Summary: After living through the Palisades fires and the SVB collapse - it feels like 'once in a lifetime' events are happening more than, well, once in a lifetime. Unlike traditional insurance, where risks are diversified across independent policyholders, startup insurers face systemic risks—events that could lead to simultaneous claims from most of their customers.
Last thursday night (Feb 27 2025) I scored an invite to a venture-dinner hosted by Lightspeed Ventures. I lucked out and got seated next to both the founder and head of sales of Vouch, an insurance company that I actually use.
Having just come out of the 2025 California fires (my place was in Brentwood and was indeed, evacuated, being only 3000 or so feet from the front of the Palisades fire), - I've found myself with an increasing interest in insurance maths while watching the aftermath of this event. What causes 'end of support' events for traditional insurers is clear (usually defined as acts of god). It was actually my second time living through an 'act of god' event - in 2009 in Perth, Western Australia, we experienced a catastrophic hailstorm that wiped out a large portion of the cars in the city. Insurance companies got out of paying anything by claiming 'act of god' loophole, and life went on. We'll see what happens with the Palisades fires and insurers, I'll be watching close.
I also lived through the SVB collapse (Harry and I ended up in the ABC over it with a tasteful topless beach pic see the article here) and nearly watched $5 million of our seed capital evaporate over a weekend - I didn't include any mention of bank collapse in this piece as it seems so rare, but, between these three events, I've definitely got a lot to say about insurance maths/doomsday scenarios.
My friend Anthony Mainero notes: It's a funny idea to wrap your head around insurance for an industry where 95% of startups fail anyway, even without acts of god. A solid point. Regardless:
The Vouch guys gracefully endured my questions around 'what would be a similar doomsday scenario for their type of insurance' - ie - what could cause an insurance company focused on startups to collapse entirely?
Unlike traditional insurance, where risks are diversified across independent policyholders, startup insurers face systemic risks—events that could lead to simultaneous claims from most of their customers.
Another way to think about this is just - how so many companies inevitably have 'all eggs in one basket' without even realizing it.
My friend Sophie Helfend points out: Crowdstrike was the most obvious example of this. Easily predictable, but, who saw it coming?
The most concerning risks discussed included a catastrophic AWS outage, Bitcoin crashing to zero, a global cybersecurity meltdown, and abrupt regulatory changes. These are the kinds of black swan events that no insurer truly prices in but that could redefine the industry overnight. Here's a breakdown of the biggest existential threats to startup insurers and what they can learn from traditional insurance models.
What Would Kill a Startup Insurance Company?
Traditional insurance survives because risks are spread across independent events. One house burning down doesn't make the next one more likely to burn. But in the startup world, systemic dependencies mean one failure can cascade across an entire sector.
Startup insurers rely on their customers staying in business. If a massive event hits simultaneously—say, every startup relying on AWS's us-west-1 region goes offline—claims skyrocket while premium income dries up. Similarly, if an entire sector like crypto or gig-economy startups is suddenly outlawed, insurance companies lose entire customer bases overnight.
Real-World Doomsday Scenarios
AWS Region Outage: When the Cloud Eats Itself
AWS has had multiple outages, and while most are brief, a prolonged failure of a major region like us-west-1 could be catastrophic. Many startups rely entirely on AWS, meaning business interruption claims would flood in at once. Worse, insurers themselves likely rely on AWS to process claims, compounding the disaster.
Bitcoin Collapsing to $0
A total crypto wipeout would mean a wave of bankruptcies for crypto-based startups. This would trigger claims for directors & officers (D&O) insurance as investors sue failed founders, cyber theft coverage as hacks escalate, and even general business interruption policies. While Bitcoin hitting zero is unlikely, its volatility alone makes it a massive risk for any insurer with exposure to fintech or blockchain startups.
Global Cyber Meltdown:
A software update or vulnerability in a widely used framework could cripple companies worldwide. We've already seen glimpses of this: the 2024 CrowdStrike update that caused blue screens across industries, or the NotPetya ransomware attack that inflicted $10 billion in damages. If a widespread cyber event disabled the core infrastructure of digital businesses, insurers would be drowning in cyber liability and business interruption claims.
Regulatory Overhaul: Banned in a Flash
Governments have a habit of banning or severely restricting entire industries overnight. China's crypto ban in 2021 instantly erased an entire segment of the market. A similar scenario could unfold for AI-driven startups, adtech companies reliant on third-party data, or gig-economy platforms facing employment law changes.
One real example of regulatory risk materializing was when Meta Pixel was hit with lawsuits over 'wire tapping'. As soon as that happened, insurers carved out Meta Pixel-related lawsuits as a specific exclusion for new clients. This highlights how insurers reactively adjust policies in response to sudden legal shifts. However, a broader regulatory crackdown—such as a sweeping privacy law banning certain data collection practices—could still create catastrophic exposure for insurers before they have time to adjust.
Probability Calculations:
Estimating probabilities for black swan events is challenging, but here are rough odds based on historical data:
Major AWS region outage: ~1-5% per year for a catastrophic, multi-day failure. While AWS has redundancy, history shows that even leading cloud providers experience downtime.
Bitcoin hitting zero: <1% per year. Total collapse is unlikely but remains a non-zero risk, particularly if regulatory crackdowns accelerate.
Global cyber meltdown: ~0.5% per year. Large-scale cyberattacks happen frequently, but a truly global meltdown would require an unprecedented vulnerability.
Regulatory wipeout of a major sector: 1-2% per year for any given startup category. Over a decade, the likelihood rises substantially.
For comparison, a house fire has a 0.24% chance per year, and car accidents with injuries occur 1-2% per year per driver. Traditional insurers can price these risks predictably. Startup insurance deals with rare but catastrophic events that could generate claims from most customers at once.
Comparison to Traditional Insurance
Unlike home or auto insurance, startup insurance faces correlated risk—when one claim happens, many happen.
Data Predictability: Traditional insurers have decades of data; startup risks evolve too fast for reliable historical modeling.
Magnitude of Worst-Case: A hurricane devastates a region; a cloud outage or regulatory ban devastates an entire industry.
Claim Frequency: House fires happen at a steady rate. A startup insurer might see years of calm, then a flood of catastrophic claims all at once.
Startup insurers mitigate risk by diversifying their customer base and purchasing reinsurance (insurance for insurers) to cover extreme losses. However, certain digital catastrophes—like an internet-wide cyberattack—could be too big to insure, similar to how traditional insurers exclude nuclear disasters or acts of war.
Final Thoughts
Maybe it's just me but it does feel like there are more 'end of the line' events occuring lately. Between the SVB collapse and the palisades fires, it feels like these things are accelerating a bit. It's equally a tough time to be a founder who has to protect their capital, as it is an insurer who has to keep calculating and covering these risks.
The nature of systemic failures means we can't rely on traditional actuarial models. We need more contingency plans for black swan events, diversified policyholder bases, and strong reinsurance partners.
For fellow startup founders, understanding what your insurance won't cover is just as important as what it does. If your business depends on AWS, crypto, or AI, be aware that insurers may not fully cover those risks—or could carve them out after the first major failure.
Investors should also consider the systemic dependencies of their portfolios. If all your startups rely on the same infrastructure or regulatory loophole, you may be more exposed than you think.