Nearing the end of Q1, founders seek more protection, show economic anxiety in the startup sector

New insurance industry insights show that following the closure of Silicon Valley Bank (SVB), VC-backed startups were increasingly looking for stronger protection, specifically liability policies covering company executives. Embroker, the digital platform making it radically simple to get business insurance, found that 15% of shoppers looked at doubling and sometimes tripling their Directors and Officers (D&O) insurance limits week-over-week, up from 7% the week before the SVB collapse. This data is one of many findings in the company’s Q1 2023 edition of Embroker’s quarterly Risk & Response summary, revealing that startups are anxiously steeling themselves in the event that their own assets are compromised.

By analyzing real-time business insurance shopping behaviors, Embroker uncovers risk trends and sentiments within the startup sector. A comparison of Q4 2022 and Q1 2023 shows fear, uncertainty and doubt among startups as a potential recession, mass layoffs, bank closures and political tensions threaten their health. Now, as founders search for the insurance they need to mitigate forthcoming risks, they must consider every possible outcome in the face of challenge.

SVB Leaves Founders Wondering: Could It Happen to Me?

The forced closure of SVB on March 5, 2023, had an immediate impact on how founders were shopping for insurance. Searches for $3 million limit D&O quotes more than doubled from 7% on March 5 to 15% only four days later. In the week of March 12, just 10 days after the closure, quote searches skyrocketed 62%. Initially, these searches were for high-coverage amounts, causing the performance of $1 million quotes to decline; D&O quotes dropped by 37%, Employment Practices Liability insurance (EPLI) quotes dropped over 25%, and Tech Errors and Omissions (Tech E&O) and Cyber quotes dropped 20%.

The sudden focus on high coverage quotes signals that startups were reacting to the closure without considering the costs associated with higher coverage limits. As the initial shock of the closure steadied, shoppers’ frugality returned, causing a sharp increase in quotes for $1 million limits: 78% increase in D&O, 42% increase in EPLI, and 8% increase in Tech E&O.

“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

In Q4 2022, average quotes were over 6 (6.4) per account; as recession suspicions increased, founders weighed their options en masse. Searching for coverage now requires even 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, a wide sample still had not.

Prior to the SVB closure, startups displayed little worry about their board or investors. The professional sector had not yet weighed every possibility of a dubious financial market. D&O limits were largely consistent at the close of 2022: 60% looking for a $1 million limit, 12% looking for a $2 million limit, and 19% looking for a $3 million limit.

In early Q1, shopping trends hint at founders shopping by price tag only, as many prepared for tighter budgets. Quotes swayed on the lower end: in January, 67% of founders searched for $1 million limit quotes. This trend continued through March with 81% of searched D&O quotes being for $1 million limits, leaving only 11% of quotes for the $3 million limit.

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

Drastic changes often signal a market in fear of — but not yet experiencing — capital insecurity. 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, startup founders everywhere reallocated funds while larger enterprises preserved capital by decreasing payroll.

The White House Wages War on Cyber Crime

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

These searches were not just for simple coverage, either. Quotes for the lowest level ($1 million) dropped 13% 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, 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, founders still largely crowd in the extremes, with a trend from Q4 carrying through Q1; 55% of shopped Tech E&O quotes were for the $1 million limit while 15% were on the higher end at the $5 million limit.

For more information on these trends, visit https://www.embroker.com/insurance-index/.

About Embroker

Embroker is transforming commercial insurance by making it radically simple for businesses to get the right insurance at the best price. Embroker focuses on industry-specific coverage for the most complex and inefficient lines of insurance, such as Directors and Officers, Employment Practices Liability, Cyber, and Professional Liability. Embroker uses predictive modeling powered by proprietary technology to fully automate underwriting and make the buying process simple, fast, and more affordable. Through Embroker Access, Embroker provides partner agencies and wholesalers with the capability to offer all of Embroker’s industry-leading insurance products to their customers. Founded in 2015, Embroker is headquartered in San Francisco and has raised more than $140M in funding from leading Fintech and Insurtech investors.

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