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Insurer in Full: The SVB tremors will still be felt despite the bail-out

Keen industry historians will recall SVB as the nearly bust Lloyd’s insurer that was pulled back from the abyss 20 years ago under a new management team led by Matthew Fosh...

Ironically it was under-priced financial lines/D&O business that almost sunk that firm two decades ago (it became Novae and was sold to Axis in 2017 for $605mn). Now, there’s a new SVB failure in town and the contagion risk is substantially more serious.

This SVB – Silicon Valley Bank – presented itself as a very modern, tech-focused institution but on Friday it was brought down by that most old-fashioned of endings: an ignominious run on the bank.

Overnight, the US administration stepped in decisively with a set of emergency measures designed to protect SVB customers and stave off a wider banking crisis, despite US Treasury Secretary Janet Yellen initially ruling out a full bail-out of the bank earlier in the day yesterday.

In a joint statement made after consulting with President Joe Biden, Yellen, Federal Reserve chair Jerome Powell and Federal Deposit Insurance Corporation chair Martin Gruenberg last night said that all depositors will see their funds fully protected.

The Fed also announced it will make available additional funding to eligible depository institutions to help make sure that banks have the ability to meet the needs of all their depositors. In London, HSBC is to buy the bank’s UK arm for £1.

The actions came after concerns that customers of other medium-sized banks may look to move their money away to larger institutions, which could result in further runs on bank assets.

It would certainly seem the factors that led to the run on the bank that triggered SVB’s collapse – outsized losses on long-term fixed income bonds because of sharply higher interest rates – are not unique.

The emergency measures may succeed in staving off any contagion to the wider banking sector and the protection of deposits should avert further funding crises for tech company clients of SVB, including a number of insurtechs it is known to have relationships with.

But it has further highlighted the fragility of the fintech and insurtech funding world, and raised questions about the concentration of deposits, and the vulnerability of smaller banks to the impact of higher interest rates on investment portfolios.

And there will surely be insurance losses despite the action.

SVB’s D&O tower, for example, will likely be toast (we understand it’s ~$180mn of limit and widely syndicated).

It’s also possible that class actions may emerge which, if successful, will impact FI/D&O lines. Take the Californian streaming business Roku, for instance. On Friday, it confirmed it had $487mn – equivalent to 26 percent of its entire cash – deposited with SVB. Even if those deposits are now fully protected, there must be a possibility that lawsuits will be filed over a decision to put so much cash on deposit with SVB on a largely uninsured basis.

Nonetheless, even if a worst-case scenario had unfolded and the regulators had taken the view it is better to let the bank fail, it should be remembered that the (re)insurance industry overall had a good financial crisis in 2008/09.

And perhaps the events of the last few days will also serve to put a stopper on the current downward pricing momentum in the D&O/FL market, highlighting the vulnerabilities that exist in the current environment?

That would certainly be one silver lining to welcome after the weekend banking dramas…

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