Founders sought out more protection from fiscal fallout in Q2 with higher D&O, Tech E&O quotes

Embroker, the digital platform making it radically simple to get business insurance, released new data revealing founders are still anxious about tight fiscal conditions in Q2 2023. The insights come from the company’s quarterly Risk & Response Index, in which Embroker analyzes real-time business insurance shopping behaviors to uncover risk trends and sentiments within the startup sector.

The data reveals that when shopping for coverage, founders are seeking higher limits on Directors and Officers (D&O) insurance. The number of companies looking for $3 million coverage limits increased from 12% in April to 21% in June. As companies grow or if they anticipate a riskier business environment, they will opt for higher limits – sometimes up to $5 million – to minimize losses or liability.

“Founders are continuing to feel the external and internal pressures on their business, evidenced by the types of insurance policies they’re exploring,” said Ben Jennings, chief revenue officer at Embroker. “Still recovering from an unsettling first quarter, startup founders are looking for the right insurance policies to cover them from a broader range of potential risks. They’re hoping for the best, but preparing for the worst.”

Here We Go Again: First Republic Bank

On April 24th, First Republic Bank delivered a dreadful Q1 earnings report, leading to a major spike (24.6%) in overall shopped insurance quotes from founders. Searches for leaner coverage ebbed, though: that week in April showed the single largest drop in quotes for the lowest limits of Employment Practices Liability Insurance (EPLI), just beating out the week Silicon Valley Bank (SVB) collapsed. Searches dropped from 95% the week of April 17th, to just 63% (SVB was 89% to 67%) the week of April 24th.

Founders flocked to higher quote limits, similar to right after the SVB collapse. A majority of founders (67%) had looked at policies with the lowest limit ($1 million) just one week prior — but that dropped to just 47% when First Republic began showing uncertainty. Similarly, D&O quote searches looking at the lowest limit decreased from 70% to 46% week-over-week.

After the frenzy of the SVB collapse in Q1, searches for D&O quotes with $2 million limits increased 89% month-over-month from March to April. The overall volume of quotes requested were down between March and April but showed a 15% increase compared to February. While the acute crisis of the SVB closure has since resolved, founders are now reassessing the risks involved in their startups — and taking steps to minimize them.

By May 1, First Republic Bank closed its doors after the Federal Deposit Insurance Corporation (FDIC) announced the sale of most of its deposits and assets to JPMorgan Chase. Having recently seen this with SVB, many founders had already made the necessary adjustments, including having previously upped their coverage. However, those still unprepared from SVB led a run on insurance the week of May 14. However, founders were inching their way back toward the lower limits; Tech E&O searches for the $1 million limit increased from 53% to 66%, and the lowest limit of D&O searches increased from 52% to 72%.

April saw drops in both the $1 million and $2 million limit quotes with a 30% increase in quotes for $5 million limits. While a majority of founders aren’t fixating on cybersecurity, 34% of investors ranked it as a top priority for 2023. The rising pressure from investors and board members to prioritize cybersecurity may be driving founders to consider higher limits for Tech E&O and Cyber.

“In a down economy, business leaders may be forced to make tough decisions and this can lead to unintended consequences when it comes to cyber crime. Shifting priorities and budget cuts may leave a business more vulnerable as security becomes less of a focus, and this can present new opportunities for criminals,” said David Derigiotis, chief insurance officer at Embroker.

The D&O and Tech E&O Rollercoaster

There was a 3% increase in quotes for startup insurance overall in May, seen across several product lines — with Tech E&O and D&O rising 7% and 16%, respectively. While June was on par with May in terms of overall quotes, there was an uptick in the number of D&O quotes throughout the month; up 20% over April and 3% over May.

The week of June 18th saw a 12% decrease in quotes – the same week the media and the world was captivated by the missing Titan submersible. What’s notable, however, is that the week of June 19th in 2022 saw a 24% drop from the previous week, so perhaps people are simply enjoying the summer of that week and not thinking about insurance. As they’re watching a company experience an insurance nightmare, it’s possible founders were fixated on the worst-case scenario of others instead of thinking about the reasonable risks they could experience themselves.

Towards the end of Q2, businesses were increasingly looking at policies with higher limits. D&O policy shoppers favored $3 million quotes (21%), compared to 18% in May and just 12% in April. Tech E&O policy shoppers looked at both $3 million and $5 million quotes more often than in previous months (20% chose $3 million in June compared to 15% in May, and 16% chose $5 million compared to 12% in May).

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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