What implications may SVB collapse have on insurtech?
Technology is an exciting and challenging industry, with nearly 600,000 tech companies in the U.S. Expectedly, many tech professionals fall in love with the space, eventually launching their own tech companies. And who’s to blame them? Experts expect the U.S. tech industry to grow by 5.4% this year, which is unsurprising as it currently accounts for roughly 35% of the total world market.
However, headlines, like the collapse of Silicon Valley Bank (SVB), have sent tremors throughout the tech landscape. As a result of the banking collapse, we can see more clearly the vulnerable areas where tech companies could sharpen their risk management approach. This post covers a few of these exposures and viable solutions to combat new threats.
Understanding the banking collapse
SVB surprised us when it prompted a classic bank run in mid-March. It helps to understand the backstory and how we got to this point of navigating the most significant banking failure since 2008.
Briefly, SVB is nestled in the San Francisco Bay Area, a prominent tech hub, and formerly served thousands of tech companies. The short story is that SVB didn’t follow a foundational rule of finance: diversification. As a result, rumors circulated that the bank couldn’t pay its depositors — and it couldn’t. After being placed under FDIC control, other banks quickly moved to become the next go-to ‘niche bank.’ First Citizens Bank eventually purchased SVB after a two-week auction process.
We watched the saga unfold, with tech leaders struggling to make payroll and tapping into their safety nets of insurance. Undoubtedly, it anchored many to the idea of better risk management. But what does the banking collapse genuinely mean regarding insurance implications for tech companies? It’s worth looking at from a few angles.
Making payroll might create challenges
As the niche bank for the tech industry, many firms kept the lion’s share of cash at SVB. After the collapse, many leaders were genuinely worried about making payroll in the following weeks. To make matters worse, and you can probably relate, very few of us knew what was happening behind the scenes.
If failing to pay employees wasn’t enough, the thought of massive layoffs was now a reality, thanks to the banking collapse. This snowball outcome could have quickly materialized, triggering many lawsuits and insurance claims.
For example, employment practices liability (EPL) insurance protects companies against employment-related allegations, from breach of contract to wrongful termination to wage disputes. Employees who failed to receive their paycheck or were laid off due to payroll cash being tied up in SVB could sue. EPL insurance would respond to these claims; however, the influx of cases might cause another snowball effect of increased premiums, restricted coverage terms, and decreased capacity.
We imagine tech leaders likely visited and revisited their employee handbook to double-check employment-related processes. And the next task was probably initiating a candid conversation with their insurance broker to get the skinny on what would be covered if worse-case scenarios played out — two items now priorities for tech companies.
Directors and officers could face lawsuits
Here’s the thing; SVB Financial Group (SVB’s parent company) is a publicly traded bank, but many of the tech firms it served via SVB were private companies. Public tech companies, like Apple or Microsoft, face much more scrutiny on the open market, leaving them vulnerable to management liability lawsuits. However, it’s worth noting that their private counterparts, like Airtable or Discord, also face unique challenges and aren’t automatically exempt from similar lawsuits.
By now, most of us know that some of SVB’s top executives were sued by shareholders for fraud, accusing them of concealing how rising interest rates would make SVB susceptible to a bank run. This all-to-familiar scenario typically triggers directors and officers (D&O) insurance. But let’s look at D&O insurance implications for the tech companies that relied on SVB.
First, the FDIC extinguished most of the fires from tech companies’ concerns about making payroll. However, it’s not unheard of for private tech companies to couple EPL insurance with D&O for secure, 360-degree protection as D&O responds to claims of mismanagement (among other things).
Tech leaders are reimagining their banking strategy, avoiding putting all their eggs in one basket. We’ve heard of many leaders scattering their money around, opening multiple accounts at various institutions to avoid another SVB-like nightmare. But what does this mean for the insurance industry now that the trust in financial institutions has all but faded?
Although farfetched, the chance for mismanagement accusations isn’t obsolete. And best practices are being reassessed.
New insurance subjectivities will surface
The hard truth is that tech companies that used to bank with SVB face new and unexpected exposures. These threats are more than a mere ‘by association’ scenario. Instead, leaders who can’t access their capital due to the banking collapse have their hands tied. And the waiting game might be unkind.
We’ve heard of a few insurers peppering new questions into their application process. And we’ll likely see more of the same. For example, tech companies searching for an insurance quote will likely be asked on the application if they did business with SVB.
We expect insurers to add subjectivities for exposure to SVB and quote expiration dates. Subjectivities are how insurers guarantee your business upholds a particular standard. The banking collapse caused headaches for tech companies; consequently, the insurance industry must respond to these new threats.
Life (and business) is funny that way; when you think you have it figured out, a curveball comes at you. Unfortunately, SVB was the curveball for tech companies. Yet, the experience has enlightened the tech industry about where we can sharpen our risk management approach, vetting our ecosystem more stringently and ensuring a wide enough safety net for the rainy days.
