Analysts at AM Best have argued that the recent stock market frenzy and social media outrage surrounding GameStop, AMD, AMC and other stock could cause an increase in class action lawsuits.
The rating agency noted that disclosures provided by Robinhood will be under intense scrutiny by lawyers.
And although it may be a while before the courts decide, insurers providing coverage for Robinhood could still face steep defense and containment costs (DCC), analysts warned.
Robinhood’s investors and the firms through which it routes its trades may also face scrutiny with regard to their regulatory filings and disclosures.
Some D&O insurance provides for government investigations if individual directors are the target of the investigations and, if Congress issues requests for documents or subpoenas, these expenses may be covered by the D&O policy.
Additionally, AM Best believes that the overlap between D&O policies and cyber policies could also be tested by recent events.
A large portion of Robinhood’s revenue comes from selling transaction data to firms for execution, which it had failed to disclose to its customers.
In 2020, the SEC claimed this practice cost Robinhood users $34.1 million, even after considering the lack of commissions on transactions, and charged the company for its repeated misstatements. Robinhood paid $65 million to settle the claims.
AM Best points out that DCC and social inflation are already creating pressure on D&O and professional liability insurers, and headline news such as Robinhood and the involvement of hedge funds will likely worsen social inflation significantly.
Adding to this the accelerated pace of communication and engagement in social media, insurers will need to monitor this space closely over the medium term, analysts said.
