Automated weather insurance could offer help in an increasingly hot world

(Bloomberg) --Carlos José Báez experienced the full brunt of Hurricane Maria when it made landfall in Puerto Rico as a catastrophic storm in 2017.

The auto paint shop owner, who lives in Aguas Buenas, Puerto Rico, saw his home badly damaged by Maria's ferocious winds and rain. Despite submitting claims to his homeowner's insurance policy for over $25,000, Báez ultimately received a payout of $11,000.  

"We had a lot of property damage and insurance, but they didn't want to pay," Báez said in an interview in Spanish.

More than $1.6 billion in insurance claims remained unresolved more than two years after Maria while others were denied completely. The latter happened to Jonathan González's mother, who waited nearly a year for an adjuster to come take photos of water damage and a broken wheelchair ramp only for the claim to be denied six months later. 

That experience led him and three partners to co-found Raincoat in 2019, a climate technology startup that creates insurance that pays instantly. As climate change continues to worsen extreme weather, damaging homes and wreaking havoc on crops, the need for more responsive insurance policies is growing. 

"We're still talking about federal aid related to reconstruction," González said, calling the timeline for payouts from the public and private sectors "absolutely insane." 

Most types of insurance policies, like auto and homeowner insurance, kick into action when a customer calls to submit a claim. Parametric insurance, a category of insurance which includes life insurance, for example, flips that model. Claims are automatically paid out when certain parameters are met, whether that's the policyholder dying or, in the case of climate insurance, when an extreme weather disaster meets certain conditions. 

Quantifying loss is "a fuzzy experience," González said, involving minute debate and human judgment about things like where water damage came from, sometimes a long time after the event occurred. With parametric insurance, that fuzziness disappears, he said.

Traditional insurance companies are already feeling the pressure of climate change. Allstate and State Farm fled California due to wildfire risk to homes as did American International Group Inc., which also pulled back on home insurance sales in other markets deemed risky. It's clear that the industry needs a jolt of innovation to adequately meet the needs of customers, particularly in the regions most affected by climate change. 

Parametric insurance can fill some of the gap left behind by traditional insurers, which are finding it increasingly more difficult to quantify climate risk and limit exposure, González said, because it hinges on metrics that are measurable and modelable, such as wind speed and seismic activity. 

The value proposition of parametric insurance in the context of natural disasters is not necessarily scale, but speed. When his mother's ramp was broken, González waited months without repairing it so the insurance adjuster could visit and assess the damage. If the claim had been processed sooner, he could have fixed it sooner. 

"The longer it takes you to financially recover from these types of events, the less likely you are to recover and the more likely you are for these things to balloon out of control," he said. 

González and his co-founders were all software engineers prior to founding Raincoat. None of them had a background in insurance, but they realized the industry had a technological problem. Insurance companies and reinsurers they met with would tell them that a mass consumer parametric product for disasters was difficult to deploy. How do you detect an event accurately enough to be able to activate an individual policy? How do you build a risk model around pricing for that type of event? How do you download the data that's required? How do you segment it? 

If Raincoat could answer these questions and more, insurance companies would agree to sign on, they told González. So he and the team developed their models and showed insurers that they worked, creating simulations of historical events as well as theoretical future ones to illustrate what a potential weather disaster event's impact might look like for the insurance product prospective clients could sell.

Traditional home insurers can go years with no activity and then experience a sudden surge in claims activity after an extreme weather event. That spikiness can make it difficult for insurers to handle incoming volume, straining the system. 

"One of the beauties of software is we can run simulations," González said, making it much easier for Raincoat to anticipate and respond to future demand.

Today, the Puerto Rico-based Raincoat has customers in four locations — Puerto Rico, Mexico, Jamaica and Colombia — and works with distribution channels like governments and banking institutions, as well as insurance partners, to provide climate insurance for individuals. The startup's products help create insurance policies for, among others, families, small-scale farmers and small businesses, and its products help insure against catastrophic events, including hurricanes, wildfires, floods and earthquakes and agricultural risks, such as drought, excess rain and flooding. 

This sort of climate-related financial engineering isn't new, according to Daniel Osgood, lead scientist for the Financial Instruments Sector Team at the International Research Institute for Climate and Society. In the early 2000s, power companies started to buy and sell weather derivatives based on heat. Shortly thereafter, the agricultural insurance industry started offering what's known as index insurance, which pays farmers out based on an index, like rainfall measured via a satellite, rather than field-level crop losses. 

What's new, Osgood said, is applying this model and technology for all types of individuals. "It's very exciting to see them putting together this kind of thing focused on people," he said. 

Of course, insurance products like this aren't a be-all, end-all for consumers. For most individuals, they are more of a stopgap measure than something that can be solely relied upon in the wake of a natural disaster. Raincoat's policies, for example, are typically cheap and the payouts are usually small, maxing out at a few thousand dollars. Those smaller but quick sums can help those affected buy provisions, check into a hotel or do a quick repair on their home. 

"You have a screwdriver and a hammer and pliers and all different tools intended for different things to cover gaps," González said.

Báez, the auto paint shop owner, decided to pick up one of those tools after Maria. When installing solar panels on his house, his contractor offered him the Raincoat-powered climate insurance policy. Remembering the devastation of Maria, Báez purchased the plan. When Hurricane Fiona hit the island last year, Báez received an automatic payout of $75 two days later. (Fiona was a much weaker storm than Maria when it reached Puerto Rico and only clipped the island, resulting in less damage.) He and his wife used that money to buy groceries, since their fridge stopped working. 

"I didn't have to fill out any documents, and they didn't have to come see anything. The process was very quick," Báez said.

To contact the author of this story:
Michelle Ma in Los Angeles at mma304@bloomberg.net