Exclusive: Startups are seeking more protection amid mounting pressure
Insurance News
Silicon Valley Bank’s (SVB) collapse in March caused havoc for the US banking sector and tech industry. New data reveals that startups are seeking stronger protection, specifically for company executives, amid the fallout.
The volume of quote limit searches for directors and officers (D&O) insurance with $3 million limits more than doubled the week after the banking turmoil began, according to commercial insurance platform Embroker.
The $3 million limit is considered the traditional mid-range point for protection for the personal assets of company leadership.
The findings show venture capital-backed startups are steeling themselves amid heightened uncertainty, according to Ben Jennings, chief revenue officer at Embroker.
“Founders are feeling the pressure,” said Jennings. “Not only are they worried about capital insecurity, but they also have to consider how the decisions and actions of others can impact their business.”
“Those lucky enough to not be directly impacted by the SVB collapse see what’s happening to their peers, and they’re shopping for higher quotes in hopes it prepares them for a similar situation.”
How did the Silicon Valley Bank (SVB) crash impact startups’ insurance demands?
Embroker, a San Francisco-headquartered insurtech, tracks insurance shopping habits by startups on a quarterly basis to uncover trends in the sector. It offers D&O, employment practices liability, cyber, and professional liability insurance on its platform.
According to Emboker’s Q1 2023 survey, quote searches for higher coverage limits D&O skyrocketed 62% in the week of March 12, 10 days after SVB’s closure.
But as the initial shock wore off, shoppers’ frugality returned, causing a sharp increase in quotes for $1 million limits.
‘Era of the frugal startup founder’
The shopping trends indicate that startup founders are highly aware of the volatility in the economy. However, higher search volume doesn’t necessarily translate to purchases; inflation has also made insurance consumers more price conscious.
“There’s typically a consideration period between shopping for a quote and actually making the purchase,” said Jennings.
“From that data we have noticed that as economic conditions tightened, many shoppers became more price conscious. Toward the end of last year, even larger companies were opting for lower limits.
“But when risks become tangible, like with the collapse of SVB, suddenly founders look at their risk transfer strategy and start looking for more coverage.”
Additionally, there were significantly more searches for lower-coverage limits in the wake of Silicon Valley layoffs in February and as economists expressed a grim prognosis for 2023.
The high concentration of lower-value quotes in Q1 indicates capital insecurity and ushers in what Embroker calls “the era of the frugal founder.”
“The data overall shows that anxiety-driven insurance shopping and social or economic volatility go hand-in-hand,” said Jennings.
“Founders understand there is far more they cannot control than what they can, and because of that, they turn to insurance for protection.”
With tighter overall funding environment this will increase pressure on many tech startups to cut costs with a brighter spotlight on various credit lines for unproven tech start- ups with high cash burn post SVB collapse. Ripple impacts in Valley/tech will be key looking ahead
— Dan Ives (@DivesTech) March 13, 2023
How can brokers guide startups through uncertainty?
Amid banking closures, mass layoffs, and a potential recession, businesses are feeling the squeeze. Jennings advised brokers to be ready to adapt their strategies and work with clients to identify exposures.
“By staying tuned into the surrounding business environment, brokers can guide startup founders to adjust their insurance policies based on what may or may not happen next in the market,” he told Insurance Business.
“Insurance isn’t static — founders’ needs and vulnerabilities are constantly changing whether it’s because of shifting internal or external risks. They need insurance policies that they can ‘right size’ for their business over time, and it’s the broker’s responsibility to get founders that new coverage.”
Do you agree with Embroker’s assessment of the mood in the startup sector? Let us know your thoughts.
