This article was published on February 17, 2020

3 things startups need to consider before buying insurance

3 things startups need to consider before buying insurance
Lauren Hubbard
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Lauren Hubbard

Lauren is a brand and communications analyst at Lloyd’s, the 320+-year-old insurance marketplace. Lauren is a brand and communications analyst at Lloyd’s, the 320+-year-old insurance marketplace.

Startups can be among the riskiest businesses to insure. That’s because they operate in new markets and often with untested business models. Even worse, they often grow very quickly into unknown areas with unknowable risks.

For all these reasons entrepreneurs and innovators can sometimes find it hard to access the type of financial protection they need. This is a particularly pressing issue in the fast-track, fast-fail world of technology.

Despite these challenges there are plenty of underwriters who are looking for new types of risk to insure. Insurance is also a highly competitive marketplace, and underwriters are in fierce competition to offer the best prices, terms, and conditions to their customers.

Here are three things that will help you to secure the financial protection you need for your startup.

1. Explain clearly what you’re doing

This might be stating the obvious, but it’s difficult to insure something if you don’t understand how it works. 

If you want an underwriter to assume risk on your behalf, you are going to have to make sure they understand exactly what it is they are insuring.

This can be tricky if you are operating in a completely new market, with new ideas, new concepts and new risks. Not many people outside your sector will be familiar with the details of what it is you’re doing.

How many people really understand cryptocurrency markets, for example? And yet crypto-insurance is a burgeoning market.

As more money flows through digital exchanges, losses from hacks on exchanges and trading platforms are on the rise. Nevertheless, cryptocurrency companies have found ways to protect their digital assets from theft and, by working closely with underwriters, insure losses that do slip through the net.

Recent moves by Lloyd’s syndicates in this area include facilitating a $255 million policy for Coinbase and a $100 million policy for crypto custodian BitGo.

By taking steps to increase their security both on and off-line, these firms have ensured users, investors, and insurers that their digital assets are protected. 

2. Think about all the different types of information that you can provide

Most insurers use historical data to help them model future risks. But looking at what has happened in the past rarely tells you much about the future where innovation is concerned. Underwriters must then turn to other sources of information to help them assess risk when detailed loss records aren’t available.

One particularly compelling example of this is in the sharing economy. 

Increasingly, the world is shifting to a shared economy where brands no longer own assets themselves but trade off their reputation for providing a quality service. About 500 million people share assets in six of the world’s biggest markets, according to Lloyd’s research. And the percentage of people willing to share services or assets in the future is expected to grow by double digits.

Where there are assets, even intangible ones like reputation, there’s insurance. This isn’t simple though — the sharing model, by its very nature, creates relationships between multiple different parties (consumers, providers, and the sharing platforms themselves), and consumers expect a high level of protection when they use and share their services.

However, the technology and data that these platforms possess, such as geo-spatial information from ride sharing apps, for example, is a powerful way of providing insurers with the high-quality information they need to assess risk properly — this can even substitute for the lack of historic data.

So, if you’re a startup, it’s important to think about what new types of information you might have that can help your insurer to understand and model risk more effectively.

3. Don’t be afraid to take (managed) risks

No one gets anywhere without bravery. Another truism, but few people understand this better than entrepreneurs who tend to have one thing in common – they aren’t afraid to fail.

Nowhere is this fearlessness better illustrated than in the realm of space exploration, in particular amongst a daring new breed of space entrepreneurs that includes new private space companies, wealthy entrepreneurs, and innovative startups.

The “New Space” economy is booming with new aerospace companies and ventures. Lloyd’s predicts that the global space industry’s value will grow threefold by 2040, from $300 billion today to $1 trillion. And much of this growth is driven by firms that are looking to develop faster and cheaper access to space and spaceflight.

As paid trips into space and privately funded astronauts increasingly becomes the norm, firms are looking for scalable and bespoke space insurance policies to protect them against a myriad of different threats. In December, Lloyd’s launched a new multi-million-pound space insurance policy for the emerging private spaceflight industry. 

In-orbit collisions, exploding rockets, and firms’ third-party liability for space tourists are some of the risks that underwriters must weigh up, as operators turn to the insurance industry to help them make space more accessible.

Deep industry knowledge, specialty expertise, and a long tradition of space exploration are all factors that can help insurers and their clients understand and model these risks effectively. 

But ultimately none of this would happen without that unique human instinct, a desire to explore and to be bold. And that comes down to a simple understanding that risks (no matter how complex or frightening they are) can always be managed with the right level of expertise, insight, and bravery. 

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