Impact Investment for Inclusive Insurance

Impact Investment for Inclusive Insurance

Impact Investment for Inclusive Insurance

Author(s): Anonymous – published on MiN Blog

When Leapfrog Investments sold 90 percent of its stake in mobile insurance leader BIMA to Allianz last year for an impressive US$96.6m, many in the industry saw it as vindicating the business case for impact investment in inclusive insurance. As Leapfrog partner Stewart Langdon said at the time, “BIMA is a stellar example of a digital financial services firm that has scaled quickly and profitably.”

Traditional investors in inclusive insurance have included multilateral institutions and development finance institutions. More recently, impact investors operating in the financial inclusion space, such as Leapfrog, have shown it is possible for microinsurance to provide a good return on investment.

The potential for investors is huge: according to the World Bank’s International Financial Corporation, micro, small and medium enterprises (MSMEs) account for more than more than half of all employment worldwide.[1] The potential growth of this market, coupled with insurance tied to microfinance products such as loans should be tempting, but uptake of microinsurance by clients of microfinance institutions has often not matched expectations.

MicroEnsure is another company attracting private money – suggesting that impact investment can give inclusive insurance the big push it needs to have impact at scale. As MicroEnsure’s insurance products have gained popularity and demonstrated financial viability, it has attracted private sector investors including Omidyar Network and AXA. Omidyar likes to invest in companies and start-ups that use pioneering technology to increase reach, usage, and scale impact of financial inclusion solutions – so far this amounts to more than US$600 million.[2]

Would-be private investors need to be convinced the inclusive insurance market will grow quickly and significantly. That means tackling constraints to growth such as lack of consumer trust; the need to scale up low-margin, high-volume products; products designed without consumers’ needs in mind; inefficient distribution; and business models which fail to maximise each part of the value chain. Furthermore, there is often little incentive to invest in insurers launching new products or business models in challenging and untested markets.

To answer some of these questions, the Microinsurance Network is hosting an interactive workshop at the forthcoming European Microfinance Week (e-MFP) in Luxembourg from 14-16 November 2018. The interactive workshop, Making insurance markets work for the poor: is financing the binding constraint? will look at what puts traditional investors off and how targeted, innovative funding mechanisms and InsurTech could help fill the gap. The session will also explore whether responsible investment and responsible exit strategies may also create obstacles.

Both BIMA and MicroEnsure are essentially insurance distribution channels – the next challenge is to get investors to put their money into InsurTech companies and to build capacity in developing markets. As ever, scale is the big obstacle. Emily Coleman, an insurance expert with the International Fund for Agricultural Development (IFAD), says that “to attract the private sector without the need for donor support for ever more, it [microinsurance] needs to be delivered at a large scale, for it to be sustainable. If it can’t wash its own face, it won’t last.”

 

Sources

[1] International Trade Centre, 2017. MSMEs and the 2030 Agenda for Sustainable Development. [Online] Available at: http://www.intracen.org/MSME-Day-2017/SDGs/ [Accessed 3 November 2017]. [2] http://ventureburn.com/2018/06/omidyar-1-3bn-investments-few-exits/

This article has been previously published on the Micro Insurance Network blog. You can find it here.    

How inclusive insurance can help beat poverty

How inclusive insurance can help beat poverty

How inclusive insurance can help beat poverty

Poverty remains a significant global challenge

Author: Katharine Pulvermacher, Executive Director of the Micro Insurance Network

Since the turn of the century, the concerted effort to reduce poverty around the world has generally seen significant success, although as of 2015, 3.4 billion people – 46% – were still living on less than $5.50 a day.1 There is little room for complacency. In Latin America and the Caribbean, for example, the percentage of the population living in poverty has actually increased since 2015.2

Households that emerge from deep poverty are fragile

When a household succeeds in emerging from deep poverty, relatively ordinary events – that ordinary middle-class families in wealthier countries could take in their stride thanks to access to credit, savings, effective social security and more affluent social networks – can be enough to destroy this fragile success. Things as simple as a family member falling ill can and often do engender difficult choices: to pay for medical care or to pay for school fees, or supplies to be sold in a market.

Insurance can help prevent them falling back into poverty

People living in rural areas – who rely on farming to survive – are still more likely to be poor, and poorer, than their urban counterparts. Because of this, natural disasters and adverse weather conditions can see crop yields fall dramatically or even see harvests completely destroyed.

Solutions based on insurance principles offer an obvious way to mitigate such situations.

Microinsurance focuses on solving these problems

Such solutions, which aim to meet the needs of low-income households, have commonly been referred to as microinsurance. They are typically simple insurance products with relatively low premiums that may be collected at higher frequency than traditional insurance products. In some countries, microinsurance is governed by specific regulatory frameworks that take into account – more or less successfully – the special purpose and special needs of products and services targeting low income people.

The effectiveness of some microinsurance products leaves room for improvement

In practice, microinsurance evolved as the microfinance sector expanded and became more sophisticated, and credit-life insurance still represents the largest share of the market. Often, this type of insurance is required as a condition of granting a loan (microcredit). And in many cases, the client may not even be aware that she or he has the insurance, which may only cover the amount of the loan that is outstanding at the time a claim is made.

Best practice products serve to protect lenders against non-performing loan risk, while offering additional protection to borrowers, e.g. insuring more than just the amount of the loan that is outstanding. Crop insurance may include technical assistance to reduce the risk of low yields. Micro-health insurance may include hospital cash benefits and access to a medical helpline.

Insurance for emerging consumers can be challenging for service providers

Emerging consumers present some particular challenges to insurers and distribution channels seeking to provide them with services:

  • Hard – and therefore costly – to reach (many live in rural areas for example, or in urban areas that may be less accessible)
  • Margins may be thin – reaching scale can be difficult
  • Lack of data on risk may result in inaccurate pricing, with products that are too expensive or under-priced
  • Lack of data on low-income consumers may result in unsuitable products that do not resonate, with low take-up
  • Existing (traditional) business models may not be “fit for purpose”

The Microinsurance Network exists to limit and remove these constraints

The Microinsurance Network is a not-for-profit organisation that brings together a community of experts from around the world in order to share and develop knowledge around best practice. We believe that access to insurance is essential to sustainable development and that the world’s poor will not achieve lasting prosperity without it. Existing access is insufficient and approaches based on insurance principles are the best way to provide access to risk management tools. The collective action by Network members provides the critical knowledge to the organisations that drive improvement to yield lasting prosperity for the billions of people and small businesses who need it.

A track record of concrete action

The Microinsurance Network has a track record of more than fifteen years, pre-dating its launch as an independent organisation in 2012. In collaboration with highly respected partners such as ILO’s Impact Insurance Facility, the Access to Insurance Initiative (A2ii), the International Association of Insurance Supervisors, global, regional and national insurance companies, universities, think tanks, development agencies, policymakers and cutting-edge start-ups, we organise knowledge-sharing events around the world and produce key reports and data to support the development and use of effective insurance services designed to mitigate the risks faced by low-income households. In addition to 30 individual members, we represent more than 70 institutions working in more than 50 countries: a total of 375 experts.

Sources

1 World Development Indicators, Poverty headcount ratio at $5.50 a day (2011 PPP) (% of population)

2 Economic Commission for Latin America and the Caribbean (ECLAC) reported that 30% of households in Latin America, representing around 186 million people, were living in poverty, up from around 25% in 2015. See https://www.cepal.org/en/pressreleases/poverty-increased-2016-latin-america-and-reached-307-population-percentage-seen

This article has been previously published on the website of Micro Insurance Network. You can find it here.