US government action minimised D&O claims from SVB collapse: AM Best

Silicon Valley Bank SVB headquarters and branch.jpg

Had the US government not stepped in to make all depositors whole following the collapse of Silicon Valley Bank (SVB), directors and officers (D&O) claims would be much higher, according to AM Best.

The ratings agency said that, without government intervention, underwriters of D&O insurance for start-ups and venture capitalists, as well as the financial-institution insurers supporting such entities, could have faced “financial distress”, as they are operating on thin capital.

David Blades, associate director of industry research and analytics at AM Best, said: “Since start-ups are by nature much more agile and less risk-averse than other companies, their directors and officers often make decisions quickly.

“Therefore, the potential for D&O claims for start-ups would have been high in the case government had decided not to help the depositors.”

SVB, which specialised in lending to start-ups, collapsed in the US this weekend after it failed to raise $2.25bn to make up for a loss from the sale of assets hit by higher interest rates.

US regulators shuttered the bank on Friday (10 March), and authorities put its UK subsidiary into insolvency Sunday night (12 March).

The UK subsidiary has now been sold to HSBC for £1. Similarly, New York-based Signature Bank was also shut down by regulators on Sunday.

According to analysis from AM Best, eight insurers had exposures greater than 2% of their capital and surplus, with the maximum being less than 5%.

AM Best is also predicting that the impact on equity portfolios could be more significant, with major bank stocks already losing significant value.

Jason Hopper, associate director of industry research and analytics at AM Best, said: “Many insurers depend on banks for operational aspects but generally are not as vulnerable to bank run-on scenarios, although they can occur as we’ve seen in the past and emphasize the importance of a robust risk-management structure, especially for annuity writers in a rising interest rate environment.

“Insurers that conduct detailed analysis on the impact of rising interest rates on their asset-liability portfolios and manage their impacts through capital and other risk-management tools will fare better in those events than those that are less well-managed.”

Analysis from sister publication Inside P&C showed that the impact of SVB’s collapse is relatively small, and the bigger problem is the potential macroeconomic impact.

The Inside P&C Research team said insurers might need to re-evaluate their investment approaches, and that InsurTechs could find it harder to raise capital as investors reassess their capital allocation.