting buyers and sellers when covered risks materialize, and the market’s response reflects insurers recalibrating to ensure they can continue to provide adequate protection on a sustainable basis.
Some market turnover, particularly after an extended period of intense competition and one-way traffic into the space, should not be mistaken for evidence that the market is not functioning effectively.
What This Means for Dealmakers
In a firmer, more selective market, execution matters more. Favorable outcomes increasingly depend on how a risk is positioned, which carriers are approached and how the process is managed.
Experience, solid carrier relationships and the ability to think creatively around non-standard risks become more valuable as underwriting becomes more selective and the differences between carriers become more pronounced.
The Bottom Line
The transaction liability market is recalibrating, not retreating. After an extended period in which economics and coverage moved overwhelmingly in favor of insureds, a shift in market conditions was increasingly likely.
A firmer market does not mean a dysfunctional one. The recalibration underway may ultimately leave us with a market that looks more like 2018—a period when TL was already widely adopted by dealmakers despite pricing and underwriting that were more insurer-friendly than the conditions of the past several years.
A more sustainable market should ultimately produce greater stability in pricing, underwriting and capacity —while continued competition in that market should help ensure that clients receive broad coverage and attractive terms.
We stand ready to help clients navigate the evolving market. We also are actively engaging with carriers as they contemplate refinements to their platforms in order to ensure that any such changes are appropriately suitable for our clients.
Please don’t hesitate to reach out for timely guidance and support.
