The Australian tech start-up industry has the potential to contribute $109bn (or 4 per cent of GDP) and 540,000 jobs to the Australian economy by 2033, a research by PWC has found. This promising sector could provide brokers with huge opportunities to transform and expand their businesses.
Brokers CAN fit their services to start-ups needs
“Rather than just provide an insurance product, brokers can guide start-ups on useful risk management techniques,” says Joe Power, Vice President of Beach Financial Group based in the US.
Brokers can pitch themselves as insurance partners, stresses Power.
“As they grow, understand their trajectory and ‘buy in’ to their business plan by matching insurance to their evolving needs,” he explains.
Power adds finding insurance for start-ups in the Australian market is a matter of navigating various insurers and then negotiating suitable coverage.
“A broker is the best source to do that,” he says.
Geoff Stooke, Managing Director, Modern Risk Solutions, states that many start-ups feel shunned by the insurance market because they are deemed too small and are told that the achievable premium against the work required does not make them an attractive pursuit.
To overcome this, Stooke suggests working with the right underwriter. “I prefer to work with underwriters that not only understand the segment, but also have some degree of underwriting authority.”
“As a start-up can change quickly, including pivoting its business at little notice and potentially changing its risk profile, it is important to work with a supportive insurer that not only understands the risk, but also has a broad enough appetite to deal with change.”
Power believes when speaking with underwriters, the critical thing is to pick up the phone.
“I cannot stress this enough – speak directly with the underwriter about the start-up, help them understand the risk, point out its unique elements and the vision that you and the client have for coverage,” he says.
As a start-up can change quickly … it is important to work with a supportive insurer.
A start-up will likely be showing a loss on its profit and loss statement, so there is a need to explain that in the context of the start-up’s business model and provide a detailed business plan.
“As a broker you will quickly find which underwriters can assist. The more transparent you are with the underwriter, the more likely they are to help you,” says Power.
Brokers need to manage emerging risks for start-ups
Stooke states that the most important question brokers should be asking start-ups is whether they intend to raise capital from third parties.
“Far too many start-ups overlook the exposure to shareholder issues from raising money and having a diverse cap table,” he explains. “Far too many insurers also exclude capital raising activities and the issuance of securities within their Management Liability Insurance policies, when raising money is the primary goal of a start-up as they scale after achieving product market fit.”
Brokers are key to protecting proprietary ideas and innovation
Powers suggest that brokers need to be thinking a few years ahead when planning insurance programs for start-ups and pre-empting issues they might encounter as they grow.
FACTORS UNIQUE TO START-UPS THAT BROKERS MUST CONSIDER TO BEST PLACE RISK:
Stooke adds: “Intellectual Property Insurance with IP Pursuit coverage is an emerging risk area in Australia that will present a new plethora of opportunity. As it stands, there is significant expansion in Australian R&D activity from ESIC (Early Stage Innovation Company) changes from 1 July 2016 with tax incentives for both investors and start-ups.
“Patent & IP Enforcement Insurance is a relative new entrant to the professional risks arena for the insurance industry. Certainly, no insurer in Australia presently offers the policy – and Modern Risk Solutions has sought this cover from Lloyd’s for our clients.”
Power explains that big data, Internet of Things (IoT) and data sharing, as well as new media-social media, are rapidly emerging risks and something that is complex for insurers to rate under conventional methods.
“Few insurers consider the coverage, but demand is growing. Some basic cover is often afforded under a broad IT policy, but stand-alone coverage can also be considered which can defend third party claims, as well as pursuit costs,” he says.
How to excel in this sector?
Power suggests brokers need to be creative in how they manage the client relationship, as many start-ups are interested in exploring new ways of dealing with professional services and how technology can enable that.
“For the broker, it all comes back to understanding what a start-up is and the unique challenges they face as a business. A greater understanding of this and customer needs will always generate superior results,” he says.
Stooke’s view is that, brokers must have a genuine passion for innovation and the challenges of entrepreneurship that clients in this space are facing.
“A professional risks background would help too from a technical perspective,” says Stooke.
“Marc Andreessen [co-founder of Netscape] famously said that ‘software is eating the world’ and as an insurance broker if your traditional clients are currently untouched and not disrupted by emerging software from tech enabled startups – they soon will be. It is therefore imperative for insurance brokers to consider the businesses of the future that will shape various industry verticals from transport, logistics, health, care, travel, finance and education.”