Will Ross and William Steenbergen were AI researchers at Stanford working on climate and atmospheric modeling and reinforcement learning, respectively, when they began collaborating on forest fire modeling and hurricane modeling initiatives for the insurance industry. They were surprised to learn how big the difference was between what the data told insurers to do and what carriers actually did, Ross said. After studying the problem, Steenbergen and Ross . launched Federato to provide insurers with a unified view of information to select and price risks.
Now Federato is raising new capital to grow the company. Emergence Capital led a $15 million Series A round in the company, which recently closed with participation from investors including Caffeinated Capital and Pear. Some of the money will go toward expanding the workforce, Ross told londonbusinessblog.com via email, from Federato’s current 23 employees to 50 by the end of the year.
As Ross sees it, the insurance industry today faces three major challenges: climate-related increase in natural disasters; “loss uncertainty” in insurance risks, including state-sponsored cyber-attacks and ransomware; and payout inflation caused by judgments against insurers in a contentious environment. He pointed out that Russia is sponsoring cyber-attacks on US companies, which may or may not be covered by the “war exclusion clauses” typical of cyber policy, and recent statements regarding the opioid crisis, truck accidents and asbestos that raise questions about whether companies be able to transfer risks.
“A lot of insurers come to Federato looking for a tool to help create operational efficiencies, which the unified underwriting workflow element of the platform does really well,” Ross said. “The reality is that eventually they buy because they come to understand the value of the reinforcement learned approach to portfolio management, which provides valuable insights for managing portfolio risk, balancing and expanding their business book.”
Using the platform, clients, primarily insurers, can visually monitor risk and manage their policy portfolios, utilizing workflows aimed at minimizing the need for manual tasks such as searching for risk data and drafting underwriting guidelines.
Federato also claims to leverage machine learning, creating a common portfolio management framework while ensuring it is optimized for each organization’s constraints. The platform uses a “mathematical representation” of underwriting strategies to identify trends, Ross says, and adjusts accordingly.
“[T]The great thing about Federato’s approach is that all of its client contracts are pretty clear that it doesn’t share or pool any client proprietary information,” explains Ross. “[Any] meta-learning based on very high-level usage data still allows for some level of moat to be developed, but customers know that their customer data and loss experiences are not being shared.”
Ross positions Federato as an alternative to internal service providers such as Accenture and EY, as well as legacy vendors such as FirstBest and Pegasystems. He declined to reveal how many customers the startup currently has, but he identified several by name, including Insurate, QBE North America and Propeller Bonds.
Ross says Federato is likely to break even in terms of cash flow in the second half of this year.
“The property and casualty insurance industry is in a uniquely counter-cyclical moment as inflation and high interest rates mean that property and casualty insurance stocks have actually risen over the past six months, while other sectors are suffering,” Ross said. “That dynamism, combined with a greater emphasis on talent (the Great Resignation) and digital tools and workflows due to the pandemic (the transition to remote working), has actually accelerated Federato’s growth… Before the pandemic, insurance relied heavily on of manual processes – and it still is.”