Why founders prioritize D&O and EPLI during tumultuous economic times
Review the types of coverages founders seek during different stages of growth and economic conditions.
Founders will do anything to protect their business during difficult economic times, and a huge part of that is picking the right insurance policies that mitigate their biggest internal and external risks.
As chief revenue officer at Embroker, I talk to startup founders every day to understand the vital role that insurance can play in whether or not a business is successful. By looking through their lens, we as insurance providers can better understand the primary risks they face and create products that appropriately address their needs.
Embroker’s third annual Vertical Insurance Index: Startup Snapshot investigates founders’ purchasing behaviors beyond simply pricing data — with analysis on what policies and protections founders prioritized and why. This report provides transparency into the types and costs of coverage founders are choosing across different stages of growth and amid varying economic conditions.
Growing pains and how businesses treat them
In 2022, startups of all sizes experienced the ramifications of inflation, fewer funding opportunities and an unsteady economic landscape, forcing founders to take a hard look at what safeguards were truly critical for their businesses. Directors and officers (D&O) and employment practices liability insurance (EPLI) saw the greatest jump in premiums as founders prioritized protecting their leadership and businesses in a heightened risk environment due to factors like increased layoffs and executive turnover.
There’s no question that with more employees comes more risk and responsibility. Embroker’s data found that EPLI premiums rose by 182% for startups that grew their headcount from 10-30 to more than 30 employees. Startups with more than 30 employees also saw a big jump (62%) in EPLI premiums for 2022. As a startup grows, vectors for risk increase along with it. That being said, it’s critical for founders to protect themselves from alleged harassment, wrongful termination and discrimination suits. Though no one expects such allegations to hit their business, it’s important to be prepared.
For startups looking for funding, D&O insurance is likely a non-negotiable for potential investors. The higher the raise, the higher the premiums. In fact, our 2022 data found that D&O premiums increased by 147% for startups that grew from $5 million-$25 million to over $25 million in funding. But what drives that increase? As a startups grow, they typically add additional senior leadership to drive the business. This trend is highlighted by mid-size startups (those with a revenue of $1 million-$5 million), who saw the greatest increases in D&O premiums in 2022 — up by 50% from 2021. Outside of executive leadership change, this potentially indicates that the midmarket took a more substantial hit than analysts realized: Navigating a depressed funding landscape may have contributed to a greater sense of vulnerability for their executives.
Given inflation made business operations historically expensive, many startups also lowered their limits — the maximum amount of money an insurer will pay toward a covered claim — in 2022. Also noteworthy, startups reduced their average number of policies compared to prior years. At once, founders are looking to increase protections in vulnerable areas, while seemingly sacrificing them for what they consider to be low-risk. While the economics of these decisions might make sense in the short term, the unfortunate reality is that risks are increasing as the startup landscape becomes less predictable.
Founders are trying to do what is best for their business in these unsteady economic times, including getting the appropriate insurance coverage to mitigate their risk exposure. The right business insurance allows for peace of mind to focus on other things such as finding the right investors and talent or bringing their products successfully to market. Insurance providers must put on the founders’ lens to give customers the best tailored package to meet their specific needs. As businesses grow and change, their insurance policies must adapt with them.
Ben Jennings is chief revenue officer for Embroker, the leading insurance technology company that’s radically improving the way insurance works for businesses of all types and sizes. A seasoned global technology executive, Jennings brings more than 25 years of experience in sales, marketing, business development, customer success and alliances to the role. He is responsible for driving new client acquisition, installed base retention, customer success and overall go to market for the company.
Opinions expressed here are the author’s own.
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