APRIL 2023

Embroker Vertical Insurance Index:

Startup Snapshot

 

Analyzing the Risks and Costs for Founders in 2022

APRIL 2023

Embroker Vertical Insurance Index:

Startup Snapshot

Analyzing the Risks and Costs for Founders in 2022

Report Overview & Key Data Points

In 2022, Startups Face Hard Choices

 

In 2022, the startup community faced a year of restructuring and rebalancing amid a series of both familiar and unexpected challenges. The fundraising boom benefitting tech startups in the preceding two years came to a halt for most sectors; recession threats, geopolitical conflicts, surging inflation, and interest rates caused investors to take a more conservative approach to deploying their capital.

The market retreat forced many founders to find new ways to extend their financial runway and reduce their risk exposure, leading big and small tech companies alike to significantly reduce staff in the second half of the year. This double-edged sword freed up more capital but also exposed these businesses to greater risks of lawsuits and other employee claims.

Fewer funding opportunities and dwindling runways also pushed startups to think more critically about which protections were non-negotiable and what they’d have to risk facing without coverage. With inflation making operations historically expensive, many startups reduced their limits and the number of policies held compared to prior years.

While cyber attacks continued to rise during this time, investments in Errors & Omissions (E&O) and Cyber policies stabilized compared to the frenzied uptick in cyber protections in 2021. Many companies continued efforts to transition more staff from remote work to an in-office or hybrid model in 2022; with more employees in closer proximity, the risk for employee issues and threats rises, while cybersecurity exposure decreases.

Ultimately, founders stretched their limited funds to maintain only critical coverage in 2022. The entire startup community was affected, but the largest startups felt the most impact.

What were startups’ most common trade-offs as a result of these external pressures? What did founders value the most in 2022, and what risks are they most concerned with?

The annual Benchmarking Report is part of a series of reports from Embroker that provides a comprehensive examination of business insurance coverage and costs for startups. Derived from nearly 2,500 Embroker individual policyholders, this data investigates founders’ purchasing behaviors beyond just pricing data. Embroker’s goal is to provide startups transparency on the types and costs of coverage their peers are choosing at different stages of startup growth amid market volatility and increasing premiums. This empowers companies to plan for their operational and risk management needs, allowing them to better navigate the business insurance market. With this insight at their fingertips, founders can make smarter buying decisions with greater confidence.

The importance of startup business insurance coverage

 

Without the appropriate coverage, the hard work and sacrifices founders have endured building their businesses are at risk. The right business insurance allows for the peace of mind to find the right investors and talent, and to bring products successfully to market.

Certain types of business insurance are required for VC-backed startups, but those serious about hedging their bets and growing their business must educate themselves on every available option.

Starting a company inherently involves risk. However, with the right risk management plan, founders can more easily mitigate the unavoidable challenges that await them. As risks are successfully transferred through insurance, startups can also become far more attractive to investors and strategic partners.

The risk profile for startups, especially VC-backed startups, is unique – what sort of coverage do they need?

 

As startups grow and adapt to their environment, so too must the insurance policies they employ. Beyond traditional business risks, startup founders face additional risks specific to the technology they use or develop, their directors’ and officers’ decisions and actions, their investors’ demands, and their employees’ needs. Founders should mitigate and transfer this risk effectively and efficiently to focus on building their products, company, and future.

To learn more about the policies and products offered by Embroker for startups, visit www.embroker.com/coverage/startup-insurance.

At a minimum, founders should seek Directors & Officers (D&O), Employee Practices Liability Insurance (EPLI), Tech Errors and Omissions (E&O), Cyber Insurance, and Fiduciary Liability Insurance to best equip them against the challenges they may face.

Report Overview & Key Data Points

In 2022, Startups Face Hard Choices

In 2022, the startup community faced a year of restructuring and rebalancing amid a series of both familiar and unexpected challenges. The fundraising boom benefitting tech startups in the preceding two years came to a halt for most sectors; recession threats, geopolitical conflicts, surging inflation, and interest rates caused investors to take a more conservative approach to deploying their capital.

