Investing in the Future of Climate Risk Insurance for the Built World

Why PropTech1 invested in FloodFlash

Summary:

1. The real estate ecosystem is heavily exposed to all kinds of climate change related physical risks and regulators around the globe are increasing the pressure on making these risks transparent, potentially leading to severe consequences for real estate owners in valuations and interest rates, and even creating stranded assets.
2. FloodFlash has developed cutting-edge technology and algorithms to assess real estate related climate change risks that are granular, precise and vetted by worldwide leading insurance and experts including MunichRE.
3. This unique IPR could potentially be used in many commercially highly attractive ways in the real estate context. Their first product — parametric flood insurance — shows its potential with an impressive start of their commercial roll-out in the UK and USA. We are delighted to add more real estate related ideas and contacts as the only PropTech-specific investor in the very strong and international Series A syndicate.

The impact of increased global urbanisation and global warming on our planet are intensifying. Sea levels have risen by 20cm since the last century, with the rate doubling in the past 2 decades. As a result, extreme climatic events such as wildfires, storms and flash flooding are on the rise, with yesterday’s tail risk becoming tomorrow’s central scenario.

These effects have a profound effect on the built world. Flooding already affects more people than any other environmental hazard. A study published in Nature from 2021 shows that the percentage of the global population at risk from flooding has risen by almost a quarter since the year 2000. (Source: Satellite imaging reveals increased proportion of population exposed to floods | Nature)

Image Source: The Human Cost of Disasters — An overview of the last 20 years 2000–2019 — World | ReliefWeb)

The growing awareness and effects of global warming are directly impacting assets that have a market price — namely real estate — therefore making the scale of the looming climate calamity more tangible. An estimated $651bn in flood damages occurred between 2009 and 2019. (Source: The Human Cost of Disasters — An overview of the last 20 years 2000–2019 — World | ReliefWeb). As a result of growing awareness in sustainability, real estate asset managers are now increasingly using data to measure flood risks’ impact on portfolio valuations taking action to reduce stranded asset risk.

A RICS study has shown that “insurers were seen as a key stakeholder in encouraging flood risk mitigation across all countries in the research.” (Source: RICS flood-risk-mitigation-and-commercial-property-advice-rics.pdf). The influence of insurers on flood risk mitigation is heavily dependent upon the uptake of insurance policies, which in turn depends upon insurance terms and conditions, legislative and regulatory requirements and the perception of flood risk. Flood risk insurance (including all types of flooding and the range of potential damage and loss) is rarely mandatory and many businesses choose not to cover themselves for all risks, often due to affordability.

In FloodFlash, we found a solution that is user-friendly, technically defensible and, most importantly, ensures that stakeholder interests are aligned. FloodFlash offers a more affordable parametric insurance solution, which denotes a non-traditional insurance product that offers pre-specified payouts based upon a trigger event — in this case flood depth. This becomes possible by installing sensors onto customers’ buildings. A pre-selected payout will be made when the sensor detects a flood height above a pre-determined parameter. This in turn reduces the cost of supplying insurance by eliminating the claim handling process, whilst encouraging the customer to invest into flood prevention products such as absorbent bags, flood barriers, guards and gates. By investing into more flood prevention products, customers can set a higher claim parameter on their sensor, which ultimately reduces the risk premium, and therefore annual price, of their policy.

Since we first met FloodFlash in the early days after being introduced by our friends at Smedvig Capital, the company has grown from strength to strength, bagging 12 insurance industry awards in 2021 alone, doubling their sales and distribution from 2020 (on top of continuous growth since inception) and launching a successful pilot in the US market. (Source: 2021 FloodFlash: the year in 12 numbers | youTalk-insurance.com) They have proven their pricing competence and ability to deliver by working with some of the largest insurance companies in the world, including MunichRE (also co-investors), HannoverRE, Marsh, Aon and many others.

Adam and Ian had previously worked together for several years at leading risk management consultancy RMS (now part of Moody’s Analytics) on the similar concept of modelling catastrophe bonds for the insurance sector. The strength of their team, traction and product led us to conclude that this is a category defining product addressing a real problem worth solving. The market size alone gives FloodFlash ample opportunity to grow into multiple countries and create a profound force for good for real estate owners and tenants alike in any geographies affected by flood.

All of us at PropTech1 Ventures are delighted to be joining Adam and Ian on their journey and to be working as the only PropTech specific investor, alongside a high calibre round of experienced, internationally positioned and strategic co-investors. We’re super excited by what is yet to come for 2022 and beyond!

(Some) of the FloodFlash team wielding their sensors