Special-purpose acquisition companies (SPACs) are experiencing a boom in the United States investment arena. Also known as blank-check firms, SPACs have no commercial operations; rather, they’re formed solely to raise capital through an initial public offering (IPO) for the purpose of merging with a private company and taking it public.
In the first three months of 2021, SPACs in the US raised $87.9 billion, breaking 2020’s full-year record of $83.5 billion, according to data from SPAC Research. This meteoric rise has not gone unnoticed by the insurance industry, where the knee-jerk reaction has been one of rate and retention increases, as well as further limitations on capacity.
It’s not uncommon for insurers to react to “emerging” risks in this way, according to Jonathan Selby (pictured), general manager at Founder Shield, a technology-enabled commercial insurance brokerage that focuses exclusively on insurance solutions for emerging industries. While SPACs are not exactly “emerging” – they’ve been around for a few decades – the boom they’ve experienced over the past few months is unlike anything the market has seen before, thus making their insurance placement very difficult.
“There’s just not enough loss history right now for traditional insurance companies to get comfortable offering coverage to SPACs, let alone affordable coverage,” said Selby. “There’s only really three or four insurers that will properly underwrite and offer coverage for directors’ and officers’ (D&O) insurance for SPACs, and they’re the same carriers that will dip their toes in other emerging industries, like cannabis, cryptocurrency and micro-mobility.”
With less than a handful of major players willing to insure SPACs, there’s not enough insurance capacity to manage the market boom. There’s also a lack of specialization, according to Selby, who described the current market as “the Wild Wild West,” where the few underwriters dealing with SPACs are seeing every single risk come across their desks.
“There’s no way that these underwriters can have expertise in everything that the SPACs are pursuing,” said Selby. “I think there needs to be more of a niche focus. For example, if an insurer has a lot of expertise and a huge premium book of life sciences companies, they could look at insuring SPACs, but only those with an area of focus in the life sciences sector because then they’d be able to ask more detailed questions in the underwriting process.”
SPACs are most at risk in the extended reporting period in a D&O policy. There are many claims that could arise after they’ve taken their acquired company public, especially around alleged wrongful acts or misrepresentations during that process.
There has been a string of post de-SPAC litigation in recent months. In April, a securities class action lawsuit was filed against electric vehicle company Canoo, Inc. as well as against the former directors and officers of the SPAC into which Canoo merged in December 2020, accusing the defendants of misleading investors in various pre- and post-merger filings. The lawsuit was filed the day after the price of Canoo’s shares allegedly dropped 21%.
Read more: Beazley launches D&O coverage for SPACs
The reason that private companies are attracted to SPACs is “the ease of doing business,” according to Selby. There are a lot of regulatory hoops to jump through with traditional IPOs (e.g. SEC filings) that are automatically taken care of by SPACs. However, if litigation continues to skyrocket – and it’s trending in that direction right now – that could certainly slow down the SPAC boom.
“It’s too early to tell how long this trend will continue,” Selby told Insurance Business. “I think the determining factors will be litigation and how some of these companies fare in the public market. If their stocks are stable, then I think it will continue for a few more years […] at least until there are more data points for companies to determine whether the SPAC route is a sound option.”
As for the insurance industry, Selby expects to see more new players entering the space as the SPAC industry remains red-hot. But he warned that they might not necessarily be long-term players.
He commented: “There will be underwriters who are looking at what’s going on and thinking: ‘If I can get some actual data points, I can make a better determination about the risk.’ How do you get data points? You can either ask a friend at a different insurance company, or you can dip your toe in the water a little bit and start taking on some of that risk. How are you going to win accounts? It’s no secret that insurance is very much a price pain point right now for the SPAC sponsor teams. So, I think there are going to be new carriers dipping their toe in the space at more competitive premiums, but I also anticipate that they might only be temporary players in the space.
“That poses a few questions and a few concerns. As an insurance professional, am I going to recommend to the SPAC sponsor teams that I work with to take a gamble on a company that may not be around offering this insurance in another year or two? Or is the juice worth the squeeze? You get into this decision-making process of longevity and reputation, versus cost benefit. This is the hardest I’ve ever seen this market, so I do anticipate there will be new players trying to undercut on pricing, but I don’t know if they’ll stick around for long. It’s my job, and my team’s job to keep our pulse on everything going on in that regard.”