You're right, it's cool and it appears you have a "son in service" (one star=one son) flag that would have been displayed in the front window by a son's mother during WWI.
The green backing of these flags were generally made out of wool. The red ("world war veteran") panel was probably added after the war.
As to it being a "one-of-a-kind" hand-made piece, I can't sure for sure but I'm confident other TNet member will know for sure.