Rising Claims Severity Challenges Sustainability of Low RWI Insurance Rates

While rates for Representations and Warranties Insurance (RWI) have remained at industry-all-time lows over the course of 2024, the incidence of claims has remained at similar levels compared to prior years. RWI claims are tied to breaches discovered after the transaction closing that were not uncovered during the buyer’s due diligence process. Most RWI claims are discovered within 24-48 months of policy inception.

Euclid Transactional, one of the leading carriers in the RWI insurance space and one of our largest trading partners, recently published its annual claims report. Based on their data, the majority of claims are driven by financial statement breaches (more than 50%), followed by customer and contract breaches (accounting for 18.5% of total claims). Euclid stated that they have paid more than $268M in losses from June 2023 – June 2024. While the number of claims has remained relatively steady, the severity of claims (i.e., the dollar value) has increased year over year. In the same period from June 2023 – June 2024, one-third of the total claims Euclid paid had a loss of $10M or more.

As such, it will be challenging for the current RWI rates to be sustainable in the coming years. With the dollar value of claims on the rise, we anticipate that insurance rates will eventually need to increase in order for insurers to maintain profitability.