SPAC D&O Insurance Solution
The recent explosion in special purpose companies – with twice as many investments in 2020 as in the last 10 years – led to an overheated market with large cost increases and tougher conditions, said Machua Millett, Head of Innovation and SPAC and de-SPAC practice leader at Marsh LLC's FINPRO US unit.
"In October and November 2020, we saw the SPAC market take a real turn," he said. Retentions increased by five to ten times and premiums by three to five times between October 2020 and March 2021, according to Marsh.
Traditional board members and civil servants' insurance policies "were misguided with how the SPAC and de-SPAC worked," Millett said. De-SPAC transactions occur when there is a merger between a private operating company and a listed SPAC.
Mr. Millett said Marsh took the traditional D&O product "to his studs", given that these so-called blank check companies have no real balance sheet; has only a small working capital; are designed to make a deal within a maximum of 24 months; and poses little significant risk of litigation until after the de-SPAC deal has been closed.
The product, which was introduced in February and is the winner of a Business Insurance 2021Innovation Award, is a hybrid model. It typically offers $ 2.5 million in limits during the SPAC investment period and doubles in size to $ 5 million during the post-de-SPAC stage, with surpluses available, Millett said.
There is a primary insurer, which Marsh refused to identify, and about half a dozen insurance companies that will write off the business in surplus, Millett said. All insurers involved are large publicly owned US D&O insurance companies, he said.
In addition to being designed to reflect how SPACs and de-SPAC transactions work, the product saves policyholders about 40% on their advance insurance premiums, Mr. Millett said. It has also reduced current detentions by half compared to the market,
Mr. Millett said the coverage adjusts the relationships between insureds and their insurers in line with the specific risks of these transactions.
"It is a balance of interests" that is not about one party exploiting another, he said. "This product has helped bring balance back."
Mr. Millett said the broker had bound about 40 of the policies by the end of August. "It has taken very quickly."