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The one thing you need to know when listing your company
When private companies are considering listing to become a public company, with all the due diligence and protocols required, not many have the vision to get their Insurance Broker involved early in the thought process.
The ones that don’t “miss out on some key strategic advantages that can yield significant benefit” Ryan Neary, Manager, Professional Risks at GSA tells
He explains, the most commonly asked questions from private companies planning to go public, or should be if it isn’t, is:-
“When should I start to discuss my insurance program if we’re thinking about an IPO?”
The answer is always: as soon as possible, in fact right in the initial stages when you are starting to consider whether it is even viable. The extra information
and expertise buys you a few easy and strategic advantages and a couple specifically stand out:-
- Your broker will be able to provide feedback on the IPO and guide you through the whole end to end process.
- Starting the conversation before the draft prospectus allows you to gain an accurate forecast on your premium. Once you have these figures, you can budget this into the raise and even allocate to investors at their cost (not yours).
It is also important to educate all stakeholders along the journey. In most cases, the best way to optimize coverage is through sufficient preparation and time.
Other questions I am regularly asked include……
“What should I expect my premium to be given the current market conditions?”
We have seen the D&O liability market harden considerably over the past 18 months and more recently the last six months. Insurers are now re-evaluating
their pricing models and overall appetite for public company D&O in the face of significant securities class action claims activity. This class
action activity is being driven by both litigation funders and plaintiff law firms, the number of these participants locally has increased. They have
created a business model whereby opportunities to bring class actions are actively investigated for the benefit of aggrieved shareholders based predominately
on alleged lack of timeliness in the provision of disclosures to shareholders or alleged misrepresentations to shareholders.
The marketplace is transitioning from an actively competitive environment with an abundance of capacity to an increasingly cautious environment, where
Insurers are demonstrating more selective capacity deployment and less aggressive pricing strategies. This is predominantly for public company D&O
who are seeking the inclusion of cover for securities entity claims (Side C).
Insurer’s aggressive pricing strategies over a number of years, brought about by an abundance of capital and competition from new entrants, has placed
the Australian premium pool under enormous pressure. The Australian pool is currently around $250 million, yet we have seen successful individual claims
in excess of $100 million, and billions in current outstanding reserves. With the Australian premium pool struggling to cover the quantum of current
claims activity, Insurers’ profitability has suffered to the extent that current pricing and capacity models have become unsustainable. This has forced
Insurers to take corrective action, which includes:
- Reduced capacity (Insurers scaling back the limits they are willing to provide)
- Increased deductible structures (Increase predominantly of Securities entity claim excess levels)
- Increased premium rates (we are seeing an average increase on premiums of 50-70%, with some increases being up to 400% on non-preferred risks)
- Insurers not willing to attach at a low position, we are seeing Insurers be hesitant in attaching to a new piece of business below $60million. The average settlement on a securities class action is approximately $50million and therefore they do not want to deploy capacity below this level, this is constantly increasing.
“Is the market expected to shift anytime soon?”
A major Insurer of D&O globally released a report last week stating that a 300% correction in premium was required in the Australian market in order
to keep their portfolios sustainable and be around to provide capacity to Directors in the future. The hardening of the market could be endured for
an extended period.
“What is required for the submission?”
You will receive an extensive checklist of information that Insurers are looking for to provide capacity. This allows you to understand the mindset underwriters
are taking when analysing D&O risk, and the selective process they are taking when deploying capacity.
“How can you secure the best premium?”
Whilst the Insurance market is in a hard state, GSA are undertaking extensive marketing exercises of both Prospectus Liability and D&O Insurance submissions
to ensure that we are securing the optimum result for clients. This will include approaching all local markets who have the product and capacity in
this class and also utilising our London broker to access the Lloyds and Company markets based in that region.
To secure an optimum premium, the initial conversation with your broker should start when the planning begins. As above, the additional time allows for
greater ability to prepare the document and a better financial outcome by including the premium into the budget.
GSA would also recommend meeting with prospective Insurers to take them through the investor presentation and PDS. This helps the Underwriter to gain a
greater level of understanding and comfort around the risk. This can result in sharper pricing and increased cover.
It is important to have an experienced broker who will ensure you are properly covered. While the focus of this article has looked pre-IPO, the entire insurance risk management program needs to be ready for public company scrutiny post-IPO.
If you have more questions, speak to Ryan Neary.
Ryan Neary has assisted multiple companies domiciled both locally and overseas, who have listed.