The market for representations and warranty insurance in the mergers and acquisitions arena continues to grow as sellers seek to move buyers toward the coverage and away from traditional escrow arrangements.

Prices and terms have become more favorable as more insurers join the market, while increased merger and acquisition activity helps drive demand, experts say.

Worldwide M&A activity totaled $1.2 trillion during the first quarter of 2018, up 60% from the first quarter of 2017 and the strongest first quarter for global M&A since records began in 1980, according to a Thomson Reuters Corp. analysis.

The M&A market is “skyrocketing,” according to Stephanie Hyde, executive director of PE Risk, a New York-based risk and insurance consulting firm. She was previously a managing director at Morgan Stanley as an internal risk and insurance consultant to its private funds division.

Representations and warranties insurance is used in merger and acquisitions transactions in place of the traditional seller-indemnity model, which required that funds up to 10% of the enterprise value of the deal be placed in escrow to cover future buyer claims of misrepresentation by the seller.

Buyers use the coverage to strengthen their position in a deal, said one expert.

“What savvy buyers realized 10 to 15 years ago was that if they offered a seller less than a 10% equity cap and get insurance for that portion that they are no longer seeking to get from the seller, they theoretically can look more attractive to the seller if competing against other bidders,” said Matthew Heinz, managing director for transaction solutions with Aon P.L.C. in New York.

Sellers then decided to take the initiative, according to Mr. Heinz said.

“What sellers realized was that they could pitch insurance to potential buyers and just tell them right out of the gate, ‘I’m not going to indemnify you beyond a minimal amount, or not at all. All reps expire at closing. There will be no seller indemnity here. Go to the insurance market and get insurance,’” Mr. Heinz said.

Many sellers will hire a broker to prepare a proposal, which is submitted to potential buyers, according to Mr. Heinz said. “Here’s your road map. Here’s your pathway to insurance in lieu of traditional indemnity.”

Reps and warranties insurance is used largely in private mergers and acquisitions as opposed to public deals, Mr. Heinz said.

“Not exclusively but largely.” Corporate buyers are more hesitant to use reps and warranties, but when sellers started pitching insurance to buyers, corporate clients took notice, Mr. Heinz said.

“We’ve seen a huge uptick in corporate usage over the past two or three years,” he said.

Janet Oliver, San Diego-based counsel with MoginRubin L.L.P. who specializes in complex mergers, agreed, saying now more corporate buyers are using these policies and there seems to be a “drastic” increase in the use of these policies in the past two years, even though they have been around for a decade or more.

The market has enjoyed substantial growth, according to figures from sources.

In a report issued in May, Marsh L.L.C. said it placed 28% more transactional risk insurance policies globally in 2017 compared with 2016. Average limits placed also increased, driven by the size and number of transactions in which insurance is being used.

Mr. Heinz said when he joined Aon in 2010, there were perhaps only 20 to 25 reps and warranties placements annually.

“By 2013, we were doing 40 to 45 deals, and we did approximately 430 deals last year,” he said.

Richard Warren, Richmond, Virginiabased partner with Hunton Andrews Kurth L.L.P. who specializes in mergers and acquisitions, said there’s been an explosion in usage in the last four-to-five years, particularly in the private equity market.

The increased demand has helped attract more insurers, sources said.

Capacity has increased “meaningfully” in recent years with more than 25 insurers now offering transactional risk insurance globally, according to the Marsh report.

Five years ago, there were six insurers writing R&W in a market that struggled to provide $200 million to $250 million in capacity for any one deal, Mr. Heinz said. Now, “we’ve got well over $1 billion in capacity available in the marketplace.” Such increased capacity and competition has made the market more favorable for buyers, experts say.

A purchaser of a R&W policy today for the exact same risks that existed 18 months ago would get broader coverage from the same carrier and a lower retention at about half the cost, Ms. Hyde said.

But risk managers should review the coverage and should also be “getting accustomed to the form prior to the transaction and understand how it interacts” with their programs, she said.