For those truly discerning readers, you might be saying right now, didn’t he already do an ALERT for D&O? And, yes, kudos to you, you have a fine memory!

However, that was related to the frequency of nuisance suits like M&A objections. This ALERT is for the coming severity driven by a late cycle bull market, particularly in technology.

Trouble in Tech

While the Uber IPO might have been the canary singing, the WeWork failure was a cacophony of bells ringing. The idea that tech startups can focus on wild growth without any ballast from costly capital (or, you know, limiting egregious self dealing) has run its course.

Pricing business below cost to gain share (because #TAM!) hoping someday the profits will come is so 1990s. Startups from ride sharing to meal delivery to scooters and all other kinds of hopeless business models are realizing there is no path to profit.

The thing about bubbles is, when you don’t need funding, you can have as much as you want, but when the music stops and you need capital, there is suddenly nobody willing to offer it at any price. Softbank does not have unlimited funds.

This means a number of formerly rock star startups will soon go under, get much smaller, or sell out at a fraction of their last round. This will bring D&O suits!

Watch Out For Private Claims

This will be easiest for those who have already gone public, but I suspect the privates will draw their share of suits as well. We will also see VC firms as defendants and, of course, the poster child of this cycle, the Vision Fund.

I am even going to predict a new type of D&O claim. Normally, private D&O is considered lower risk because there obviously isn’t the risk of shareholder suits. Wait, is that truly obvious?

One thing that’s changed over the last decade is there are now private exchanges where employees can sell their pre-IPO stock. Here are just a few. I certainly wouldn’t put it past an enterprising trial lawyer to seek out We employees to form a class.

If there was a quote several months ago that showed they could have sold at near the $47B valuation from the peak Softbank round and now they can only get 20% of that, I think they just might have standing.

I’m not saying the employees will win for certain, but they will have a fighting chance. It’s not like a judge is going to be biased towards taking We’s side on this. It’s very easy to paint the employees as sympathetic when Neumann walked away with over $1B.

Until someone can show me case law that says employees can’t sue based on the private exchange value, I would call this a risk for insurers. And if the lawyers can win against We, well, then they can sue every private tech company that comes public below the last private round. So much for private D&O being “safe”! Of course, the actuaries will never see it coming.

Don’t Ignore the Broader Market

But this isn’t just about tech. Certainly Juul is going to have a major loss. And Altria for not doing proper dili on the legal risk. And Bayer for the same reason on Monsanto. Boeing must be a full limit loss. And the market is still at all time highs!

Everyone knows the greatest risk to a D&O policy is an expensive stock market. The last time the D&O market truly took a header was at the end of an expensive market driven by a tech boom.

While I can’t predict when the bull market will end, it is certainly reasonable to say we are a lot closer to the end than the beginning. The risk of a claims outbreak is elevated, from both frequency (a falling market means more suits are filed) and severity (the magnitude of the stock price decline is greater). Put them together and we get the dreaded frequency of severity (also known as getting your *ss kicked)!

Is this concern part of the reason D&O prices are going up? Yes. Is this concern reflected in higher AY picks for D&O? No. Companies are only confessing to concerns over general liability and commercial auto so far (if they confess at all).

How come the pricing actuaries are aware of this risk but the reserving actuaries aren’t? Because we don’t speak of these things in front of reserving actuaries. That’s what makes them IANS!