March 14, 2023 by Alyssa DiSabatino
Canadian insurtechs may not be entirely immune to the aftershocks of two U.S. bank failures, one expert told Canadian Underwriter.
Silicon Valley Bank (SVB) failed on Mar. 10 after its mostly tech-centric and tech start-up customer base, hit hard by inflation, was prompted to make withdrawals en-masse. The heavy withdrawals caused the bank to collapse.
SVB is headquartered in the U.S and operates in Toronto, Canada as a foreign bank branch. The Office of the Superintendent of Financial Institutions (OSFI) has seized temporary control of its assets in this country.
The bank’s Toronto branch has been primarily lending to corporate clients, and the branch does not hold any commercial or individual deposits in Canada, OSFI said in a statement.
“SVB was only licensed to provide lending services in Canada — it wasn’t licensed to take deposits. That somewhat limits the fallout and risk to clients in Canada,” Joel Baker, president and CEO of MSA Research observed. “The risk on the lending side is that deals that were in the works that were supported by potential loans from SVB would need to find alternative funding sources.”
SVB’s concentration in tech start-ups could reveal vulnerabilities for Canadian insurtechs and other related start-ups.
SVB is one of two banks that shuttered last week. U.S-based Signature Bank also failed on Sunday, after its mostly crypto clients made similar inflation-prompted withdrawals. However, that bank is not licensed in Canada.
“The larger risks to Canadian start-ups — FinTech, InsurTech or other tech — is for business in the U.S. and any dealings they may have had with SVB or Signature stateside,” said Baker. “The U.S. government, in an attempt to limit contagion, has guaranteed deposits, so immediate fallout should be minimal.”
However, if financial contagion (i.e., spreading instability through the financial system) reaches banks north of the border, the risk could become more severe in Canada.
Plus, funding sources for start-ups are likely to be reduced, Baker observed.
“The longer-term risk is a reduction of funding sources for start-ups going forward,” he said. “The tech industry is already on the ropes. [Venture capital] funding will likely take an even larger role.”
In Canada, insurtech activity saw a downswing in 2022. The country saw a total of 14 insurtech deals in 2022, and only three deals in 2022 Q4. Globally, insurtech deals dropped to 106 — the lowest number since 2020 Q4.
“The music stopped for the easy money ride more than a year ago,” said Baker. “This latest blow makes it all the more difficult for start-ups to get off the ground.”
However, there’s a positive: “More stringent investor diligence is not a bad thing. Not every start-up should see the light of day,” said Baker.
A pedestrian passes a Silicon Valley Bank Private branch in San Francisco, Monday, March 13, 2023. Depositors withdrew savings and investors broadly sold off bank shares Monday as the federal government raced to reassure Americans that the banking system was secure after two bank failures. Regulators closed the Silicon Valley Bank on Friday after depositors rushed to withdraw their funds all at once. (AP Photo/Jeff Chiu)