The market retreat forced many founders to find new ways to extend their financial runway and reduce their risk exposure, leading big and small tech companies alike to significantly reduce staff in the second half of the year. This double-edged sword freed up more capital but also exposed these businesses to greater risks of lawsuits and other employee claims.

Fewer funding opportunities and dwindling runways also pushed startups to think more critically about which protections were non-negotiable and what they’d have to risk facing without coverage. With inflation making operations historically expensive, many startups reduced their limits and the number of policies held compared to prior years.

While cyber attacks continued to rise during this time, investments in Errors & Omissions (E&O) and Cyber policies stabilized compared to the frenzied uptick in cyber protections in 2021. Many companies continued efforts to transition more staff from remote work to an in-office or hybrid model in 2022; with more employees in closer proximity, the risk for employee issues and threats rises, while cybersecurity exposure decreases.

Ultimately, founders stretched their limited funds to maintain only critical coverage in 2022. The entire startup community was affected, but the largest startups felt the most impact.

What were startups’ most common trade-offs as a result of these external pressures? What did founders value the most in 2022, and what risks are they most concerned with?

The annual Benchmarking Report is part of a series of reports from Embroker that provides a comprehensive examination of business insurance coverage and costs for startups. Derived from nearly 2,500 Embroker individual policyholders, this data investigates founders’ purchasing behaviors beyond just pricing data. Embroker’s goal is to provide startups transparency on the types and costs of coverage their peers are choosing at different stages of startup growth amid market volatility and increasing premiums. This empowers companies to plan for their operational and risk management needs, allowing them to better navigate the business insurance market. With this insight at their fingertips, founders can make smarter buying decisions with greater confidence.

The importance of startup business insurance coverage

Without the appropriate coverage, the hard work and sacrifices founders have endured building their businesses are at risk. The right business insurance allows for the peace of mind to find the right investors and talent, and to bring products successfully to market.

Certain types of business insurance are required for VC-backed startups, but those serious about hedging their bets and growing their business must educate themselves on every available option.

Starting a company inherently involves risk. However, with the right risk management plan, founders can more easily mitigate the unavoidable challenges that await them. As risks are successfully transferred through insurance, startups can also become far more attractive to investors and strategic partners.

The risk profile for startups, especially VC-backed startups, is unique – what sort of coverage do they need?

As startups grow and adapt to their environment, so too must the insurance policies they employ. Beyond traditional business risks, startup founders face additional risks specific to the technology they use or develop, their directors’ and officers’ decisions and actions, their investors’ demands, and their employees’ needs. Founders should mitigate and transfer this risk effectively and efficiently to focus on building their products, company, and future.

To learn more about the policies and products offered by Embroker for startups, visit www.embroker.com/coverage/startup-insurance.

At a minimum, founders should seek Directors & Officers (D&O), Employee Practices Liability Insurance (EPLI), Tech Errors and Omissions (E&O), Cyber Insurance, and Fiduciary Liability Insurance to best equip them against the challenges they may face.

Essential Startup Business Insurance Products Explained

Primary lines of coverage for startups:

Directors & Officers

The policy that helps your Founders, Executives and Board Members sleep soundly. Provides financial reimbursement for legal fees and settlements from decisions you make running the company.

Employment Practices Liability

As soon as you start hiring employees you need EPL Insurance. Provides protection from alleged sexual harassment, wrongful termination, or discrimination suits.

Tech Errors & Omissions incl. Cyber

Protects against cybercrime as well as the specific professional liability risks that people operating in the technology industry commonly face.

Fiduciary Liability

Provides protection for your company and the people administering your benefits plans, from current and former employees alleging mismanagement or misleading advice.

Other policies:

For more details on our policies, see the glossary in the appendix.

Business Owners Policy

Workers Compensation

Commercial Umbrella

Commercial Crime

General Liability

Startup Insurance Benchmark Report – Key Findings

As startups mature, founders must adjust and expand their insurance coverage to protect their businesses from evolving risks. The key findings from our analysis provide insight into the types of coverage founders are choosing, and how much they are paying based on the stage of the startup.

