One of the most noticeable -- and noted -- effects of climate change has been its impact on how other events in the environment -- be they natural or man-made occurrences -- play out: forest fires burn more violently and for longer; floods happen more often and are more severe when they do; and so on, with climate change often cited as the main culprit for all of the catastrophes. Today, an insurance startup called Kettle that believes it has built a better product -- specifically, a reinsurance underwriting product to insure insurers -- to account for catastrophic events like these, by way of better data science, is announcing some funding on the heels of (sadly) more need for its services.
It has closed a Series A of $25 million, money that it will be using to build out tools and services for a specific set of catastrophes in one specific market: fires in California. Acrew Capital is leading the round, with Homebrew, True Ventures, Anthemis, Valor, DCVC and LowerCarbon Capital also participating.
Kettle's longer-term plan is to expand to more disaster types, and more states, in the coming years, but for now, fires in California present a particularly acute set of problems.
Events like the Caldor and Dixie fires have contributed to an overall rise in the rate and size of wildfires in California, Kettle says. 2020 saw over 4% of the state burning. On average there are some 10,000 fires every year in California, but the outsized nature of some of the fires seems to be growing, with 14 fires causing 98% of the damage due to wildfire in the state.
Nathaniel Manning, Kettle's COO who co-founded the company with Andrew Engler, said that these forces have created a gap in the market for insurance: in short, those who might want to insure their homes against these kinds of wildfires are either unable to, or end up having to pay exorbitant premiums.
Manning said that this is primarily because insurance companies -- while ironically being the trailblazers in data science decades ago to determine risk for unexpected events -- have failed to keep up with how to use that technology to account for recent developments like climate change, subsequent catastrophic environmental events and their impact on the things that typically get insured, like property, life, automobiles and so on.
"The industry hasn’t updated," he said. "It's the classic innovator's dilemma." Typically, insurance companies are using the same modeling that they have always used to try to understand what are new kinds of risks, "but you can't look at the last five years and determine the next 10 years anymore." Communication, and making it more accurate and reflective of the situation at hand, is something of a fixation for Manning: prior to Kettle, he had been the CEO of Ushahidi, the crowdsourced information startup.
Kettle mostly presents itself as a reinsurance technology provider to customer-facing insurance companies (it also currently resells insurance that it underwrites via one channel, aimed at the most expensive properties and their owners, starting at anything over $3 million and up to $10 million).
This is a huge business, typified by incumbent behemoths like Lloyd's of London, who in theory mitigate the risk insurance companies face when they get the formula wrong. Manning's belief is that reinsurance companies also are not using enough data, and accurate enough data science or technology overall, to do their jobs to match today's circumstances.
Reinsurance is currently a $400 billion-a-year industry, but it's struggling with the cracks just starting to emerge. There has been, Kettle said, a 68% drop in return on equity because catastrophes, and their unintended consequences, have caused more than $1 billion in damage over the past 15 years. This presents an opportunity to provide a different spin on how to provide this service. Kettle's approach is to pinpoint specific situations -- in this case wildfires in California -- to provide reinsurance specifically for policies or parts of policies that cover just that.
Using machine learning in which it combines weather data, satellite imagery and other data sets, Kettle applies a lot what has helped AI stand out from non-AI processes in other fields: the ability for machines to simply make more calculations than any human or even group of humans can.
"Normally, an insurance company will run between 10,000 and 100,000 simulations to predict outcomes," Manning said. "We run over 500 billion. This means that it can account better for eventualities to help create pricing that meets them. Kettle claims to have been accurate on its predictions 89% of the time so far. In August, Kettle said that some 26 insurance carriers have been in contact with it to help model their risk, and Manning told me that the company expects three to four commercial deals to close by the end of this year.
There is often something a little weird feeling about technology that essentially is built around the idea of bad events happening, and potentially profits from those things that go wrong. Insurance often falls into the category, not least because a lot of insurance hasn't really been built that well to fit modern times, and often feels exploitative, or arbitrary, or there by grace of lobbyists making sure it is mandated, more than any actual need for it. (And insurance fraud speaks to the other side of that inefficiency coin.)
Manning accepts this, but also sees it very differently.
"I think the industry itself is very poorly managed," he admitted. "The incentives are not in the right direction, and creating a system where the customer and company have different incentive structures is not great.
"But I do think it’s important," he continued. "As a homeowner, if my home burns down I’ll get its value back. That can be a truly life changing thing."
For investors, the disruptiveness Kettle is bringing is what attracted them, although longer term you have to imagine that the big incumbents can't not be considering how to update their data models, too. And that could mean more business for Kettle, or an acquisition, or... death, which is perhaps fitting for a insurtech. For now, though, there's a lot of potential still for this young startup.
“When you take a minute to think about it, it becomes very obvious why traditional reinsurers can't accurately underwrite climate risk -- their methodologies look to the past,” says Lauren Kolodny, partner at Acrew Capital, in a statement. “And our climate is changing in ways that can’t be predicted on the basis of historical data. Kettle is solving a massive, global problem. And we're so thrilled to deepen our partnership with this incredible team.”