How shrinking IPO activity impacts the D&O insurance market
The lack of IPO activity will impact insurers wanting to write this business and result in a more competitive environment.
In the wake of a global pandemic, valuations bloated, and venture capital (VC) investments spiked at around $643 billion. Additionally, the U.S. welcomed more than 580 unicorns and rolled out more than 1,030 IPOs, though half were SPACs. We haven’t even topped 200 IPOs for 2022, a stark contrast to the “miracle year” before. With the sour taste of a hard D&O insurance market lingering, we can only wonder how shrinking IPO activity impacts this space. Let’s talk about these dynamics and what to expect in the future.
Making sense of changing market trends
The IPO market quickly went from a boom to a bust, with investors being more risk-averse than the previous year. High inflation and increasing interest rates have scared some investor’s heads in the sand, motivating them to focus on safer alternatives with more potential for profit.
It only makes sense for investors to think twice about speculative investments; most people’s appetite for IPOs fades quickly in a market downturn. Unsurprisingly, where 2021 welcomed overvalued startups, 2022 was themed with severe valuation corrections. Although we expect 2023 to usher in more IPOs than the year prior, the dynamics unfolding now will help make this trend happen.
For example, Greek yogurt maker Chobani recently pulled IPO plans due to “current market conditions,” according to Reuters. Chobani leaders originally had November IPO plans — but those dreams, in general, are currently pending. Reddit and ServiceTitan have also hit the brakes.
Additionally, private fundraising levels have dwindled nationwide, with late-stage companies taking the hardest hit. Although there’s plenty of VC dry powder, market experts warn leaders not to pin their hopes on it. However, these factors set the stage for growth investors with shifting goals to indirectly impact other areas of the industry, namely the D&O insurance market.
IPO activity & the D&O insurance market
The fewer companies that ring the opening day bell, the fewer insurers must write public D&O insurance policies. It’s simple math. However, while the numbers add up, there’s a unique twist happening at the moment. And these shifts signal a softening of the D&O insurance market.
The most significant factor in this shift is increased capacity, particularly from new insurtech entrants to the D&O insurer market targeting private companies. We’ve seen insuretechs enter the cyber insurance market over the past several years, such as Coalition and At-Bay. Now, we see this trend overflowing into the management liability space.
Historically, traditional insurers and legacy players have shied away from writing smaller, nontraditional business models. But we’ve seen these insurers back some insurtechs like Coalition to establish a market presence in the space. Best of all, increased capacity to insureds also equals more competitive pricing.
My colleague, Matt McKenna from Scale Underwriting, explained: “We see this shift at Scale, with the addition of even more ‘traditional’ carriers competing on risks that were previously either too small or too emerging for them to invest their time and resources. I suspect that what we’re seeing in the private D&O space is a lagging indicator of what’s happening in the public space, namely that these carriers are looking elsewhere for returns.”
In summary, the lack of IPO activity will impact insurers wanting to write this business and force them to become more competitive. We have also seen insurers willing to get more creative on policy structure for SPAC IPOs and DeSPACs.
Here’s the thing; IPOs are great for D&O insurers that rely on large runoff and go-forward premiums for income. So when IPO activity dies down, and more companies stay put for longer, these players must look elsewhere for returns — another example of the “increased capacity” factor contributing to a wide softening of the D&O market.
Navigating other issues influencing the D&O market
We can only talk about how IPO activity impacts the D&O insurance market if we address other issues that carry weight. For example, securities class action filings have been on a downtrend since their peak in 2017-2019. Market pricing is now catching up to this trend.
Environmental, social, and governance (ESG) and anti-ESG remain hot-button issues that insurers continue to face. Unfortunately, while ESG is often top of mind for underwriters, it’s challenging to determine the likelihood of a company experiencing ESG claims.
As mentioned, significant stock drops for public companies like Meta or Amazon could result in layoffs. In turn, we might see an uptick in employment practices liability litigation, which could snowball into social movements similar to #MeToo or Fight for $15. Unsurprisingly, these movements often become D&O issues, thus impacting the D&O insurance market.
Additionally, a recession would have wide-ranging effects on insureds, many of which are drivers of management liability claims. Plus, increased regulatory enforcement driven by greater investment in agencies like the DoJ and SEC. The DoJ’s Antitrust division is a prime example.
Lastly, the above factors impact how and when companies launch IPO planning, not to mention the D&O insurance market. Although they seem like outlier influences, each element affects the big picture. The assortment of variables may cloud the future, but we have several expectations for the new year.
What to expect from the D&O market in the future
As the D&O insurance market reacts to the space it’s protecting, we expect it to mature, from novel products to more creative underwriting. Shrinking IPO activity is undoubtedly a factor impacting the D&O insurance market directly, and other factors woven throughout the private and public space also influence it.
We’ve seen long-awaited pricing reductions throughout 2022 and anticipate relatively flat pricing year-over-year after the first “soft market” renewal. D&O underwriters face the interesting challenge of competing with more capacity for business that is getting riskier as time passes. As always, companies must balance risk and opportunity savvily, from launching a funding round to filing for an IPO.
Finally, with the current economic state, only some companies are going public via SPAC or the traditional IPO route. As a result, insurers are forced to be more competitive in their offering to write this new business. Renewal pricing for newly public companies is decreasing significantly from both a pricing and retention perspective. We have high hopes for the new year and expect the D&O insurance market to provide more relief than in previous years.
Kyle Jeziorski is the market-facing leader at Founder Shield, with eight years invested in the boutique broker and more than a decade in the insurance industry. Before Founder Shield, Kyle worked at Marsh on the FINPRO team focusing on management liability in the large private and public spaces. A graduate of Saint Joseph’s University’s Risk Management and Insurance Program, Kyle has focused his entire career helping clients to navigate through an ever-changing risk environment.
Opinions expressed here are the author’s own.
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