Where are all the full-stack insurance start-ups?

Insurtech meetings often lament the lack of a new full-stack insurer in the UK. Since the days of Esure, Admiral and British Gas Insurance, UK regulators have seen little in the way of insurance start-ups approaching for authorisation.

The same cannot be said for the banking world. In 2013, in light of the financial crash five years before, the Bank of England lowered the capital requirements for start-up banks. This resulted in a flurry of digital ‘challenger' banks in the form of Monzo, Starling and Atom. The same process was not undertaken in the insurance world.

A number of insurance newcomers have established themselves over the past half-decade, just not in the UK. Gibraltar, thanks to its image of a being a  soft-touch regulation and tax haven, has traditionally been seen as the more attractive location for UK start-ups. 

However, in light of recent controversies, the change in regulations to consumer credit and the looming possibility of a hard Brexit, Gibraltar is looking less attractive as a domicile. So, could the UK see a full-stack insurance start-up in the near future?

Insurtech is booming
Insurtech is currently undergoing a massive boom in the UK. As of September, investment in insurtech had already tripled that of the whole previous year, with more than £16.5m flowing in to support start-ups.

Roy Jubraj, managing director of insurance practice at Accenture, says: "If you look at the insurance value chain, and the industry as a whole, it's massively ripe for technology disruption, whether that's new ways of working with data, or predictive tools, cloud-based technology or analysis tools.

"These are real opportunities, and there's a lot of energy and a lot of buzz around it. The whole proposition is being modified. And to do that, insurers are needing to adapt and integrate this new technology."

Research from Oxbow Partners reveals only 2% of insurtech investment has been funnelled into the insurer section of the value chain. Most of the money (56%) has gone into the distribution sector, while 34% has gone into the vendor sector and the remaining 8% has been invested into peer-to-peer propositions.

"If you look at the insurtech space, there's a huge amount of activity," says Greg Brown, partner at Oxbow. "That activity can be mainly broken into two areas. One is the distribution space, for which you don't need to be a full-stack insurer.

"The second is people tackling specific technology parts of the value chain. An example of that could be artificial intelligence for claims. Again, you don't need to be a full-stack insurer for that, you don't need to have any regulation to do that necessarily."

Brown explains the reason for the insurtech drive is the availability of technology, which becomes even more obvious when looking at other sectors such as banking.

"But if you look at the insurance sector, everything except peer-to-peer can be tackled in the distribution space and you don't need to be a full-stack insurer," he says.

"You need capacity, but you don't need to own the capacity. At the moment, insurers are scared the next Uber will come along in insurance, so they're very happy to provide capacity to start-ups. There's no lack of capacity provision.

"The question is whether the industry needs a full-stack insurer. Will it happen in the next two to three years? It seems unlikely to me."

Tony Sault, head of UK general insurance at EY, says the soft UK market provides plenty of excess capital for start-ups to tap into. "Clearly there is a multitude of insurtech start-ups.

"It's becoming a serious phenomenon, especially from a revenue perspective. Why haven't we seen the same level of start-ups with full-stack insurers like we have in banking? Barriers to entry.

"To set up as an insurer is still very expensive. If you look at the insurtech companies, a lot of them are backed by venture capital type funds. In terms of appetite, those investors prefer to look at lighter regulated companies than insurance companies. So it's soft market plus regulatory burden.

"A lot of the insurtech start-ups are looking at the distribution space, that's where we're seeing innovation. Even these innovative start-ups like Lemonade are backed by large existing insurance companies." 

Barriers to entry 
Slaughter and May partner Ben Kingsley says the tough capital requirements, coupled with the strict regulatory environment of the UK, has put off start-ups from exploring the insurer portion of the value chain, instead choosing to focus on the distribution space. 

"To become an insurance distributor is actually pretty straightforward from a regulatory and legal perspective," he says. "You're not running a balance sheet and you're not subject to the capital requirements that insurers are subject to under Solvency II.

"You are obviously subject to regulation because you're selling financial services products to the public, but it's relatively straightforward. That's where most of the focus has been."

Kingsley predicts any emerging insurer in the future will grow out of an already established and well-funded company, like a technology or telecoms company.

"To get an insurer licenced is going to take many millions of pounds. So it would also require the staff and the systems that are necessary to run an insurer's balance sheet. It's quite a complicated operation. To attract the right quality of actuarial professionals and product professionals would take a significant investment.

"It's the sort of investment that would be a drop in the ocean to the likes of Apple or Amazon or Facebook. But whether companies like them have the appetite to throw themselves under a regulatory spotlight is a whole different question."