The following takeaways address the premium impact for different stages of a startup, demonstrating how risk — and the need to transfer it — increases as businesses grow:

%

More Employees = More Risk

EPLI premiums rose by 182% for startups that grew their headcount from 10-30 to over 30 employees

%

More Revenue = More Opportunity for Error

E&O/Cyber premiums increased by 116% for startups that went from $1M-$5M in revenue to over $5M in revenue

%

More Funding = More Responsibility

D&O premiums increased by 147% for startups that grew from $5M-$25M to over $25M in funding

YoY Change in Average Premiums

Overall, average premiums are going up year over year in the double digits.

Tech Startup Business Insurance Premiums at a Glance

Premium Averages 2020-2022

What can you expect to pay?

Average Premiums by Company Size Year D&O (Directors & Officers) EPLI (Employee Practices Liability Insurance) E&O (Errors & Omissions) / Cyber
2020 $5,393 $3,240 $4,709
<$1M 2021 $6,098 $3,596 $5,053
2022 $7,546 $3,991 $6,238
2020 $5,587 $3,173 $6,110
$1-5M 2021 $7,286 $4,017 $7,445
2022 $10,934 $5,668 $10,202
2020 $9,009 $4,825 $11,205
$5M+ 2021 $12,411 $6,327 $15,338
2022 $16,695 $11,745 $22,070
Average Premiums by Company Size Year D&O (Directors & Officers) EPLI (Employee Practices Liability Insurance) E&O (Errors & Omissions) / Cyber
2020 $4,370 $3,094 $4,936
<$5M 2021 $6,947 $4,139 $7,684
2022 $5,520 $3,452 $6,141
2020 $6,020 $3,585 $6,923
$5-25M 2021 $6,947 $4,139 $8,184
2022 $8,224 $4,497 $10,202
2020 $14,723 $5,176 $12,520
$25M+ 2021 $17,319 $6,692 $14,633
2022 $20,283 $10,752 $17,287
Average Premiums by Company Size Year D&O (Directors & Officers) EPLI (Employee Practices Liability Insurance) E&O (Errors & Omissions) / Cyber
2020 $4,669 $2,863 $4,610
<10 2021 $5,370 $3,335 $4,808
2022 $6,276 $3,083 $5,883
2020 $5,999 $3,237 $6,281
1030 2021 $6,912 $3,730 $6,981
2022 $8,450 $3,736 $7,921
2020 $10,132 $5,094 $11,813
30+ 2021 $13,232 $6,489 $14,494
2022 $15,793 $10,536 $15,728

Range of Premiums at a Glance

Range of premiums across all sizes and stages of companies

Key Purchase and Decision-Making Patterns

What triggers a need for more coverage?

Key triggers that cause an increase in required coverage and a commensurate increase in premiums:

D&O

Adding more directors and officers
as funding increases

EPLI

Adding more employees as revenue increases

Tech E&O/Cyber:

Increasing professional liability and cyber risks as revenue and customer numbers increase

Key Purchase and Decision-Making Patterns

What triggers a need for more coverage?

Key triggers that cause an increase in required coverage and a commensurate increase in premiums:

D&O

Adding more directors and officers as funding increases

EPLI

Adding more employees as revenue increases

Tech E&O/Cyber

Increasing professional liability and cyber risks as revenue and customer numbers increase

Limits to coverage: When do companies choose more or less?

D&O

When are startups opting for lower limits to protect founders and their executive teams? Directors and Officers insurance is the most expensive policy for nearly all startups, but those with the most VC dollars ($25M+ in funding) are opting to lower their limits. Given the rising prices, this may be tied to budgetary constraints.

2021

$25M+ in Funding
(Choosing a Limit of $1M)

$25M+ in Funding
(Choosing a Limit of $5M)

2022

D&O

When are startups opting for lower limits to protect founders and their executive teams? Directors and Officers insurance is the most expensive policy for nearly all startups, but those with the most VC dollars ($25M+ in funding) are opting to lower their limits. Given the rising prices, this may be tied to budgetary constraints.

