Embroker: Business Insurance Shoppers Concerned With Startup Leadership Post-SVB

Following the closure of Silicon Valley Bank (SVB), VC-backed startups were increasingly looking for stronger protection in case their assets were compromised — specifically liability policies covering company executives, according to digital business insurance platform Embroker.

The company analyzed real-time business insurance shopping behaviors to uncover risk trends and concerns within the startup sector. New insurance industry insights from Embroker’s Q1 2023 edition of its quarterly Risk & Response summary revealed 15 percent of shoppers were interested in doubling and sometimes tripling their Directors and Officers (D&O) insurance limits week-over-week, up from 7 percent the week before the SVB collapse.

A comparison of Q4 2022 and Q1 2023 indicates fear, uncertainty and doubt among startups as a potential recession, mass layoffs, bank closures and political tensions threaten their health.

SVB Leaves Founders Wondering: Could It Happen to Me?

The forced closure of SVB on March 5, 2023, elicited an immediate response in founders’ business insurance shopping habits, according to Embroker. Searches for $3 million limit D&O quotes more than doubled from 7 percent on March 5 to 15 percent only four days later. During the week of March 12, 2023, just 10 days after the closure, quote searches skyrocketed 62 percent. At first, the searches were for high-coverage amounts, prompting the performance of $1 million quotes to decline; D&O quotes dropped by 37 percent, Employment Practices Liability insurance (EPLI) quotes dropped over 25 percent, and Tech Errors and Omissions (Tech E&O) and Cyber quotes dropped 20 percent.

The sudden focus on high-coverage quotes signaled that startups were reacting to the closure, without considering the costs associated with higher coverage limits, the digital insurance platform found. This was followed by a sharp increase in quotes for $1 million limits: 78 percent increase in D&O, 42 percent increase in EPLI and 8 percent increase in Tech E&O. The increase was the result of the market coming to grips with the closure and focusing once again on pricing, the report stated.

“Founders are risk takers. But the fallout of the SVB closure showed many what risk without protection can look like,” said Ben Jennings, chief revenue officer at Embroker. “Founders are feeling the pressure; 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 in the blink of an eye. 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.”

The Season of the Frugal Founder: Big Tech’s Spring Freeze

The summary found that in Q4 2022, average quotes were over 6 (6.4) per account; as recession concerns increased, founders weighed their options en masse. Requiring more foresight since 2020, founders have been forced to consider far more than the traditional risks. Entering 2023, average quotes settled at 5.6 — while some decision-makers had landed on the terms of their coverage, Embroker found that a vast number still had not.

Prior to the SVB closure, startups displayed little concern regarding their board or investors, with D&O limits largely consistent at the close of 2022: 60 percent looking for a $1 million limit, 12 percent looking for a $2 million limit, and 19 percent looking for a $3 million limit.

In early Q1, Embroker noted founders shopped by price tag only, in response to expected budget-tightening. Quotes swayed on the lower end: in January, 67 percent of founders searched for $1 million limit quotes. This trend continued through March with 81 percent of searched D&O quotes at $1 million limits, leaving only 11 percent of quotes for the $3 million limit, according to the summary report.

The biggest shift in quote limit preference occurred in mid-February. In the early weeks of Q1, trends established in Q4 2022 looked as though they would continue, but when economists expressed an even grimmer prognosis for 2023, a secondary wave of layoffs across Silicon Valley hit. On Feb. 12, 59 percent of quotes were for $1 million and 28 percent were for $3 million, the summary reported. This changed dramatically just one week later: 75 percent of shopped quotes were for $1 million, while quotes for $3 million dropped to just 7 percent.

Drastic changes often signal a market fearing capital insecurity. Embroker opined the high concentration of lower-value quotes in Q1 ushers in the era of the frugal founder. This trend of lower quotes was concurrent with the large volume of layoffs seen in the technology sector in February. As signs of a recession piqued, the report noted, startup founders everywhere reallocated funds while larger enterprises preserved capital by decreasing payroll.

The White House Wages War on Cyber Crime

On March 2, 2023, the White House released a momentous cybersecurity strategy. This triggered a trend among startups; searches for Tech E&O policies jumped 33 percent following the announcement, according to the report. This set the first record in 2023, bested only by the rush of shoppers after the SVB closure, noted the summary.

These searches were not just for simple coverage, either. Quotes for the lowest level ($1 million) dropped 13 percent as more shoppers opted for higher rates. Shoppers sought comfort in liability transfer, leading to a record number of quotes across all policies available through Embroker: EPL, Tech E&O, D&O and Fiduciary.

This change aside, analysis from the summary concluded that founders largely exist in two camps: those who trust their technology, and those who do not. While the week by week data shows a volatile Tech E&O market, according to Embroker, founders still largely crowd in the extremes, with a trend from Q4 carrying through Q1; 55 percent of shopped Tech E&O quotes were for the $1 million limit, while 15 percent were on the higher end at the $5 million limit.

Source: Embroker