Kingsley adds: "They could have thrown a couple of hundred million pounds at it and set up their own in-house insurer, but we haven't seen that happen yet, which is probably an indication that they don't yet feel ready to enter that highly regulated world of financial services.

"Why would they, when instead all they need to do is partner up with an incumbent insurer and say: ‘Look, you do all the underwriting and the risk management, and we'll do all of the distribution, and away we go'?"

Kingsley explains that the organisations most likely able to resource the creation of a new insurer don't need to start their own because they have the financial leverage to partner up with an incumbent insurer.

"I wouldn't say never, but it's less likely that we'll see many new insurers like we've seen so many new banks."

The Gibraltar advantage gone?
Though traditionally an attractive domicile for insurers, the reputation of Gibraltar as an easier regulatory environment than the UK has taken a knock in recent years. 

Michael Ashton, senior finance centre executive, Gibraltar Finance, HM Government of Gibraltar, told Post in August that the Gibraltar government had poured more resources into the Gibraltar Financial Services Commission in recent years with the aim of strengthening the Rock's regulatory environment.

"From the government's perspective, it's about making sure that the regulatory environment for insurance is at the same level as you'd expect to find in any major European market economy," he said at the time.

Penny Searles, CEO of Gibraltar-based Smart Driver Club, says Gibraltar makes more sense from a regulatory standpoint and Solvency II perspective.

"The funds required to be able to run an insurer are immense now. So from an investor perspective, if you're looking for an investment, that money's got to just sit there. It's not working for an investor.

If you're looking for an investment for a normal company of £100m that would be used to set the company up, invest in marketing, staff, technology and so on. With an insurer, a good portion of that has to just sit in a bank account and be capital adequacy to deal with any future claims.

"So the way the UK companies are required to be structured under Solvency II is really off-putting for an investor. Or for any company considering setting up as an insurer.

"I would have liked to have set up in the UK, but there's no way I would have been able to get the investment for a brand new insurer with those capital requirements. It's a very competitive space with limited distribution opportunity."

Searles adds, however, that Gibraltar is losing the competitive edge it once had over the UK.

"From a regulatory perspective, Gibraltar probably isn't as attractive as it once was. There's more people there, there's confusion between the Financial Conduct Authority and the Gibraltar Financial Services Commission around consumer credit.

"Now that the FCA regulates consumer credit, there's no incentive to be a Gibraltarian entity. So Gibraltar is looking less attractive for insurers and intermediaries."

Brexit impact uncertain
Looking to the future there are many questions around what effect the UK leaving the European Union or Brexit will have on UK insurers. Passporting rights, data protection equivalence and solvency parity are all issues insurers and brokers have lobbied the government on in recent months.    

There remains a possibility, however remote, that the existing Solvency II regime could be modified to facilitate a less hostile regulatory environment for start-ups in regard to capital requirements.

Andrew Tyrie, the Conservative MP who chairs the Treasury Select Committee, said last month: "Brexit provides an opportunity for the UK to assume greater control of insurance regulation. 

"The Solvency II Directive came into force in January, only after a heap of concerns had been expressed about it. Among its manifest shortcomings was the failure to secure value for money over its implementation."

Could Brexit provide an easier environment for start-ups to operate in? Sault says: "We don't know what's happening yet with Brexit. The government hasn't been very clear yet on what form Brexit will take and what its effect will be on the financial services industry.

"There will be chinks in the armour, so to speak, and opportunities for some out of something this seismic. But just because Brexit is going to happen doesn't mean anything will be any easier for any potential wannabe insurer to set themselves up either in the UK or the European zone. There may be some space in the London market for very specialist insurers but nothing full-stack.

"It's easier to just buy what's already there. There are already plenty of regulated insurers out there that aren't doing much. They already have licenses and capital, so it would be easier to just purchase one of them and repurpose it rather than starting anew."

John Morley, managing director of insurance risk and finance management at Accenture, says: "With Solvency II being employed across Europe, capital requirements become less of a differentiator. What is a differentiator is how the rules are interpreted and how harsh a regulator body is. The Prudential Regulation Authority is particularly robust in the way in which it applies regulation. That obviously can be a discouragement to new entry.

"So Ireland can have a preferential environment and that coupled with passporting, the ability to operate in any EU country. If you were a start-up with capital, the most preferential areas to start would not be the UK."

He concludes: "Brexit could change things but it depends what replaces it. It's not a binary ending to this problem considering all the interrelationships that there are across the different entity setups.

"One would assume that things would change, because if you wanted to sell in the UK you would need a UK entity. I suspect we will continue to be governed by the European Economic Area to some extent. It will be more likely that there is some kind of passporting put in place to replace the existing passporting relationships."