2021

$25M+ in Funding
(Choosing a Limit of $1M)

2022

$25M+ in Funding
(Choosing a Limit of $5M)

EPLI

Even though many founders claim their biggest internal risks are their employees and employee claims, there’s a sizable percentage of well-funded companies opting for the lowest EPLI limit.

2021

$25M+ in Funding
(Choosing a Limit of $1M)

$25M+ in Funding
(Choosing a Limit of $1M)

2022

E&O/Cyber

Cyber policy limits are showing signs of stabilizing compared to 2021 when policy limits increased across the board.

2021

More than $5M in Revenue
(Choosing a Limit of $1M)

More than $5M in Revenue
(Choosing a Limit of $1M)

2022

Less than $1M in Revenue (2022)

More than $5M in Revenue (2022)

Choosing a Limit of $1M

VS

Choosing a Limit of $5M

Choosing a Limit of $1M

VS

Choosing a Limit of $5M

Less than $1M in Revenue (2022)

Choosing a Limit of $1M

Choosing a Limit of $5M

More than $5M in Revenue (2022)

Choosing a Limit of $1M

Choosing a Limit of $5M

D&O

Limits for those with over 30 employees dropped from 2021 to 2022.

2021

30+ Employees
(Choosing a limit of $5M)

30+ Employees
(Choosing a limit of $5M)

2022

E&O/Cyber

How much are startups investing to address their E&O/Cyber vulnerabilities?

Data from 2022 signals that the market may be stabilizing and that companies are more confident in their technology and cybersecurity risks.

2021

Less than 10 Employees
(Choosing a limit of $1M)

30+ Employees
(Choosing a limit of $1M)

30+ Employees
(Choosing a limit of $5M)

2022

E&O

How much are startups investing to address their E&O/Cyber vulnerabilities?

Data from 2022 signals that the market may be stabilizing and that companies are more confident in their technology and cybersecurity risks.

Companies with under 10 employees had a $1M limit policy, compared to 73% the prior year

Companies with more than 30 employees had a $1M limit policy in 2022, compared to 19% in 2021

Companies with more than 30 employees had a $5M limit policy in 2022, compared to 50% in 2021

Premium increases: What to expect as your company grows

When a startup increases its venture capital funding, their business risk and exposure increases and therefore their business insurance needs to be more robust. In turn, premiums increase.

Premium increase for companies that go from under $5M in funding to over $5M in funding ($0-$5M to $5-$25M)

Premium increase for companies that go from under $5M in funding to over $5M in funding ($0-$5M to $5-$25M)

Premium increase for companies that go from under $25M in funding to over $25M in funding ($5-$25M to $25M+)

D&O

  • 49% 49%
  • +100% +100%

EPLI

  • 30% 30%
  • 100% 100%

Tech E&O

  • 33% 33%
  • 100% 100%

Premium increases: What to expect as your company grows

When a startup increases its venture capital funding, their business risk and exposure increases and therefore their business insurance needs to be more robust. In turn, premiums increase.

D&O

Premium increase for companies that go from under $5M in funding to over $5M in funding ($0-$5M to $5-$25M)

  • 49% 49%

Premium increase for companies that go from under $25M in funding to over $25M in funding ($5-$25M to $25M+)

  • +100% +100%

EPLI

Premium increase for companies that go from under $5M in funding to over $5M in funding ($0-$5M to $5-$25M)

  • 30% 30%

Premium increase for companies that go from under $25M in funding to over $25M in funding ($5-$25M to $25M+)

  • +100% +100%

Tech E&O

Premium increase for companies that go from under $5M in funding to over $5M in funding ($0-$5M to $5-$25M)

  • 33% 33%

Premium increase for companies that go from under $25M in funding to over $25M in funding ($5-$25M to $25M+)

  • +100% +100%

Key Purchase and Decision-making Patterns

Premium increases: What founders are prioritizing today

Along with price increases from providers, the inflationary period of 2022 caused founders to reprioritize what was most important to them. When it comes to D&O and EPLI — which saw the greatest jump in premiums — founders prioritized protecting their leadership and businesses from potential fallout from a broad range of changes in the future.

