The Collapse of Silicon Valley Bank sends shock waves through the Insurance Sector

The collapse of the Silicon Valley Bank

On Friday 10 March 2023 SVB was shut down by US banking regulators.  The Tech-focused lender failed to raise new capital after facing $42bn (£33bn) in deposit outflows.  Customers raced to withdraw their funds, which compromised of a quarter of the bank’s total deposits.  SVB had about $209bn (£166bn) in assets. 

SVB’s failure comes after a slew of tech start-ups and venture capitalists withdrew their money amid fears over its financial future.  According to David Blades, associate director, industry research and analytics, AM Best “Since startups are by nature more agile and less risk-averse than other companies, their directors and officers make decisions quickly.” 

Instability within the financial markets has been exacerbated by the collapse of Signature Bank which closed on 12 March 2023, two days after the collapse of SVB. 

The effects of the collapse will be felt well beyond the tech industry and will send shockwaves of uncertainty around global financial markets, with an impact on the insurance sector.  When a bank collapses, it is almost inevitable that there will be lawsuits against the institution’s leadership resulting in Directors & Officers insurance claims as companies and shareholders try to recover their losses. 

Litigation against SVB executives following the collapse.

A few days after the collapse, an investor lawsuit was filed against SVB accusing SVB Financial Group, CEO Greg Becker and CFO Daniel Beck of violating federal securities laws by making misleading statements about the company’s business and operations. 

The lawsuit from shareholders is seeking unspecified damages to be awarded to those who invested between June 16, 2021, and March 10, 2023.  It states that quarterly and annual financial reports from SVB did not fully account for the warnings from the Federal Reserve about the increases in interest rates. 

The suit states that the annual reports from 2020 through 2022 “understated the risks posed to the company by disclosing that likely interest rates hikes, as outlined by the Fed, had the potential to cause irrevocable damage to the company.”

It also claims that the company “failed to disclose that, if its investments were negatively affected by rising interest rates, it was particularly susceptible to the bank run”. 

Any banking failure in the US is also likely to result in an action by the Federal Deposit Insurance Corporation (FDIC) a US government corporation supplying deposit insurance to depositors in American commercial banks. The FDIC has a legal right to bring claims against former directors and officers of the bank.” As reported in the Insurance Insider SVB had a Chubb led D&O program with limits of USD180m. It is understood all Insurers on this program are on notice and it would be expected the entire program would be eroded by claims made against SVB.

 Insurance implications of the collapse

The risk to insurers is that further bank failures could lead to a rash of FDIC lawsuits and public shareholders securities class actions.

The most significant claims will be on the failed bank’s Directors and Officers (D& O) insurance which covers defence costs for the failed bank’s executives.

Other covers could also be affected depending on the circumstances surrounding the bank’s demise, including employment practice liability (EPL) claims from employees who lose their jobs, Professional Indemnity E&O claims, and fiduciary liability claims.

Market outlook

The US Treasury, Federal Reserve, and the FDIC have unveiled a plan to stem any contagion Silicon Valley’s Bank (SVB) failure and HSBC UK and Goldman Sachs have stepped in to purchase SVB’s UK subsidiary, calming fears of a financial meltdown like that of 2008, however these failures are still likely to impact the financial lines insurance market.

Karen Allen, Lonmar’s Managing Director for Financial & Specialty, has commented:

“It’s almost three months since the collapse of SVB and Signature Bank. We have been keeping a close eye on the London insurance market to determine if the recent financial tremors have caused any effects – in terms of insurers retreating with reduced appetite or even withdrawal from certain areas. It’s fair to say there’s a level of caution and relevant skepticism but not to the extent at this moment in time, that it has affected terms we can achieve for our clients."

"After the rapid hardening of D&O rate around 2019, we have experienced one of the most dramatically softening market cycles over the last 12-18 months for D&O. There is an abundance of capital from many new entrants and claims notifications from the US bank collapses have mainly hit the US insurance market, not effecting the London market (as yet). This of course could change very quickly and the very systemic nature of claims which arise from banking failures could affect our Financial Lines market and rate much more broadly, including in the Fintech space where London is very active. Our broking teams at Lonmar are highly experienced in navigating the challenges of the market for our customers’ benefit and we are committed to doing this when, if judging by the market cycle of recent decades, the next (almost inevitable) challenge arises. We hope a looming financial crisis is not in the offing, due to support from Governments and we can continue to get the broadest terms and best rate for our clients."