Does the World Need Another Auto Insurtech Like We Need Another TV Commercial with Flo or the Gecko? Yes, if it’s Clearcover!
Written by OMERS Ventures team members Alyssa Spagnolo and Michael Yang.
Every six months, if you own a car and plan to drive it, you must buy personal auto insurance. It’s like death and taxes. Today, there are a dozen auto insurance carriers in the Fortune 500. It’s a big business and most of the household names that we are familiar with were created before 1940. Yeah, you read that right — the big carriers are approaching the century mark — Progressive (1937), Geico (1936), AllState (1931), American Family (1927), Nationwide (1926), USAA (1924), State Farm (1922), Farmer’s (1922), and Liberty Mutual (1912).
With a such a backdrop, it comes as no surprise that founders and VCs have been poking around at insurance as a market ripe for disruption. Venture investment in insurtech has grown 12x from 2014 to 2019, and while some may be concerned that too much money is rushing into this market too quickly, insurtech funding is still only 15% of the overall fintech market.
Venture Capital Invested in Insurtech (and Fintech)
How many times have you seen a TV commercial telling you that “15 minutes can save you 15% on your car insurance”? Every carrier suggests that it can save you $500, and the industry has trained consumers to be consummate price comparison shoppers. Each year, the market sees very few new customers — less than 1%, which means that 99% of the market is already spoken for.¹ So that’s why this business is all about share shifting and stealing consumers from each other.
Personal Auto Insurance Market Share
The weapon of choice for competing to date has been offering the lowest price and then marketing that lowest price. Those gaining share in the market (GEICO and Progressive) are those with the lowest cost structure and thus the ability to offer the lowest prices, which they drill into consumers’ heads by using their massive marketing budgets. It certainly hasn’t been about operational excellence or delighting customers. It should come as no surprise that the average NPS in the insurance industry is just 28 points.²
Therein lies the opportunity. Today, we are excited to welcome Clearcover to the OMERS Ventures family, having led its $50M Series C financing with continued support from existing investors, American Family Ventures, Cox Enterprises and IA Capital Group. Based in Chicago, the heartland of property & casualty insurance, Clearcover was founded by Kyle Nakatsuji and Derek Brigham, insurance vets who came out of American Family Insurance and wanted to create the next generation, low-cost auto insurance carrier for consumers. Clearcover is a tech-enabled, full-stack carrier with a razor-sharp focus on having the most efficient cost structure in the business, in order to offer the most favorable premiums or rates to consumers. By being systems integrator to both home-grown and best of breed technology, Clearcover is systematically streamlining various insurance processes from the front to the back of the house.
Venture investors must appreciate that insurance fundamentals are very different than typical tech or SAAS financials. There are two equations in P&C insurance of note:
1) Premium = Incurred Losses + Loss Adjustment Expenses + Underwriting Expenses + Underwriting Profit
2) Combined Ratio = (Incurred Losses + Loss Adjustment Expenses + Underwriting Expenses)/Premiums Earned
Incurred losses refer to the claims you have to pay out. Loss adjustment expenses refer to how much it costs you to pay those claims. Underwriting expenses speaks to sales and marketing, pricing, and policy servicing costs. What’s most interesting is that many (if not most) carriers run a book of business such that the combined ratio is close to 100%, suggesting low profitability. That is to some degree true because the big picture in the game is all about float and aggregating assets under management. Float — the amount of cash collected via premiums, but not yet paid out, so available for investment — is the actual economic engine and driver of value creation. That’s why insurance is the cornerstone of Warren Buffett’s Berkshire Hathaway empire.
Clearcover is setting a new standard for what low cost structure means across the entire insurance value chain. Simply focusing on marketing hacks and pretty front end UX is not enough. Trying to find the needle in the haystack on superior underwriting risk management is not enough either. Ultimately, you need to solve for the full equation, and that’s what Clearcover is all about. We look forward to supporting Clearcover and continuing to find other investment opportunities in the broader insurtech landscape.