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Associate Director Camila Carvalho examines the growth of Transactional Risk Insurance in Latin America

Associate Director Camila Carvalho explores the growing popularity of Transactional Risk Insurance in Latin America, and discusses how such products can allow dealmakers to mitigate risks and maximise potential rewards, in Insurance Day.

Camila’s article was published in Insurance Day, 12 September 2024, and can be found here.

Cross-border transactions across Latin America have grown in volume, value and complexity in recent years. This has prompted dealmakers active in the region to make ever greater use of Transactional Risk insurance, to better manage the associated risks and uncertainties and provide peace of mind for deal makers during often turbulent periods.

The rapidly evolving legal and regulatory frameworks across Latin American jurisdictions have also increased the need for protection against unforeseen liabilities, as legal risks multiply and evolve, often amid wider political and economic flux. This confluence of factors means that Transactional Risk insurance is increasingly becoming seen as an attractive option by dealmakers across the region.

As a greater awareness and understanding of the benefits of such insurance products grows amongst the Latin American market, demand for Transactional Risk insurance is becoming established with both major international insurers and smaller boutique firms establishing their position in this emerging market and becoming more confident to insure a variety of risks in Latin America.

Of course, mergers and acquisitions are uncertain at the best of times. In Europe or North America too, deals can unravel rapidly as economic conditions change, or a snap election throws up a new government which introduces new tax policies or regulations that might alter the business case for a transaction overnight.

In the wake of the coronavirus pandemic and the 2022 outbreak of war between Russia and Ukraine, businesses are nowadays keenly aware just how quickly the world can change around them. Indeed, such geopolitical factors have helped drive investor interest in Latin America, as Europe rapidly economically decoupled from Russia after 2022, and future US-China economic relations remain uncertain. Latin America is seen as a key, “high risk, high reward”, area to invest in, and an attractive region to seek out compelling M&A deals. Of course, savvy investors want to minimise risk, while maximising the potential rewards.

The use of Transactional Risk insurance for corporates and private equity funds engaging in complex cross-border deals is therefore becoming seen as an essential risk-mitigation strategy internationally and dealmakers and their advisors involved in deals across Latin America are increasingly embracing such insurance solutions as a matter of course. There has been an increase not only in the use of Warranty & Indemnity (W&I) insurance, but also in other areas such as Specific Tax and Contingent Risks insurance.

Latin America is a politically and economically diverse region. Its economies range from more the well-developed to the less well-developed, and everything in between. While some more established business locations like Chile, Brazil, Mexico and Colombia offer greater economic stability and a well stablished and sophisticated M&A community, investors may seek potentially lucrative opportunities in states with greater political instability, or in smaller, less developed economies. Ongoing economic volatility and political uncertainty in several Latin American countries has helped prompt businesses to seek insurance solutions to safeguard their transactions against potential disruption and risk.

Argentina provides one example of just how fast things can change in some Latin American countries. In the wake of his election earlier this year President Milei said, “The changes our country needs are drastic,” and that “There is no room for gradualism.” He duly devalued the Argentinian peso by 50%, and slashed government subsidies. Other reforms include tax reforms, and a lucrative incentive package for foreign firms investing US$200 million or more. Of course a key risk for investors doing investing in Argentina would be that a new government sweeps away such incentives and raises tax. Also, Brazil has recently announced a general tax reform, which will contribute to the stability of the country from a tax perspective, and consequently attract more investors.

In addition to W&I insurance, Tax Insurance has also become associated with M&A transactions, as it provides important protection against identified tax risks of the target entity that can be an issue and even a deal breaker on the transaction. Recent market trends have shown a shift towards tax insurance being used in a broader range of scenarios. Underwriters and brokers are supporting such diversification. Such policies could help encourage M&A and foreign direct investment in Latin America, while supporting wider business activity within the region, by mitigating the very risks that have so often stymied business activity in the past.

Such insurance can also be deployed outside an M&A scenario, for example during group restructurings, or when repatriating profits from overseas, or liquidating funds. As such activities increase in Latin America, it is inevitable that the market for insurance to help secure such transactions will also grow.

The maturing and growing Latin American M&A market has made Transactional Risk insurance an accessible and appealing tool for dealmakers seeking to navigate market volatility and protect against unforeseen risks.

Yet, the increasing adoption of Transactional Risk insurance has also, in turn, helped to support M&A activity in the region. As major international underwriters compete for market share in Latin America, we can expect such positive trends to continue.