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2021 Innovation Awards: SPAC D&O Insurance Solution

2021 Innovation Awards

SPAC D&O Insurance Solution 

The recent explosion in special purpose acquisition companies — with twice as many placements in 2020 as there were in the previous 10 years — led to an overheated market, with major increases in cost and harsher terms and conditions, said Machua Millett, chief innovation officer and SPAC and de-SPAC practice leader at Marsh LLC’s FINPRO U.S. unit.

“In October and November of 2020, we saw the SPAC marketplace take a real turn,” he said. Retentions increased by five to 10 times and premiums by three to five times between October 2020 and March 2021, according to Marsh. 

Traditional directors and officers liability insurance coverages “were misaligned with how SPACs and de-SPACs worked,” Mr. Millett said. De-SPAC transactions occur when there is a merger between a private operating company and a publicly traded SPAC.

Mr. Millett said Marsh took the traditional D&O product “down to its studs,” taking into account that these so-called blank check companies have no real balance sheet; have only a small amount of working capital; are designed to do a deal within at most 24 months; and pose little significant litigation risk until after the de-SPAC deal is closed. 

The product, which was introduced in February and is a winner of a Business Insurance 2021 Innovation Award, is a hybrid model. It typically offers $2.5 million in limits during the SPAC’s investment period and doubles in size to $5 million during the post-de-SPAC stage, with excess coverage available, Mr. Millett said. 

There is one primary insurer, which Marsh declined to identify, and about a half-dozen insurers that will write the business on an excess basis, Mr. Millett said. All the insurers involved are major publicly held U.S. D&O insurers, he said.

In addition to being designed to reflect how SPACs and de-SPAC transactions work, the product saves policyholders about 40% on their upfront insurance premiums, Mr. Millett said. It has also reduced applicable retentions by half compared with the market, according
to Marsh.

Mr. Millett said the coverage realigns the relationships between insureds and their insurers along the lines of these transactions’ particular risks.

“It’s a balancing of interests” that is not about one party taking advantage of another, he said. “This product has helped to bring this balance back.” 

Mr. Millett said the broker had bound about 40 of the policies as of late August. “It has caught on very quickly.”

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