Exclusive: Climate insurtech Raincoat raises $6.5M

Raincoat, a Puerto-Rico based startup aiming to broaden insurance coverage in areas hit by climate-related disasters, raised $6.5 million in a seed extension round led by Two Sigma Ventures and Mundi Ventures.

Why it matters: A surge in weather-related disasters has made it increasingly difficult for traditional insurers to price their policies — turning some areas into insurance deserts.

How it works: Raincoat works with insurers, governments, and reinsurers to offer parametric insurance — a kind of insurance that has gained popularity amid a rising number of weather disasters.

• Parametric insurance policies that payout a set amount when a specific event occurs. In contrast, traditional insurance pays out based on the cost of the damage.
• This model therefore leads to faster payouts — allowing consumers to fix their homes and property more quickly. Two years after Hurricane Maria, Puerto Ricans were left with $1.6 billion in unpaid insurance.

Be smart: Parametric insurance is still uncommon compared to traditional indemnity insurance, in part because it is difficult for insurers to determine when a disaster has occurred, and to who. That potentially leads to fraudulent payouts, says González.

• Raincoat seeks to take care of that, pulling data from, for instance, government agencies and satellites and creating a model of natural disasters for each specific region that an insurer may be looking to enter.
• It can also build out the front end of the insurance sign up process, or the backend process, including the system for executing claims.

Of note: The company takes a cut of each policy underwritten.

Context: State Farm in May said it was no longer accepting home insurance applications in California, citing rising construction costs and "rapidly growing catastrophe exposure" to extreme weather events like wildfires.

• Insurers in Florida, Louisiana, and Colorado too have been battling with the health of their markets.

• "In Puerto Rico, for example, there's a lot of people that purchase some of the products that we've developed because they're completely excluded from any traditional insurance whatsoever," says Raincoat CEO Jonathan González.

Yes, but: Parametric insurance is far from mainstream, especially in more developed nations in part due to regulation. Raincoat so far has seen most of its growth in Latin America. But González — currently based in Puerto Rico — is also betting on growth in the U.S. and Europe.

The big picture: Climate fintech remains one bright spot in the industry, with investors pouring 2.4x more into the area in 2022 ($2.9 billion) than they did the year earlier, per CommerzVentures.

Of note: The company closed a $4.5 million seed round in August 2022.