What are the challenges for insurers when considering start-up technology business insurance?
Working within a constantly evolving environment presents challenges to insurance underwriters. Below we talk to James McBride Wilson at 'CFC Underwriting' and Anna Husband at 'Hiscox Insurance', to obtain their perspective on the challenges they face in underwriting technology and software company insurance
James McBride Wilson
at CFC Underwriting
explained “one of the primary challenges for insurers is the difficulty of establishing the correct premium, given technology start-ups do not have any financial history and their growth expectations are only predictions. Whilst we can make some assumptions about a start-up’s growth - those that have received significant funding or have multiple contracts lined up are likely to grow quickly and pose an increased risk.
A second challenge when considering start-up companies are their business activities are often prone to change within the first 12-24 months. Start-ups are typically fast moving and will often tweak (or even completely change) their business model to accelerate growth. From an insurer perspective, when the policy is due for renewal, our understanding verses what the company is now doing can be misaligned; and occasionally we may need to consider not providing renewal terms.”
at Hiscox Insurance
explained “technology start-ups will tend to have a small IT security budget and won’t have a full time CTO/InfoSec lead. Lack of experience and qualifications for the principals and having an unsophisticated approach to contract management are also red flags - e.g., not using external legal counsel, not knowing minimum standard requirements, and how to use back-to-back contracts. They also may not be savvy to the onerous contractual terms when asked onboard new corprorate clients as they do not have any bargaining power.
Product diversity can also cause problems, because technology and software companies are unsure what will perform, so likely to adjust and alter risk profile until they become commercially viable. Therefore, a clear understanding of what the software or technology does and their plans for the future will form a key part of the underwriting process.”
How can an insurance broker assist a start-up technology business?
Insurance brokers can provide access to a number of competitive carriers, offer guidance when purchasing a complex financial instrument, and provide support in the event of a claim.
Many technology start-up businesses assume that securing the necessary insurance covers is relatively simple. However, caution should be taken if the technology solution provides any of the following:
1) If you hold a significant about of data on individuals (especially sensitive information such as banking details, card details, or medical information).
2) If the solution provides safety critical systems, payment processing, financial trading, or provides other regulated financial or legal services.
3) If the business designs computer games, controls moving objects (such as satellites), or if you manufacture or distribute technology hardware.
Understanding the technology business
Having a good understanding of the business and services offered is key. Therefore, we commonly find that providing business plans, client engagement letters, terms and conditions, and cash flow forecasts are key in securing the most favourable terms available for the most commonly purchased policies:
Written by Simon Taylor at Get Indemnity. The views made in this article are not represented views of Willis Towers Watson, CFC Underwriting or Hiscox Insurance.