The UK InsurTech sector’s emerging funding problem
April 10, 2017
In response to our recent post about the UK All Party Parliamentary Group’s meeting on InsurTech, one startup Founder contacted us about what he perceived as a real problem in UK policy: Enterprise Investment Scheme (EIS) eligibility for InsurTech startups. The Founder asked to remain anonymous: here are his views.
The UK Cabinet Office, Treasury and FCA are actively encouraging the UK to be a global hub for InsurTech. Each has been supportive to the InsurTech community and communication has been excellent. There have been various high-level discussions and working groups, for example the meeting at 10 Downing Street in March 2016 and the FCA’s Project Innovate and Innovation Hub. Various industry bodies such as Tech City’s Fintech Delivery Panel are also beginning to broaden from pure Fintech to cover also InsurTech.
The problem is that HMRC’s policies don’t seem to be fully aligned with the stance of the Treasury and FCA. HMRC recently denied my startup Enterprise Investment Scheme (EIS) status. If this is HMRC policy, it could seriously stifle the UK InsurTech sector.
What is EIS?
The Enterprise Investment Scheme (Wikipedia page) is a series of UK tax reliefs designed to encourage investment in early stage UK companies. It has a little sibling called the Seed Enterprise Investment Scheme, which provides more generous tax reliefs to very early stage companies for rounds up to £150k. Given that InsurTech is in its early stages, EIS and SEIS are hugely valuable to investors, most of whom are private individuals who want to offset some of their risk.
What is the problem?
Many of the new InsurTech businesses being launched in the UK will operate as a managing general agency (“MGA”). As such, they will act on behalf of an insurer, and revenue will be a commission on premium.
MGAs are an important, established and fast-growing sector of the UK insurance industry. Over 300 MGAs currently underwrite over 10% of the UK’s £47 billion general insurance market premiums according to the MGAA. They come in many shapes and sizes, ranging from startup InsurTechs like mine to giants such as UK General.
MGAs can work with a single insurer or have multiple insurer relationships. It is likely that InsurTech MGAs will, at least initially, work with a single insurer given that volumes are low and the set-up cost of possibly innovative products or propositions could be high for the MGA.
It appears to be the case that HMRC deem MGAs working with just one insurer to be carrying on insurance and thus not eligible for EIS. This seems totally illogical as MGAs, whether acting for one insurer or for many, are not bearing insurance risk. The suitability for EIS must surely be the line between companies who have a balance sheet running insurance risk (i.e. insurers) and those who do not (e.g. MGAs, brokers, claims adjusters).
What are the implications for InsurTech in the UK?
If HMRC’s recent interpretation of the rules is not reversed quickly, there could be damaging consequences for UK InsurTech:
- Existing startups, such as mine, whose funding is partly contingent on obtaining (S)EIS advance assurance, could be “dead at birth” as many might not be able to source capital outside of investors using (S)EIS
- It is likely to deter cross-sector entrepreneurs from innovating in insurance, thereby reducing the benefits of vehicles such as the FCA’s regulatory sandbox and, more broadly, innovation in the sector
- The UK’s relative attractiveness as an InsurTech hub will be reduced relative to competitor cities such as Berlin, Zurich and Paris
Longer term, this could have implications on the UK’s tax receipts from insurance and InsurTech.
This technical interpretation of HMRC rules could have a hugely destructive impact on the UK’s flourishing InsurTech scene. It should be the first issue that the All Party Parliamentary Group, and Government bodies, address.
The Oxbow Partners view
We contacted HMRC’s press team for comment. They confirmed that HMRC is “unlikely to approve an application from any company operating for just one insurer.” They added that “SEIS and EIS are intended to encourage individuals to invest in small, higher-risk, companies that struggle to access finance to help them grow and develop. To ensure the schemes are well-targeted at these companies the rules exclude certain lower risk activities, including insurance and other financial activities.”