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Investors Are Increasingly Interested in a Novel Type of Weather Insurance

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Interest in startups trying to shake up the insurance industry is on the rise as weather catastrophes worsen. The latest sign: New York-based Arbol has raised $60 million in a Series B funding round.

Founded in 2018, Arbol specializes in a niche but fast-growing form of indemnity known as “parametric insurance.” Unlike traditional insurance products that link a claim with actual losses, payouts are triggered by a predetermined parameter.

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For instance, farmers and the insurer could agree that 3 inches of rain falling in an hour is the threshold that would lead to payouts. The simplified claim process enables farmers to restart crop planting straightaway, rather than waiting for weeks or longer for a loss assessment.

The challenge for insurers is creating models that price weather perils accurately. Arbol leverages artificial intelligence technology to process large amounts of climate data and simulate interactions between different weather factors, says Siddhartha Jha, the startup’s founder and chief executive officer.

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A former commodities trading strategist at Citadel, Jha has also used his Wall Street background to design a diverse product portfolio, primarily underwriting six climate-related risks including temperatures, soil moisture and solar radiation, and operating in more than 15 countries mostly in Europe and North America. That diversity, according to Jha, reduces the company’s risk exposure while improving profitability.

That strategy seems to be working. While Arbol’s business centers on insuring against weather perils, which have grown in frequency and severity under a changing climate, Jha says that the six-year-old startup is profitable.

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Arbol transacted $250 million in gross written premiums last year, up from $2 million in 2020 when it began offering parametric insurance services, according to the company.

The investment, announced Tuesday and co-led by London-based Giant Ventures and the venture capital arm of French financial powerhouse BNP Paribas, came after Arbol booked a nearly 50% increase in revenue in 2023 from a year ago. Other investors in the new round include Mubadala Capital, a sovereign wealth fund backed by the government of Abu Dhabi.

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The fundraising announcement is the latest in a growing list of investments in the parametric insurance sector. In 2022, French insurer Descartes Underwriting completed a fundraising round of $120 million, while Puerto Rico-based Raincoat also raised millions of dollars from venture investors. Floodbase, a New York public benefit corporation, is also working on a pilot of its parametric insurance product in Africa.

“The world is starting to wake up to climate coverage gaps” in insurance, Jha says. “That is going to start becoming a big focus.”

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While agricultural businesses, energy infrastructure operators and reinsurance clients — that is, insurers who buy protection from other insurers to hedge their risk — currently make up the lion’s share of Arbol’s user base, Jha says that the fresh funding will help the startup make a foray into other markets. Earlier this month, Arbol launched a subsidiary that began offering home insurance for coastal communities in the US, where state-backed “insurers of last resort” are taking on trillions of dollars in risk.

As economic damages from natural catastrophes mount, more insurance companies have pulled out of high-risk areas such as California and Florida. The remaining insurers are raising rates in response to rising climate-induced threats. A recent analysis predicts that the average premium for homeowner insurance in Florida will approach $12,000 by the end of 2024, while the national average is on course to hit a record high of $2,522, following a roughly 20% increase over the past two years.

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While parametric insurance has limitations — when a weather peril doesn’t cross the trigger point, for instance, policyholders won’t receive payouts even if damages occurred — the product is gaining traction as businesses scramble to protect themselves from the increasingly severe impacts of climate change. Data from Allied Market Research shows that globally, parametric insurance grew into a nearly $12 billion business in 2021 and is expected to more than double its size by 2031.

Photo: A worker holds a soybean plant at a drought-affected farm in Argentina. Photographer: Natalia Favre/Bloomberg

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Copyright 2024 Bloomberg.

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