Briefing: The UK’s unique opportunity to create a world-first ‘insurer of state’

There is an en vogue saying in the tech sector that eloquently, albeit with a certain degree of brevity, captures its defiant optimism.  

It goes: “You can just do things”.

This might sound better in Latin, or perhaps French, but the simple message is that new institutions, models and ways of doing things can be created if people just shed their often faulty assumption that, just because the world currently works a certain way, it could not possibly work in another, better way. 

This optimistic philosophy is shared by many entrepreneurial founders that make up the best and brightest of the insurtech world and can be applied to a whole range of initiatives – from routine change management all the way to structural changes to the market itself.

One insurtech founder I recently spoke to is currently making a case for just such a structural change. 

James York, founder of Peaccce, council member at trade body Insurtech UK and executive director at Innovative Risk Labs, is currently seeking support and funding for an idea that he believes could fundamentally change the insurance sector and how the government manages risk. 

York’s suggestion is for the UK to create an insurance equivalent to the Bank of England – termed the Insurer of State – that would act as a structured, institutionalised “insurer of last resort” while also indemnifying the government’s balance sheet and contingent liabilities. 

Currently, the modern state already acts as the ultimate underwriter of systemic risks – for example, during the riots that swept the country following the Southport attack last July, all property damage was covered by the state’s Riot Compensation Act, with property owners having to claim via the police for any damage. 

York argued that this is a fundamentally inefficient system, with various types of crises handled reactively and at great economic cost. His proposed system looks to address this inefficiency. 

He explained: “By creating sovereign indemnity capital, much like [how] the Bank of England manages monetary policy, the Insurer of State would unlock liquidity, stabilise systemic risks and shield the UK economy from economic shocks without resorting to inflationary borrowing or blunt fiscal tools.

“This would make risk management a proactive and strategic arm of government, ensuring resilience in times of crisis while unlocking long-term economic potential.” 

Revolutionary potential

In York’s conception of this new structure, the levying of insurance premium tax (IPT) would be replaced by a state insurance premium, linking risk management funding directly to indemnity policy.

But, just like the Bank of England is able to create capital, the Insurer of State would not be constrained in capability by the funds that it collected via this tax. 

York explained: ”The way it would work apes what the Bank of England did after the credit crunch with the quantitative easing programme.

”Because the Bank of England doesn’t have a solvency requirement, which is the critical point of sovereign capital, no one tells it [that] it can’t loan based on its deposits.”

The Insurer of State would work in a similar, but vitally different, way by creating sovereign indemnity capital, which would not lead to the outcome of increasing inflation by causing the government to borrow money to fund its own losses.

York added: “My system creates a special purpose vehicle called a loss purpose vehicle that is tethered to an event – let’s say [the] Covid-19 [pandemic] because we printed £450bn for Covid.

”The Insurer of State would loan this loss purpose vehicle an amount, but as long as the interest rate in that arrangement was exceeded by the amount clawed back as a slice of what was IPT, then that vehicle is always solvent. Immediately, that amount would be on the balance sheet of the Treasury because it’s no longer a loss and has been indemnified, which gives you fiscal headroom straight away.

”This also creates less inflation because indemnity, by its nature, is not debt – it doesn’t have to be paid back, you just keep paying the premium.” 

York is seeking funding from interested parties to hire quantitative analysts to look into his model and critique it – but he noted that “no one has been able to break it yet”. 

While I cannot lay out a comprehensive picture of exactly how this institution would function in its entirety here, a new lever for government to pull that would unify the state’s capacity to respond to systemic risks while also benefiting the insurance sector is not a suggestion to be scoffed at. 

As York sees it, this idea is something that the UK is uniquely positioned to capitalise on as one of the world’s centres of finance and the home of the London market.

He tole me: “The UK, home to the world’s most sophisticated insurance market, is uniquely positioned to lead the world in this policy innovation.

“With its creation, the Insurer of State would ensure the UK’s ability to sustain growth, protect the economy from future black swan events and redefine the role of government in mitigating financial and existential risk.” 

Suggestions like this can sound utopian – with all the trepidations that accompany outside of the box thinking – but it is, at least, worth figuring out if the benefits really are within reach. 

After all, you can just do things.