In order to conduct financial activities (e.g. sell products), a business must be authorised and regulated by the Financial Conduct Authority (FCA), this includes insurance companies and intermediaries as well as banks and credit unions.
Firms are required to be authorised and comply with rules set out by the FCA in order to make sure that they are meeting a minimum standard. Businesses are required to do this at all times and must regularly report to the FCA.
To become authorised a business must apply to the FCA and must pay an application fee. The process can take from 6-12 months, you must meet the criteria set out by the FCA.
An authorised business (the principal), can assume the regulatory responsibility for another which sells its products (the Appointed Representative). An AR can perform regulated activities (such as selling insurance products) but only under the control of the principal which directs the sales process, documentation and customer servicing.
An Appointed Representative (AR) is a firm or person who runs regulated activities and acts as an agent for a firm the FCA directly authorises. This firm is known as the AR’s ‘Principal’. The Principal will manage your compliance and operating requirements to the FCA.
Becoming directly authorised by the FCA provides you more internal control over your business, but this comes with the full responsibility for trading within the FCA’s requirements, including reporting, to ensure the FCA maintains your license.
Capacity is an insurance term for the financial resources made available by an insurance company to enable it to accept risks. Insurers must be able to pay claims and have to work out how many claims of what types can be afforded against these resources.
Underwriting is the process insurers go through to assess risks and calculate the price such that sufficient capacity is retained to pay the claims and make a profit.
To sell insurance products you must be either a) be authorised by the FCA as an ‘insurer’, or b) act as ‘insurance intermediary’ in partnership with an insurer.
To become an insurer requires significant solvency capital requirements, hence today we typically see an Insurtech becoming an insurance intermediary and partnering with an incumbent insurer. As part of this partnership, the insurer provides the Insurtech with ‘authorised capital’, and i.e. underwrites the startup’s insurance product.
Authorised capital is separated from a startup’s ‘working capital’ (day-to-day business cash flow) and can only be used to sell insurance product against. It is leveraged to payout on customer’s claims, and depending on the amount, limits the amount of insurance a startup can sell. The capital is assigned assigned in the partnership ‘Terms of Business Agreement’ (TOBA), or ‘Binder’.
An insurance partner is critical to sell insurance products as they provide the security that claims will be paid. Further, the insurer can provide benefits such as: ratings tables, policy wording, IT support, product design and years of experience operating in the sector. It is in their interest to ensure their partner startup is successful, so that their capacity is put to efficient use.
Reinsurers provide financial security for insurance companies by taking on risks that are too large for one insurer to handle, or to help share the risk with other insurers, easing the load on each. This allows for insurance companies to hold less capital as they have less potential losses to cover, in addition it allows them to underwrite more policies. Reinsurers can also provide expertise in some specialist markets.
An insurer sells insurance to a customer otherwise known as the insured or a policyholder. Insurance is the exchange of payment for the risk of a loss. In exchange for payment insureds are guaranteed a promise of compensation should a loss occur.
For example, many people have home insurance, customers pay a monthly fee to their insurer, safe in the knowledge that should their house be damaged in a storm their insurer will provide funds to cover repairs (NB this would depend on the type of policy that the policyholder had taken out)
A reinsurer does not sell insurance policies to consumers. Reinsurance is a type of insurance that is often purchased by one or more insurance companies who are looking to limit their total loss should a disaster or catastrophe occur. In short, it’s insurance for insurance companies.
For example a group of insurers who sell flood insurance to house owners could find their business destroyed if the ice caps melted overnight and flooded London. Instead of leaving themselves liable the group of companies can purchase reinsurance so that if the flood occurred they are only liable to compensate for a fraction of the losses and the reinsurers cover the rest.
The Insurtech Gateway offers a platform of exclusive commercial deals with best-in-class service providers. We have assessed the full stack of an Insurtech business needs, from ‘front office’ (brand, design, PR), to ‘middle office’ (customer support, claims, business services) and ‘back office’ (IT stack) to provide a recommended partner list. Our platform is not mandatory, and startups can pick and mix the services their business requires. Our platform increases speed to market, saves the management time and money and ensures all product is scalable. We estimate startups will make an average saving of up to c.£500k in year one alone!
Robert Lumley and Stephen Brittain co-founded the Insurtech Gateway with investment from Hambro Perks and Lumleys. Their vision was to create a sector focused investment vehicle that would remove the barriers to entry unique to the insurance market, and allow Insurtech entrepreneurship to flourish. Find out more about our co-founders here.
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