With insurance contracts dating back to the B.C. era, it is no surprise that the insurance sector is one of the oldest financial industries still in existence. While insurance companies invented actuarial science and pioneered the use of mass data and risk diversification, the insurance industry had been a late adopter of digital technology - but it is catching up fast.
Change brings opportunity
There are many drivers for the digital innovation that is blooming within the insurance industry – from reacting to the ‘disrupters’ that have made online broking the norm, to advances in technology that make real-time data gathering on risks as diverse as the driving styles of policy holders, to the frequency of cyber-attacks on different types of business. For example, in automotive insurance the use of sensory technology and telematic data is starting to dictate how insurance premiums and payment models are determined – offering insurers that use it a considerable competitive advantage over those that don’t.
Yet, the latest Research and Development Tax Credit Statistics issued by HMRC showed that only around 2% of the total number of claims made within FY20 related to the Financial Services and Insurance sector, the value of which equated to R&D benefits of about £385m. These findings align with BDO’s own research data, which shows that insurance companies believe that only around 2% of their overall staffing costs are related to R&D activities. So are insurance companies missing out on funding opportunities?
Does your latest project qualify for tax relief?
If you have improved your digital offering, it is highly likely that you will have carried out R&D – maybe in an app development, or how you surface data to it, analyse traffic, or the integration between the app and your core systems. It is important to remember that while a project as a whole might not qualify for R&D tax relief, elements of it may. Alongside R&D tax reliefs available for the core development work, you may be able to access additional tax reliefs through the Patent Box scheme. For example, if you were to patent a small but intrinsic part of, say, your user authentication code within a mobile app then, if structured correctly, it may be possible to get the reduced rate of Corporation Tax on all the profits attributable to the worldwide use of that mobile app.
It is not just client-facing projects that can gain funding support through tax incentives. Since 2020, the pandemic has changed the way we live and work, and every business has had to adapt its processes and systems: for example, online claim handling systems may have been enhanced to fit with remote working arrangements or to automate processes. Did those enhancements require a systematic iterative development process to resolve underlying technical challenges? If so R&D tax reliefs could be available.
Similarly, if you are currently in the process of redesigning or strengthening your cyber security strategy, or are building platforms which take cyber security susceptibility into consideration, R&D tax reliefs should certainly be considered. Whether that entails developing new anomaly detection algorithms, developing bespoke system architectures, or software solutions with advanced encryption techniques, such activities may contain elements of R&D, and thus a part of the associated expenditure could be recouped.
Finally, as insurers look to adopt IFRS17, it’s important to remember that funding through R&D tax relief may be available when you are innovating to meet regulatory or financial reporting demands.
Finding the funding
Although R&D tax relief will change over the next few years, like the Patent Box, it is going a remain a key source of funding to support innovation: from our research, we estimate that, depending on where you are in the industry, up to 3-4% of insurance business staff costs will be spent on R&D in FY22 - up from around 1% in 2017. Those insurance companies that innovate to improve their competitive position can harness these incentives to help fund their investments for growth.
For more help and advice on using government-backed innovation incentives to help your insurance businesses evolve, please contact Carrie Rutland or Thomas To.
Get in touch
Subscribe to receive the latest BDO News and Insights
Please fill out the following form to access the download.