Insurance Placement Tips For Fintech & Regtech Companies
Despite common misconception, the insurance market for Fintech companies is relatively small. Given the limited carriers providing terms and the difficulty some companies can encounter when going to market, there are some steps executives can take in order to ease the process, maximize terms and reduce pricing.
- Assess & Negotiate Policy Limits: When setting policy limits, most early and midstage Fintech startups set their policy limits by simply adhering to the insurance compliance requirements presented by their partners. This often serves as a good starting point, however those insurance requirements may be excessive or inadequate. When presented with excessive limits, companies should push back and negotiate those down to more reasonable levels, especially when the associated premiums may be cost prohibitive (or in many cases, entirely impossible to obtain). It’s not uncommon to see partners or vendors initially requiring 10-15 Mill, later settling for 3-5 Mill in limits. Lastly, it’s equally important to assess and negotiate policy terms which can often contain problematic exclusions, as discussed in our Fintech insurance guide.
- Optimize The Timing Of Your Application. When securing insurance proposals, timing is particularly important; applying too early will likely result in nothing but declinations, however applying too late may delay contract negotiations with partners, or worse, may leave the company open to litigation. For startups, the first requests for proof of insurance will likely come from outside partners (such as financial institutions) this may be months before you plan on launching your product. However, when applying for insurance, it’s imperative that the organization is able to provide critical underwriting information such as; financials and/or financial projections, detailed business plans, organizational charts, executive bios, investor presentations, sample client contracts, and timelines for product releases. We don’t recommend applying until all of those organizational documents have been finalized.
- Ensure Clarity: In certain cases, Fintech companies may pursue separate insurance for just a single subsidiary or product. In cases such as these, it’s critical to provide an organizational chart clarifying the organization, its ownership, and exactly what needs to be insured, and the applications should properly reflect those exposures. When providing business plans, we have also seen some Fintech companies include very long term projections which include additional services that they hope to include in 35 years time. When providing such projections, it’s extremely important to clarify *when* such products or services will be available. Including services that will ultimately be offered 3 years out (and failing to mention that to the insurers) will only result in the underwriters erroneously underwriting future risks, which can adversely impact the underwriting process and associated premiums.
- Set Realistic Premium Expectations: While policy premiums are greatly dependent on the actual services being provided, insurance for fintech companies is not inexpensive. We’ve seen E&O/Cyber premiums range from 20k per Mill to 70k per Mill for companies engaged in higher risk activities (such as companies engaged in lending and/or lines of credit). Companies seeking D&O for an associated coin/token offering will encounter even greater premiums with pricing often beginning at 100k for a 1 Mill policy, with large retentions and often restrictive terms (including regulatory exclusions among others).
- Start The Process Early: Given the diversity and complexity among Fintech/Regtech companies, securing insurance can often be a lengthy process underwriters will often require additional information and conference calls in order to get a better understanding of the company and its operations. We generally advise beginning the application process 4-6 weeks in advance.
- Develop a US Presence. Foreign companies will likely encounter aggressive US exclusions when placing insurance in their domiciled countries. With US claims being excluded, most companies will be forced to place separate insurance in the US. Fintech companies with no US entity or local offices however, will encounter considerable resistance from the insurance carriers, often limited solely to the Lloyds/London markets when attempting to secure insurance. Establishing a US corporation and/or a small satellite administrative office in the US can help open the markets. Alternatively, such companies can also explore the option of a separately placed foreign liability policy (or appropriate endorsements) placed out of their domiciled country.
- Address Foreign Risks: Given that many US companies will maintain a global client base and may maintain foreign data centers, it’s critical that companies properly account for foreign risks. The company’s operations and foreign exposures will dictate the available solutions. All policies should include worldwide coverage, and appropriate foreign endorsements such as GDPR endorsements on the cyber policy and global liberalization endorsements on the D&O policies. To the extent that foreign offices are maintained, separate locally placed insurance may also be required in order to comply with local laws and regulations
- Build An Experienced Team: As part of the application/underwriting process, insurers will often ask for bios of the executive team and information regarding the company’s advisors. Working with experienced advisors (such as counsel and compliance officers) not only helps insulate against risk, it can also help create comfort among the underwriters which can help attract more insurers to the table and effectively reduce pricing. Lastly, partnering with an experienced insurance broker is equally critical, as it and can often be the difference between a costly claim being covered or declined.