After several years of softening D&O Insurance rates, we saw a gradual firming in the marketplace begin about two years ago. Many technology and life science companies experienced flat to 10% increases at renewal compared to similarly sized reductions of the past. This trend has largely continued except for IPO companies who have seen rates skyrocket in recent months. When compared with peers that have been public for at least 3 years, IPO premiums can be 15-40% higher with retentions of $1-2M for IPO’s expecting large market caps.
Statistically, an IPO company has a 3 times greater probability of experiencing securities litigation than a company that has been public for more than three years. What is surprising is that this information is not new, yet rates only just recently took off for IPO companies. What happened?
Carriers argue there is a confluence of factors driving up costs. In addition to higher probability rates, the severity of settlements tend to be higher due to the strict liability provisions of the Securities Act of 1933. Carriers have also become more sophisticated in managing and deploying their capital and are actively limiting their overall IPO exposure. As a result, companies like AIG who historically quoted primary for most IPOs, are now selectively offering primary and excess quotes, or choosing not to participate at all. With several carriers such as Ace, Axis, Old Republic and others employing similar strategies, there is less competition for the primary and first excess layers. This has resulted in higher premiums and retentions compared with the recent past.
With a more disciplined underwriting approach and having already insured a number of IPOs so far this year, carriers are feeling less motivated to quote new IPOs. To overcome these challenges, brokers need to be proactive in positioning their clients for coverage. Companies need to clarify their risk profile and directly address carrier concerns. ABD spends a fair amount of time soliciting carrier feedback prior to face to face meetings between our clients and the carriers in order to help clients craft presentations to directly address issues. Commonly, carriers are more focused on issues such as: (1) What is the Company’s competitive position? Will they be able to maintain it? (2) If the Company is not profitable, is there a clear path to profitability? (3) Is there a seasoned management team with public company experience? (4) What steps is the Company taking to mitigate risk in areas such as 10b(5)1 trading plans, staffing of finance functions, and Foreign Corrupt Practices Act controls? Much like the roadshow, the Company needs to know its audience to present a compelling case for underwriters.
There are a number of other ways to manage cost, ensure quality carriers on the program, and optimize the scope of coverage to protect directors and officers. In today’s environment, it just requires a much more strategic approach to get there. ABD is the D&O broker for a significant percentage of Silicon Valley IPOs. With creative analysis and pragmatic solutions, we will work hard to make your IPO a success. Let’s talk next steps.