Clearcover launching reciprocal and expanding into non-standard auto

Auto insurtech Clearcover is working to launch a new reciprocal that will be capitalised with funds on hand, and is planning to leverage the new structure to expand into writing non-standard risks, The Insurer can reveal.

Clearcover is aiming to capitalise on the broad turnaround in auto market conditions over the last 18 months, while also leveraging existing technology, distribution, and operations to expand into the segment with minimal need for additional fixed-cost investment to spur organic growth.

The insurtech currently writes standard auto business in 19 states, with its co-founder and CEO Kyle Nakatsuji saying that results within its mainstay portfolio have “really turned around”.

“We went through a lot of the challenges everybody else did, but we're looking at it now and feeling like it is very much on the path to profitability,” he said in an interview with The Insurer.

“We started then looking at, ‘How do we expand from there now that the standard auto business we think is on the rails and on its way to becoming profitable? What's the next move for us?’,” Nakatsuji reflected.

Aiming to bring tech efficiencies to non-standard market

The insurtech founder said he and his team had been thinking about expansion into non-standard auto for “a while” and had explored entering the segment both organically and through M&A.

With auto market conditions more generally rebounding though, Nakatsuji said it was now much more “timely” to enter the non-standard segment than even 18 months ago.

“We sat down and did the math, and realised we would be able to launch that product with a lot of the existing technology and operations we had from the standard auto business,” he said,

Nakatsuji said part of the appeal of the non-standard market is its size and that, from his team’s perspective, it is still “pretty underserved, particularly from a technology perspective”.

He said the launch of the new non-standard product “provided an avenue to rethink the legal structure and entities” of how Clearcover is constructed, which then opened the door to the idea of launching a reciprocal exchange, which the insurtech plans to domicile in Illinois.

Reciprocal structure a “win-win”

Clearcover previously explored setting up a reciprocal, and Nakatsuji suggested that the proliferation of the model in recent years helped offer proof points showcasing its success.

"More than anything, the reciprocal exchange structure does a really good job of aligning policyholder interests and shareholder interests, and creates a win-win,” he said.

“As a policyholder you own the business; that business exists in order to provide you insurance at a low price; your surplus contributions can create some tax benefits,” he said, while he also noted that policyholders can earn dividends from the setup.

“We think that it's a very policyholder-friendly structure,” Nakatsuji added, and said Clearcover’s shareholders get to own a stable, fee-bearing entity, which have a track record of commanding premium valuations in the marketplace.

“Shareholders tend to like owning those, so we thought it aligned those interests pretty well,” he commented.

One use of the reciprocal exchange could mean that it serves as a reinsurer that stands behind Clearcover’s existing balance sheet entity, to assume risk from the standard policies it currently writes.

“We're big fans of the reciprocal structure. I see this as a broader transformation for the organisation, but one that we intend to step into by launching the non-standard business and then growing the exposure base within the exchange over time,” Nakatsuji explained.

Clearcover plans to capitalise the reciprocal through a surplus note funded by its existing capital, and could look to attract additional outside investment into the exchange over time, though not at the outset.

The insurtech has an existing stock company on which it currently writes business, and has an offshore captive reinsurer to which it cedes some business, along with maintaining ongoing relationships with third-party reinsurers.

“Underserved” $80bn market

Outlining the opportunity to expand into non-standard auto, Nakatsuji highlighted the fact that the market is “big” with somewhere north of $80bn in premium out of a roughly $350bn personal auto market, noting that the segment tends to be “very transactional”.

“If you look at the premium that changes hands every year, a much greater percentage of it is going to be a non-standard than in standard or preferred,” the Clearcover CEO explained, which he said presents a “growth opportunity” for the insurtech.

“There's room for the things we’ve built in standard – whether it's the user experience or digital claims or the generative AI tools – [for us] to really be quite differentiated in that market,” he added.

Nakatsuji thinks that because non-standard customers tend to be more price-sensitive, Clearcover’s tech and operational efficiencies that minimise its variable costs allow it to offer more competitive rates, which he said should give the insurtech an advantage in the market.

“We like our ability to compete on that front,” he said.

Nakatsuji also said an added appeal of the non-standard market is that it has better withstood inflationary pressures than other parts of the auto insurance sector in recent years, running at superior loss ratios, with less volatility, driven in part by the fact that it tends to be lower-limit business.

“It's been a pretty good couple of years for most non-standard companies out there, and I would fully expect that to continue,” he stated.

Minimal additional fixed-cost investment needed

Nakatsuji said that his firm is planning to kick off a new fundraising process, with its entry into non-standard and launching a reciprocal forming “a big part of the story” of that process.

He also said that in launching a reciprocal, Clearcover is operating with the advantage of having already scaled its business with a conventional stock company structure, indicating that with a strong premium flow already, there’s less start-up risk associated with the new venture.

At the same time, Nakatsuji said Clearcover’s position as a nimble tech start-up also gives it an advantage in making a transition to incorporate a reciprocal exchange into its business over larger incumbent competitors.

“We’re kind of right in the sweet spot, where we had built a big and stable enough business that we felt like we could transition it to this structure and have the exchange get a bit of a head start,” he explained.

Nakatsuji said he expects the non-standard segment to be “a pretty material part” of Clearcover’s overall portfolio “relatively quickly”, but that the insurtech is also going to approach the market cautiously.

“We have reasonable growth expectations. We want it to represent a meaningful part of our overall portfolio, but will only allow that to happen if we feel like we can underwrite the business properly,” he said.

For the new venture, the founder said that Clearcover would look to scale some customer and claims service functions and see some increase in variable costs, but doesn’t expect too much in the way of additional fixed cost investment.

“We are fortunate that the tech and the operations and a lot of the things we've already built are quite extensible,’ he noted.

“It's not like trying to launch property for us. This is a pretty similar product to standard, and so while it is not exactly the same, we can capitalise on a ton of the stuff we already have.”

Gearing up for next fundraise

Clearcover is currently working on getting the exchange approved by Illinois regulators, after which it is aiming to enter the non-standard market “as soon as possible”, hopefully during the second half of this year, and potentially early in Q4.

Nakatsuji says his company “could certainly see a path” to eventually expanding into other lines of business that are “adjacent” where it currently operates, but that it currently has “nothing on the roadmap” for product expansion beyond its core auto offerings.

After raising $55mn in funding in April to bring its total raised to $533mn, and following a $153mn November 2022 Series E round, Nakatsuji said Clearcover is planning to gear up for another raise in the months ahead.

“We have been fortunate to put together a very strong and committed group of existing investors,” he commented.

“I think we are well supported by the group of investors that already back Clearcover.

“That said, I think it's also important to add diversity of perspectives and diversity of capital,” he noted, saying he was uncertain what the outcome of its upcoming fundraise could look like, at least in terms of numbers.

But, the path to profitability the company is on within its standard auto business and the launch into non-standard will be key features in those discussions with investors.

“We're expanding our appetite here to add more market, more growth, more profitability, and then we're transforming it into this legal structure that we think is going to even do an even better job of aligning policyholder interests and your interests as a shareholder to maximise the value of your shares as a Clearcover owner,” he said.