Recent market signals have deal-makers optimistic that there will be an upswing in mergers and acquisitions activity this year. In turn, the market for representations and warranties insurance, also known as warranty & indemnity insurance outside of North America, is likely to intensify. 

Reps and warranties insurance, which originated in the U.S., has become increasingly prevalent across the globe. Specifically, practitioners in the United States, Canada, Australia and New Zealand have adopted the product as a mainstay in their respective M&A markets. Market data in these regions supports the conclusion that reps and warranties insurance is becoming the predominant source of recovery for transaction-related risk. According to a 2023 survey of North American legal practitioners conducted by Bloomberg Law, an average of 42% of M&A deals worked on by the survey respondents in the prior year involved a party covered by a reps and warranties insurance policy. In addition to the increased use of reps and warranties insurance in the M&A sector, the coverage has shown a remarkable degree of resilience in recent years, with various insurers adjusting their policies, pricing and exclusions to better align with their business partners and remain competitive in an ever-changing economic market, all while continuing to pay out sizable claims to policyholders. 

In recent years, the coverage has also gained significant traction in emerging markets in Asia, Latin America and Africa. While there are still certain obstacles that may hinder the widespread adoption of reps and warranties insurance in these markets, efforts to address these challenges and increased market penetration seem poised to unlock the benefits of the coverage on a larger scale. 

Obstacles

The coverage is based on the representations and warranties structure common to jurisdictions such as the U.S., United Kingdom, Canada, Australia and New Zealand. The product is structured to reflect these jurisdictions’ practices and styles in allocating risks related to the target business between the deal parties through statements and disclosures in the purchase agreement. As the product gains traction in emerging markets, insurers appear to be investing substantial resources to expand their coverage into these markets and adapt it to how purchase agreements operate in a wider variety of jurisdictions. For example, insurers including Mosaic Insurance Holdings Ltd., RiskPoint Underwriting Inc., and Volante Global opened Singapore offices in recent years, with a view to expanding their transactional insurance coverage into Asia. 

There are certain obstacles, though, that may hinder the product’s widespread adoption in these emerging markets: 

• Compared with mature markets such as the U.S., U.K. and Australia, reps and warranties insurance remains a relatively new concept in emerging markets. The deal participants in these markets have limited exposure to the product and its benefits in M&A transactions and have little claims data available to demonstrate the financial benefits of purchasing such a policy. 
• Because the reps and warranties insurance industry in the emerging markets is still developing, deal participants sometimes do not have experience with complex insurance products and may prefer a more conservative and better understood risk management tool such as indemnities or escrows. 
• Despite the product’s increasing popularity, the available reps and warranties underwriting capacity in emerging markets remains relatively limited, and there is not sufficient competition among insurers to drive down the price of the product. 
• In some regions, M&A activity is skewed toward certain industry sectors, such as energy and infrastructure, that the reps and warranties insurance industry traditionally avoids due to the inherent complexities, risks and uncertainties associated with these sectors. 

As more insurers expand their coverage into emerging markets and gain familiarity with a wider range of industry sectors, potential buyers of the product may see more competition and better pricing. With increased market penetration, insurers and brokers will have better understanding of the needs and characteristics of the emerging markets. The knowledge and training brought by insurers and brokers into the emerging markets can help raise the awareness about the product and increase the use of the product in these markets. 

Growth expectations

Respondents to the survey used in developing the Norton Rose Fulbright 2024 M&A Report see a strong likelihood of broad adoption of reps and warranties insurance in their M&A transactions this year. Approximately 61% of the respondents expect to see the use of the coverage either “increase somewhat” or “increase significantly” around the world. As discussed above, there still exists a wide variety of emerging markets where the coverage has not had the same level of growth and exposure as mature markets. However, data from the report suggests that certain emerging markets, such as East Asia, South Asia, Southeast Asia and Africa, are poised for the greatest growth in 2024, with the Middle East and Latin America also expected to see notable increases in usage this year.

In addition to the projected upward growth of reps and warranties coverage into new markets, certain industry sectors are expected to see an increased use of the coverage. According to the NRF report, in which respondents were asked to pick the top three industries of expected increase of reps and warranties insurance usage, energy and infrastructure stands out, with 50% of respondents selecting it as their top choice, followed by the technology sector, with 47% of respondents placing it among the top three. There also appears to be significant optimism regarding increased use in life sciences/health care, natural resources and financial institutions, cited by 37%, 36% and 30% of respondents, respectively. Overall, despite the obstacles presented, respondents see the reps and warranties industry as primed for continued growth in the coming years.

Henry Stark is a partner at Norton Rose Fulbright US LLP in Dallas. He can be reached at henry.stark@nortonrosefulbright.com. Jennifer Xiaodan Zhang is a Dallas-based associate at the law firm. She can be reached at Jennifer.zhang@nortonrosefulbright.com