Kyle Nakatsuji: The thesis was actually pretty straightforward. In this new breed of insurance company category, almost everybody is focused on one thing, which is trying to find ways to offer people a quality product for less money. Insurance, even if this isn’t necessarily true in every sense, is viewed largely as a commodity by most consumers, at least, personalized car insurance and home insurance to some extent.
We were thinking about car insurance first. This is largely viewed as a commodity by most people, which means if you want to get people’s interests, price is the lever that you really want to attack.
Most people we saw in the market were trying to lower the price of the insurance product by focusing on a fundamental change in how the product was underwritten or, in a simpler way, was priced whether that was per mile or based on how you drive or some other underlying set of characteristics that would change in a meaningful way.
We thought there were two big problems with this. The first was that it tends to not be a defensible foundation for company building because of the way the US market is regulated. It’s very hard to come up with some secret pricing advantage and keep it secret for very long. So we didn’t see pricing as a differentiated or defensible source of competitive advantage.
The second, which is arguably a more important problem, was that it shrinks your market in a meaningful way. If I look at a pool of five drivers, one of those drivers benefits from my special pricing and the other four don’t. If I lower the rates for that one driver who benefits, I have to remember that they were previously subsidizing lower rates for the other four drivers in that group of five.
If I want to maintain the same results, I just have to raise my price for the other four. So, you’re back to the idea that the market is in fact mostly commodities or viewed as such by consumers. If you raise prices for those four drivers, you don’t get to have them as customers anymore. The underlying idea here is that the specialized pricing approach is going to help you at the expense of the many. That just wasn’t our ambition as a company.
The pricing thing doesn’t work. What should we focus on? This is where ideas about distribution came into play. If you look into history, the way that transformational insurance companies have been built is undifferentiated cost structures. It has happened a handful of times before by companies like Geico, and Geico again in the mid-90s.
These transformations or these big shifts have always happened on the back of a company being able to create and embrace a cost structure that was much lower than their peers. When we thought about how you might do that today, it came down to three things. One was to start a new company because the easiest way to not have an old and hard-to-deal-with cost structure is to not start with one.
The second was to build that company on top of a modern technology substrate which was our opportunity as a new technology company. The third was to embrace this idea of integrated or context-relevant digital distribution to lower your acquisition costs, which would again lower your cost structure.
The combination of those three things would allow you to dramatically lower your costs to be an insurance company, which meant you could offer lower prices on the product to the vast majority of people in the market. That was at the end of 2017 where all of these ideas came together to form the core thesis upon which Clearcover was built.