“D&O underwriters are not going to forget what happened with SVB”: RT ProExec’s LaCroix

As the aftershocks of Silicon Valley Bank (SVB)’s collapse last week continue to be felt across the financial markets, D&O expert Kevin LaCroix predicts imminent changes in the marketplace in response to the uncertainty.

An EVP at the US management liability specialist RT ProExec, and author of the widely followed D&O Diary blog, LaCroix said he “fully expects there to be changes in the marketplace, and I think banks, as insurance buyers, need to be thinking about that as well”.

“It could affect pricing, could affect terms and conditions and could affect the underwriting process. I think all of those are in play.

“The D&O underwriters are not going to forget what happened,” he added.

In a report on lessons for the insurance industry from the bank’s failure published by AM Best, the rating agency said the collapse of SVB Financial Group was caused by rising interest rates and insufficient risk management to address the resulting asset/liability issues.

It could have been much worse if not for the action taken by the US government to make all depositors whole at the eleventh hour on Sunday evening.

This meant that D&O underwriters narrowly avoided what could have been a potentially “significant” volume of claims from start-ups and venture capital firms, but it’s still too early to tell what the full impact will be, according to LaCroix.

His comments come as the spectre of a full-blown crisis continues to haunt the banking sector, with share prices volatile and the subsequent failure of New York’s Signature Bank.

The first lawsuit against executives of SVB’s parent was filed earlier this week, putting insurers of the bank’s Chubb-led $180mn D&O tower in the firing line.

“It is certainly a significant risk anytime a bank fails that there will be at a minimum an action by the FDIC as the receiver, which steps into the shoes of the failed bank and has the legal right to bring claims against the former directors and officers of the bank,” explained LaCroix.

“There has already been a securities class action lawsuit filed against SVB and the risk there is pretty significant because, obviously, the public shareholders are wiped out. So they're not only incurring significant losses, but they're aggrieved as well.

“That’s the thing the insurers are worried about. If we are heading into a period where there are going to be further failed banks, there could be a rush of either the FDIC as receiver lawsuits or the public shareholders securities class action lawsuits,” he warns.

Market “frozen”

Initial reaction from underwriters suggests “everybody is a little bit frozen right now”, LaCroix explained in the 13-minute interview with The Insurer TV.

“I think if the Fed and the FDIC had not come forward with their extraordinary relief on Sunday night, we might well be seeing more extreme actions by the insurers.

“Right now, insurers are just trying to decode what is taking place, and I think the specific categories of questions they're asking themselves are: ‘Should we be raising our rates or increasing our self-insured retentions? Should we be changing our terms and conditions in some way? And should we be changing our underwriting guidelines and, ultimately, our risk selection criteria to look for banks that maybe have the same characteristics as SVB, or that have other risk characteristics?’”

But it’s not just D&O policies which are potentially exposed.

“Oftentimes, when any enterprise is failing, there are layoffs and so that could lead to employment practices claims,” said LaCroix.

“Depending on the types of businesses that the bank is in, there could be claims, there could be fiduciary liability claims, but the most significant risk, and the one I would be worried most about, are those D&O claims,” he added.

His comments come at a time when D&O and professional lines have experienced downward rating pressure in the past 12-18 months, in stark contrast to most other specialty classes.

According to Aon’s Financial Services Group’s pricing index the average price per million for US public D&O insurance fell 15.3 percent in the fourth quarter year on year compared with a 19.9 percent drop in Q3 2022.

LaCroix concluded by saying underwriters need to focus on the longer term and not just what’s happening right now.

“SVB was a big player in financing start-ups, tech companies. Questions the industry should be asking itself are: What is going to step in its place and what will that mean? Is there a medium run or longer-term run from the subtraction of SVB from the marketplace? What mechanisms will substitute and will other lenders or sources of capital be less supportive of start-ups and new ventures? And will that undermine the business operations and the financial condition of some of the fledgling companies out there?”

Indeed, insurtechs, including Lemonade, Root and Clearcover, rushed to reassure investors on potential exposures to the collapse.

He concluded: “All of those kinds of things are just going to take some time to play out and D&O insurers need to be worried about, particularly if they're underwriting start-up ventures that have significant debt or are burning through cash resources.

“It's going to take eight-12-18 months for those kinds of things to play out.”

Watch the full 13-minute interview with Kevin LaCroix on The Insurer TV’s News in Focus programme to get a better understanding of how the collapse of SVB will impact the insurance industry, including:

  • How D&O claims will take shape in the coming months
  • Other lines which are in line to bear the cost of the event
  • How the industry is responding
  • Changes in the D&O marketplace