D&O

D&O

Mid-size startups (those with a revenue of $1-5M) saw the greatest increases in D&O premiums, with a 50% jump compared to 2021

EPLI

EPLI

EPLI premiums increased for companies with over 30 employees by 62% compared to 2021

How many policies tech startups carry

The average number of policies purchased in 2022 decreased when compared to 2021, reinforcing that startups are reconsidering what protections are essential in the face of fiscal belt-tightening and rising costs.

As startups progress from one funding stage to the next, they are on average adding more business insurance products to protect their business. These are policies in addition to our Embroker Startup Package (ESP).

Funding of up to
$5M:
average of

2

products
(ESP + one other)

Funding between
$5M and $25M:
average of

2

products
(ESP + one other)

Funding of more than
$25M:
average of

3

products
(ESP + two others)

Funding of up to
$5M:
average of

2

products
(ESP + one other)

Funding between
$5M and $25M:
average of

2

products
(ESP + one other)

Funding of more than
$25M:
average of

3

products
(ESP + two others)

Most commonly held policies: Business Owner’s Policy, Workers Compensation

Most commonly held policies: Commercial Umbrella, Commercial Crime, Business Owner’s Policy, Workers Compensation

Most commonly held policies: Commercial Umbrella, Commercial Crime, Business Owner’s Policy, Workers Compensation

Most commonly held policies: Business Owner’s Policy, Workers Compensation

Most commonly held policies: Commercial Crime, Business Owner’s Policy, Workers Compensation

Most commonly held policies: Commercial Umbrella, Commercial Crime, Business Owner’s Policy, Workers Compensation

Most commonly held policies: Business Owner’s Policy, Workers Compensation

Most commonly held policies: Commercial Crime, Business Owner’s Policy, Workers Compensation

Most commonly held policies: Commercial Umbrella, Commercial Crime, Business Owner’s Policy, Workers Compensation

Conclusion

Looking to 2023, founders are already encountering new challenges in their risk management approach. Ongoing cutbacks, failing banks, global inflation, and geopolitical tensions all influence the socioeconomic environment founders and their investors must navigate today.

Although external data suggests cyber threats are increasing daily, founders currently prioritize D&O and EPLI over the potential fallout from cyber attacks. Embroker’s Cyber Risk Index revealed 44% of those without cyber insurance cite cost as the leading reason for opting out, which could shed light on the steady growth in E&O/Cyber premiums but the hesitancy around higher limits. Given the White House’s new cybersecurity strategy in Q1 of this year, the industry is poised to see how that impacts the way businesses approach their E&O/Cyber coverage in 2023 and beyond.

Prioritizing what risks to take is essential, especially when facing limited capital and resources. When it comes to risk mitigation, trade-offs can often signify what founders believe will protect their most vital assets in the not-so-distant future. What many overlook is that the right risk management package is the best way to transfer a large portion of risk away from the business and themselves.

Digital-first, tailored business insurance products can radically simplify the complexity of insurance for founders. The security of customized, vertical-specific lines of protection allows founders and their investors to charge confidently into the chaotic future that is inherent to the startup community.

Glossary

Business Owners Policy

A Business Owners Policy (BOP) is a package of insurance policies that the majority of business owners need to have—which is why insurance carriers bundle these coverages and sell them as one product.

More often than not, a BOP is sold to small and medium-sized businesses, since large corporations tend to have more complex risks that require customized policies.

In essence, D&O is a liability insurance policy, payable either to directors and officers of a company or the company itself. The policy will reimburse settlements or defense costs that result from covered claims

Business Owners Policy

A Business Owners Policy (BOP) is a package of insurance policies that the majority of business owners need to have—which is why insurance carriers bundle these coverages and sell them as one product.

