Insurance 3.0 — our investment in FloodFlash
We first met Adam and Ian, the founders of FloodFlash, via Freddy, the CEO of Cuvva, one of LG’s portfolio companies (our favourite kind of intro) and were immediately struck with the potential of what they are building: no less than a category defining product, changing an opaque, poorly understood flood insurance market… and that’s only the beginning. We’re delighted to be backing them alongside our friends at Pentech and InsurTech Gateway.
Parametric Insurance: smart contracts (no blockchain involved)
Around 5m, or a sixth of the properties in England, are deemed to have a higher than normal risk of flooding but per the ABI, just 55% of those living in flood risk areas are aware that their home is at risk while an estimated 350,000 properties in the UK cannot obtain commercially viable flood insurance. FloodFlash’s proposition to businesses and consumers is simple. Choose a payout level and a water height. Play around with both of those until you’re happy with the premium. Get sent an easy-to-install sensor for your property. Then, if the Flood Flash sensor gets tripped at the agreed water height, payment is immediately made to your bank account. No loss adjustment, no delay, no uncertainty.
FloodFlash is a parametric insurance company. It effectively offers smart contracts. It’s attractive for insureds because:
- payout is immediate upon the sensor getting triggered — no need to even put in a claim
- you know exactly how much you’ll get in the event of a loss. No need to painstakingly claim for each item, find receipts, etc.
- you have control over the premium. If it’s too expensive at water level x, select (higher) water level y (and move your expensive equipment off the floor ;)).
It’s also very attractive for insurance companies:
- Most insurance contracts are designed to make you whole, i.e. pay out for exactly the damage you’ve suffered, less a deductible. With parametric insurance, the insured gets a pay out if the trigger is tripped, regardless of the damage they’ve actually suffered. Without the costs of loss adjustment and processing claims, insurers save money. FloodFlash is passing these savings on to consumers, and with lower costs, insurers can insure previously uninsurable areas.
- Parametric insurance reduces uncertainty, and therefore cost, for underwriters. That’s because a carrier can insure multiple properties on a street with a limit of £1m each. One gets flooded, and suffers a million pound loss (imagine it has just received a large stock of delicate machinery that got ruined), versus the same type of building next door that got flooded to the same height, but didn’t have any valuables in that day.
A massive market
Flood risk is only the beginning for FloodFlash. Flood losses worldwide are of the order of $50b, with less than 20% insured currently but the global premium market for property casualty coverage is north of £1T. Their model is uniquely suited to event driven coverage. In addition, reduction of cost and uncertainty is particularly important for insurers who want to do business in emerging markets, which traditionally don’t have hazard data going back hundreds of years. By removing uncertainty around pay-out amounts if a loss occurs, insurers can make better underwriting predictions and enter markets that were previously uneconomical.
A new model for insurance
Parametric insurance is not new. However, it’s traditionally been the province of large corporates, because it’s typically been structured as a catastrophe bond, structured by experts, issued by the insured and marketed by sell-side banks. Investors buy it because it’s uncorrelated with other equity or debt returns. By their nature, catastrophe bonds require a degree of sophistication and size from the insured.
Ian and Adam, the FloodFlash cofounders, spent years together at RMS, the risk modelling firm, structuring catastrophe bonds for large corporates. Adam has structured over $2B insurance linked securities, and Ian, who has a PhD in hydrology, has 5 years of experience is catastrophe risk modelling.Their vision — that this type of coverage should be made simple and available to businesses and consumers — is a compelling one. They are among a handful of people with the experience to create FloodFlash, and they are passionate about bringing this model to the mass-market.
Data is the new oil
My partner, Remus, who works closely with me on FloodFlash, has a data background. He is the co-founder and CEO of Finalta (now part of McKinsey), which combines performance benchmark data and best-practice knowledge from 350 banks, insurers, and Telcos. It was clear to him that the data that FloodFlash is collecting will enable even more accurate underwriting data over time.
At the same time, we were sold on the proposition, which benefits everyone in the ecosystem. These businesses, that are win-win-win, are the ones we want to back. FloodFlash gets new customers covered, the customer gets paid immediately upon a loss and the carrier saves on claims management, loss adjustment, and underwriting costs.
Tackling a changing market
Sadly, global warming is increasing the instances of extreme weather events, especially in coastal areas. Awareness of natural disasters is increasing. Parametric insurance is particularly applicable to natural catastrophes that can trigger a sensor, like flood, hurricane, fire or earthquake. We believe that parametric insurance aligns the interests of businesses and individuals for thoughtful risk management. Insurance is clearly not the only answer here, but for businesses and individuals in risk areas, parametric insurance is quite simply a better product. Policy makers, businesses and individuals have their role to play in tackling this complex problem and we are passionate about doing what we can to help.