Briefing: The Silicon Valley Bank collapse – a case for an insurtech backstop?

By Clare Ruel

When Silicon Valley Bank (SVB) collapsed this month (10 March 2023), many insurtechs with funds tied up at the bank found the rug pulled out from beneath them.

This was the second blow of a one-two punch, with insurtech backer Tech Nation having its funding pulled in February.

However, the potential crisis of SVB UK’s collapse was quickly averted by the speedy action of the UK government, which saw HSBC swoop in with a rescue deal to buy SVB’s UK arm for just £1.

Likewise, the US government announced it would secure deposits in the collapsed US parent of SVB UK.

Now there is chatter in the market about whether the insurtech sector should have a central pooled fund or backstop similar to the one the UK government has implemented for terrorism with terrorism reinsurer Pool Re.

James York is founder and chief executive of insurtech Peaccce and is responsible for founding Totus Re, while also holding a position as a council member of Insurtech UK.

He told me: “My belief is that we need a formal insurer or state institution and [the collapse of SVB] is just yet another reason.

”In America, the US Federal State guaranteed all the deposits in the US and you have different levels of protection depending on whether you are consumer or a business.”

York argues that organisations such as the Financial Services Compensation Scheme (FSCS) would not be as effective as a central fund, due to the level of protection the latter could offer.

“There’s got to be a bit of middle ground where there is risk and protection,” he added.

Further evidence of the need for a central fund appeared when global investment bank Credit Suisse was on the brink of collapse a few days after SVB. 

Again, crisis was averted when Swiss competitor UBS swooped in for a takeover on 19 March 2023.

Averting a future crisis

While a string of near collapses have been successfully averted recently, how long can the dance of collapse and takeover continue before insurtechs are really in trouble?

York recommended that banks increase security and protection so that startups have bigger buffers.

With the government setting its sights on making the UK a “science and technology superpower”, a central fund makes sense.

On 20 March, the chancellor of the exchequer Jeremy Hunt pledged £2.5bn to the government’s new quantum computing strategy in a bid to make the country a leader in this type of technology over the course of a decade.

This backing also includes funding for a new artificial intelligence (AI) sandbox.

Speaking about the aftermath of SVB, York said: “It’s just an unravelling of time, it creates uncertainty – I’ve heard that in a knee jerk reaction, a couple of weeks back, people that had funding rounds lined up also had investors get the jitters a little bit – and this was outside of the insurance sector.

“But, undeniably when there is a seismic event with a big player in the sector, there’s going to be a bit of a sentiment ripple effect isn’t there?”

York remains positive that there is plenty of scope for the insurtech sector to take market share, despite the recent twin blows.

Going forward, York said the insurtech sector must “focus on how it can take costs and make cost savings for the sector”.

On a similar note, Ben Smyth, co-founder and chief executive at Arma Karma, notes that many venture capital firms “struggled to get the funds to make up the funds.”

As a result, Smyth said that some investment angels felt “over exposed”.

This, he says, was due to venture capital funders themselves struggling to raise funds in an economic climate that has seen inflation, the cost of living crisis and a recession.

For me, this melting pot of dilemmas is waiting to spill over and cries out for a central fund for the insurtech sector. 

With the government holding fast to its 10-year vision for the tech sector, what better way to support innovation?