Challenging Conventional Wisdom in Transactional Risk
In the high-stakes world of mergers and acquisitions, long-held assumptions often dictate strategy and risk assessment. However, a comprehensive new report is challenging one of the market’s most fundamental beliefs: that bigger deals inherently carry bigger risks. This analysis reveals a counterintuitive reality where smaller transactions are disproportionately responsible for the most significant insurance losses. The report also uncovers a critical shift in the timing of claims, which are now emerging much later in the policy lifecycle. This article will explore these groundbreaking findings, examining how they are set to reshape underwriting practices, policy design, and strategic decision-making across the transaction risk insurance (TRI) landscape.
The Expanding Role of Insurance in a Volatile M&A Landscape
To appreciate the impact of these findings, it is essential to understand the context of the rapidly maturing TRI market. Transaction risk insurance, which covers breaches of warranties and indemnities in M&A agreements, has evolved from a niche product to an indispensable tool in modern dealmaking. Data highlights this integration, showing that an impressive $67.8 billion in TRI limits were placed in 2024, a 38% year-over-year increase. This surge in adoption is happening amid a complex global environment where geopolitical instability and trade policy uncertainty make cross-border transactions inherently riskier. As the global M&A market showed a robust recovery in 2024, the demand for effective risk mitigation solutions has only intensified, positioning TRI as a cornerstone of deal security and execution.
Dissecting the Report Key Findings and Their Impact
The Small Deal Big Loss Paradox
The central and most disruptive finding from the recent analysis is that enterprise value is a poor predictor of insurance risk. By analyzing over 500 claims and more than $140 million in payouts, the report found that a staggering 80% of the firm’s most severe losses originated from transactions valued below $250 million. This data directly contradicts the prevailing industry trend of offering more favorable terms, such as low or zero retentions, on insurance policies for these smaller deals. Analysis concludes that even small-scale M&A transactions carry material exposure to significant breach of warranty losses. This paradox forces a critical re-evaluation of underwriting models that have historically equated lower deal value with lower risk, revealing a blind spot that has led to substantial and unexpected losses for insurers.
The Long Tail of Liability A Fundamental Shift in Claims Timing
Beyond the risk associated with deal size, the report identifies a second major trend: claims are being filed much later than in the past. Historically, claims reported more than three years after a policy’s inception were rare, accounting for less than 10% of notifications. In 2023 and 2024, that figure has doubled to nearly 20%. In parallel, claims made within the first year of a policy have plummeted from over 65% of all notifications to just over 20% in 2025. This delay is attributed to a confluence of factors, including a more sophisticated market where insured parties and brokers better understand policy language, the widespread use of three-year general warranty periods, and a volatile macroeconomic climate that influences when buyers choose to notify insurers of a breach. This creation of a “long tail” on liability presents new challenges for insurers in reserving capital and predicting future losses.
Rethinking Underwriting The Future of Policy Pricing and Design
The combined impact of these two trends—higher-than-expected losses on small deals and a significant delay in claims reporting—demands a fundamental rethink of underwriting and risk pricing in the TRI market. The industry practice of offering aggressive terms on smaller deals now appears misaligned with the actual risk profile demonstrated by the data. Insurers will likely respond by adjusting their pricing models to better reflect the potential for severe losses, regardless of transaction size. Furthermore, the shift in claims timing will compel underwriters to reconsider policy durations, notification requirements, and how they calculate risk exposure over the full policy lifecycle. This could lead to more nuanced policy wording and potentially higher premiums for certain types of deals as the market recalibrates to this new understanding of risk.
Navigating the Horizon Evolving Risks and Future Market Dynamics
Looking ahead, the insights from this market analysis are poised to accelerate an evolution already underway in the TRI sector. The future of transactional risk management will be increasingly data-driven, with insurers leveraging analytics to move beyond traditional metrics like deal size and instead focus on more granular risk indicators. We can expect to see greater scrutiny of financial statements, commercial contracts, and compliance records during the underwriting process, particularly for deals under the $250 million threshold. Technological advancements in AI and machine learning may be deployed to better identify hidden risks and predict the likelihood of future claims. This shift will ultimately foster a more sophisticated and sustainable market, though it may also create new complexities for dealmakers seeking coverage.
Actionable Insights Mitigating Risk in the New M&A Environment
The report’s findings offer clear, actionable takeaways for all stakeholders in the M&A ecosystem. For buyers and their brokers, the key is to recognize that a smaller deal does not mean less diligence is required; robust pre-acquisition due diligence remains the best defense against post-closing surprises. For sellers, providing transparent and well-organized documentation is crucial for securing favorable TRI terms. For underwriters, the mandate is to overhaul risk assessment models, moving away from an over-reliance on enterprise value and incorporating a more holistic view of potential exposures. This includes pricing for the long tail of liability and reconsidering the wisdom of offering zero-retention policies on deals that have proven to be a source of major losses.
The New Imperative Data Driven Diligence in M&A
In conclusion, the recent data served as a critical wake-up call for the transaction risk insurance market. By demonstrating that small deals could harbor the biggest risks and that claims were emerging later than ever before, it dismantled outdated assumptions and highlighted the urgent need for a more nuanced, data-informed approach to underwriting. As the M&A landscape continued to grow in complexity, the ability to accurately assess and price risk became the defining feature of a resilient and effective TRI market. The new imperative for insurers, brokers, and dealmakers alike was to embrace this data, adapt their strategies, and ensure that diligence—not deal size—became the ultimate measure of risk.
