Insurance requires solving an equation with four variables: product, distribution, finance, and technology.
Over the last decade, insurance companies have found success by using technology to drive innovation in one of the other three key areas. As these companies continue to modernize their respective categories, momentum builds and the flywheel grows.
- Lemonade, Root, Metromile, Kin and Hippo are pioneering tech-enabled direct-to-consumer distribution.
- Corvus is using an AI-driven approach to develop a new breed of cyber insurance products.
- Newfront is building new backend technology to help brokers sell more effectively.
- Nexus Mutual uses blockchain technology so that people can share risk together without the need for an insurance company.
The loss of stationarity
Transferring financial risk relies on the process of underwriting.
Underwriters analyze historical data to understand the probability of loss for a particular risk and then price their insurance policies so that, on average, premiums exceed claims. Underwriting relies on a key statistical concept called stationarity—the idea that the statistics of past events will remain predictive of the probabilities of future events.
For millennia, Earth’s atmospheric carbon concentrations had remained relatively static. Then, during the industrial revolution, the world began burning fossil fuels, releasing vast amounts of carbon dioxide (CO2) into the atmosphere.
In each decade since, we’ve burned more fossil fuels than the last.
The incredibly stable chemical structure of CO2 also means that it will continue to accumulate in the atmosphere and oceans, even if the rate of human emissions slows. CO2 has the unique chemical characteristic of efficiently transmitting high-frequency radiation, such as sunlight, but trapping the low-frequency infrared radiation commonly associated with heat. Simply put, CO2 in our atmosphere behaves much like the glass on a greenhouse, allowing sunlight through and holding its energy inside. This is the infamous greenhouse effect.
As a result, the average temperature on Earth has increased about 1ºC (1.8ºF) since 1880, and the variability of global weather has increased with it.
Climate (i.e., the statistics of weather) is no longer stationary.
As such, the key assumption behind underwriting—stationarity—has been violated. We have entered the unknown.
New financial risks require new financial products
Whatever the market, navigating the uncertainty brought on by climate change will require a completely new set of financial tools to help mitigate losses of all types and sizes.
At Sensible, we call this new category Climate Insurance—and our team is increasingly well-equipped to face some of its inherent financial challenges. We’re beginning by building products for the travel industry.
Our Series A was led by the fintech investors at Infinity Ventures, with participation from Certares, and founders and executives from some of the world’s most well-known hospitality brands. This new group joins existing seed investors from Wonder Ventures, Walkabout Ventures, and Group1001, and even more stakeholders from hospitality, energy, and real estate.
We’re starting with travel
To pioneer an entirely new category of financial products, Sensible started from scratch.
Over the course of two years, our team built a Parametric Policy Management System entirely in-house. This allows us to manage and track our customers' risks in real-time, trigger automatic payments, and eliminate the need for a claims process. We support this system with our proprietary Climate Risk Engine, which uses both historical and forward-looking underwriting techniques.
These tools sit on top of a capital efficient, regulated insurance company that’s funded by existing financial services providers. This gives us the flexibility to choose what products we offer and how they work. And all the while, we’ve stayed on the lookout for the technologies and partners who can best help us in our mission to build financial resilience against climate change.
We believe that all financial climate risks are important—both large and small. As such, we’ve chosen to focus our resources and technology first on serving our most influential customer base: you.
In the wake of the pandemic, our team wants to help you plan your next outdoor adventure with confidence. Our Weather Guarantee will automatically reimburse you when the weather threatens to rain on your parade… or your camp site, fishing trip, or day at the beach. Your payment arrives via text message on the morning of your plans, so you can quickly collect your money and enjoy your day.
Our Weather Guarantees are already embedded with travel, hospitality, and outdoor brands throughout the US, so keep your eye out for the Sensible logo when you check out. We’ll be rolling out internationally soon. If you want to learn more about Weather Guarantees, or you own a business and want to make a Weather Guarantee available to your customers, please check out our API docs and get in touch.
This is just the beginning
The probabilities of financially damaging weather and climate events are increasing, as is the amount of economic value exposed to those perils.
Driven by unprofitable underwriting models, insurers’ willingness to financially back climate risks is currently waning—and leading to increases in uninsured or under-insurered economic losses. As such, the protection gap is growing.
Over the coming decade, the global insurance industry will experience a revolution driven by fintech businesses who can grapple with a dynamic set of emerging weather and climate risks.
At Sensible, we’re working to improve the travel industry first, with a simple and beautiful consumer product. But really, what we’re doing is building the data technology and financial platform necessary to underwrite the single largest risk to the world today: climate change.