At Pentech, we have spent considerable time evaluating the insurance sector. Our three main conclusions from this sectoral analysis are:
- We do not want to invest in companies who compete with the incumbents in well-established segments of the insurance market, such as motor, travel or health.
- We would like to invest in companies who are focused on making the established insurance companies more efficient via the use of modern technology solutions, and most likely via the application of AI.
- We would like to invest in new insureTech companies providing product offerings to markets that are currently underserved by the current insurance industry.
Our investment in DFP was squarely aimed at the second of these conclusions with their product applying NLP and AI to help the established insurance community to improve customer conversion, increase insurance premium profitability and to improve the upsell/cross-sell of product.
Our investment in FloodFlash addressed the third of our conclusions. We were introduced to the founders, Adam and Ian, last year by our friends at Smedvig. Adam and Ian had worked together at RMS, where they were involved in the modelling and construction of catastrophe bonds for flood protection. Catastrophe bonds are investment instruments providing a pay-out, typically to large organisations such as the New York transport authority, in the event of a catastrophe such as an earthquake, hurricane or flood event happening. They often use parametric insurance where a pre-determined payment will be made when predetermined parameters have been triggered. For flood insurance, a pay-out will be made if a flood event is detected by sensors strategically placed in the local geography. There is no claims handling process as is typical in other insurance products; the pay-out happens when the sensor detects water of a particular depth. Adam and Ian’s idea was to apply the principals of parametric based catastrophe bonds for flood events to businesses and consumers. A sensor is placed on the outside of a property. A pre-agreed level of pay-out is agreed to be made if the sensor detects water at a predetermined depth, with the risk and premium modelling having been carried out by proprietary FloodFlash algorithms. This cash lump sum can help a company manage through a period of business disruption, provide cover for an excess they may have on an existing insurance policy and, in general, provide peace of mind that cash will be received quickly and without the burden of claims processing which is normally associated with insurance products.
This is a very large market opportunity. The company is building a general-purpose platform for providing parametric insurance for multiple perils, with flood being the first to be supported. For flood alone, there is estimated to be $50B of damage per annum with $41B of this not being covered by insurance. In a perfect insurance market, annual claims of $50B equates to a minimum of $50B of potential premium and so the market opportunity is significant.
From a Pentech perspective, this meets all our criteria for investment: they have a product with a compelling value proposition; deep technical barriers to entry provide a sustainable competitive advantage; a very large market opportunity; and a smart capable founding team who we believe will build a company of significant value. All of us at Pentech are delighted to be joining Adam and Ian on their journey and to be working alongside LocalGlobe, our co-investors.