More often than not, a BOP is sold to small and medium-sized businesses, since large corporations tend to have more complex risks that require customized policies.

In essence, D&O is a liability insurance policy, payable either to directors and officers of a company or the company itself. The policy will reimburse settlements or defense costs that result from covered claims

Directors & Officers

Directors & Officers insurance (D&O) is liability insurance that covers the directors and officers of the company against lawsuits alleging a breach of fiduciary duty. A company pays for this coverage so executives can serve confidently as leaders of their organization without fear of personal financial loss.

In essence, D&O is a liability insurance policy, payable either to directors and officers of a company or the company itself. The policy will reimburse settlements or defense costs that result from covered claims

Retention

A retention is similar to a deductible.

However, with a retention, your company is responsible for the retention amount, and the insurance carrier pays up to the full limit of insurance for any covered claim.

Workers Compensation

Workers compensation insurance covers claims from injured employees, including medical expenses, death benefits, lost wages, and rehabilitation.

The coverage is a win-win for both the business and the employees. In most instances, employees give up the right to sue their employer over a workplace injury, knowing they will be compensated for any workplace-related injuries thanks to the workers compensation insurance coverage that their employers have purchased.

Commercial Crime

Commercial Crime insurance can help protect your company from significant losses caused by both third parties or employees.

It provides coverage for losses of money or other assets resulting from theft, fraud, social engineering, and more.

Commercial Crime

Commercial Crime insurance can help protect your company from significant losses caused by both third parties or employees.

It provides coverage for losses of money or other assets resulting from theft, fraud, social engineering, and more.

Employment Practices Liability

Employment Practices Liability insurance(EPLi) is designed to mitigate exposure to employment-related lawsuits and protects businesses from claims made by employees against employers regarding a violation of their legal rights. The coverage applies to claims that arise under Title VII of the Civil Rights Act or any related legislation.

The most common employment-related allegations involved sex, age, national origin, religion, and color.

Key Person Insurance

Key person insurance is purchased by a business to insure the life of one of the company’s most vital employees. It’s intended to help the company recover from the loss of a key contributor whose death or disability would reduce the company’s value or operational capabilities.

Tech Errors & Omissions

Technology Errors & Omissions insurance is a specialized insurance product that was created to protect the specific professional liability risks that people operating in the technology industry commonly face.

Errors & omissions insurance is often called professional liability insurance. It’s also commonly referred to as malpractice insurance, especially when it is protecting service professionals such as accountants, architects, lawyers, and consultants. A professional liability insurance policy will help cover the legal costs that can amass if a client decides that they want to sue you because they believe that an error or miscalculation you made while performing services for them has caused them to suffer a loss of some kind, usually financial.

Cyber Liability

A Cyber insurance policy, also referred to as “cyber risk insurance” or “cyber liability insurance”, is a financial product that enables businesses to transfer the costs involved with recovery from a cyber-related security breach or similar events. In many cases, the policy can also provide access to a panel of top-tier breach coaches and other service providers.

Cyber Liability

A Cyber insurance policy, also referred to as “cyber risk insurance” or “cyber liability insurance”, is a financial product that enables businesses to transfer the costs involved with recovery from a cyber-related security breach or similar events. In many cases, the policy can also provide access to a panel of top-tier breach coaches and other service providers.

Fiduciary

Fiduciary liability insurance is designed to protect the business from claims of mismanagement and the legal liability arising out of their role as fiduciaries. A fiduciary liability policy covers associated legal costs to defend against claims of errors and a breach of fiduciary duty. One of the reasons why some businesses don’t know much about fiduciary liability is the fact that the ERISA does not legally require it.

There are many different types of employer liability coverages, but only fiduciary liability insurance will protect both the company and the individuals against fiduciary-related claims of negligence, mismanagement, or actions that are not in the best interest of the plan participants.

Limit

A limit is the maximum amount of money an insurer will pay toward a covered claim. The higher the limit on your coverage, the higher your premium may be.

Underwriting

Underwriting is the process through which an individual or institution takes on financial risk for a fee.

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