D&O insurance market tightening, SPACs feel squeeze
More than 90% of U.S. public company D&O policyholders experienced rate increases during Q3.
D&O insurance is on a sharp upward trajectory, with pricing gains of 60% in the U.S. during the third quarter, according to Marsh, which reported a vast majority of U.S. public company D&O clients are seeing an increase.
The surge in D&O insurance has driven up overall financial and professional liability insurance, which increased 28% during the quarter, Marsh reported. Employment practices liability and cyber coverage, up 10% and 11%, respectively, also impacted the financial and professional liability market.
Pricing is being propelled by fast growth in the number and value of special purpose acquisition companies (SPACs), according to Yelena Dunaevsky, Esq., vice president of transactional insurance, M&A and IPO risk insurance solutions for Woodruff-Sawyer & Co. In October alone, 49 SPACs priced IPOs and raised more than $15 billion combined.
Too many SPACs, too few insurers
From August to October, SPAC D&O premiums increased by an average of $500,000 monthly, a trend Dunaevsky said will continue accelerating as more SPACs rollout IPOs.
“The number of SPACs is increasing tremendously compared to the past few years,” she explained. “I think insurers were not prepared coming into this market and didn’t foresee this situation developing.”
At the start of this year, only five to seven carriers would write these types of policies. That number has been whittled down to just two insurers.
“Originally, only a handful would write coverage, but now they are all reaching the end of their capacity,” she said. “There are only two carriers and hundreds of SPACs.”
In addition to limited capacity, the rapid evolution of the SPACs sector this year is leading to increased attention from federal agencies.
“They are attracting attention from the SEC, like any hot developing area experiencing this kind of rapid growth would,” she said, explaining media and lawyers are also taking note, in turn, attracting additional risk.
Among the biggest issues facing SPACs is they are simply not factoring in such large premium increases during early planning stages.
“It has gotten to the point where the tail is wagging the dog. Clients are in a situation where they haven’t allocated funds or anticipated these increases, so they don’t have the capital to spend on coverage,” she said. “Not only are a lot of SPACs sitting on the sidelines right now as they wait for financial markets to calm down but also because of this additional consideration of having to spend an extra $500,000 on insurance. They spend all that time putting together a complicated deal, working with banks and lawyers, and toward the end of the process, they get hit with this difficult news, and there is nothing they can do about it.”
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