The current spate of both local and overseas businesses seeking funding for expansion through initial public offerings (IPOs) and capital raisings highlights the challenges around obtaining appropriate insurance.
Founders and private equity investees pitching for institutional and retail support include new technology and disrupter start-ups seeking working capital, mining, media and financial companies pursuing growth in scale and activities, and offshore companies seeking ASX listings, currently led by the US tech sector.
“There is no shortage in the number of initial public offerings (IPOs) and capital raisings, but the insurance solutions that go hand-in-hand with these are more challenging to obtain than previously, says Gallagher National Head, Finance and Professional Risks, Michael Herron (pictured). “It takes specialised broking expertise to obtain a solution.”
The benefits of accessing funding for development also involve significantly increased compliance obligations, not least Australian Securities Exchange continuous reporting requirements.
A transitioning directors and officers’ (D&O) liability market has resulted in insurers
- taking a closer look at IPOs
- engaging in a more rigorous underwriting process
- balancing pricing considerations on risk vs return metrics
- reviewing the availability of cover.
“Failure to live up to prospectus expectations or the delayed reporting of an earnings downgrade, for example, could lead to investors buying shares on less than full disclosure of information,” Herron says. “Those sustaining losses as a result may be encouraged by plaintiff law firms to join a class action.
Securities liability and litigation costs arising from these class actions are covered under an annually renewable D&O program. Prospectus liabilities are typically covered by a one-off, single premium policy, running for up to seven years, but insurers currently are more selective about the level of risk they will accept, often requiring answers to extensive lists of questions.
The market for insurers of overseas companies wanting to list on the ASX is also limited, and securing the best solution depends on the particular raising and the company outlook.
“The facts are all important and the broker narrative is key to insurers taking a more cooperative view,” Herron advises.
This subject is explored in greater detail in the latest Gallagher Market Overview Report, Reflecting on a year of change. The report is available as a digital download.