Where D&O cover has soared by five times

Where D&O cover has soared by five times | Insurance Business America

Where D&O cover has soared by five times

A booming market may present opportunities for insurance businesses, but one growing D&O insurance line has some companies wondering if they have bitten off more than they can chew.

Special purpose acquisition companies (SPAC) have grown in popularity in recent times, but their meteoric rise appears to be overwhelming the small group of insurers who can serve them.

SPACs are companies specially established in order to raise funds through an initial public offering; the funds are then used to buy a company that is yet to go through the IPO process itself. The popularity of using SPACs to acquire other companies has grown to such a degree that they raised almost $26 billion in January 2021 – nearly double the amount they made in all of 2019, prior to the SPAC boom in 2020.

Marsh & McLennan insurance broker Machua Millett explained to Pittsburgh Post-Gazette that, prior to the SPAC boom in 2020, the number of insurers writing D&O for SPACs was relatively small – in part due to how policies for SPACs were inherently different from regular D&O. While D&O policies are renewed annually, SPACs need policies with two-year terms, since they have a limit of two years to find a takeover target.

By the end of January, several insurers were already second-guessing whether they had written enough coverage for the first quarter, commented CAC Specialty SVP of financial lines Brian Hood.

As more SPACs emerged, so did their need for D&O insurance. With so many blank-check company listings, insurers have resorted to raising their rates to limit their exposure to a burgeoning market.

Aon national D&O practice leader Kristin Kraeger told Pittsburgh Post-Gazette that last June, D&O insurance premiums cost on average about $20,000 per $1 million. By December, those premiums quintupled to $100,000.

“Those SPACs are looking at an all-in cost number anywhere from $1.5 million to maybe even as high as $2.5 million,” Kraeger said.

Some insurers, like AIG, carefully take into consideration an SPAC’s management team, its track record, and its process to select an acquisition target, before they offer coverage.

“What we underwrite to, from an SPAC perspective, is first the quality and the track record of the SPAC sponsor and the management team,” AIG head of management liability for national accounts Nora McGee told Pittsburgh Post-Gazette. “Then we’ll evaluate the industry they’re targeting.”

But despite these measures, SPACs have found creative ways around these restrictions – such as buying policies with lower limits, or with only a component of traditional D&O coverage, Millett said.

In the end, the SPAC market will need more capacity to normalize pricing, said Hood.