Microinsurance: Missing Piece of the Financial Inclusion Puzzle

There are over one billion people worldwide seeking, and frustrated by the lack of, financial services to help them rise to the middle class. Although microcredit and microsavings have been holding the limelight as financial tools to help the poor, LeapFrog, a leading impact investment fund, argues that it’s time for microinsurance to join the stage.

 In a small dinner with the London based Women Advancing Microfinance UK network, Niclas Thelander the global head of Leapfrog Labs explained why microinsurance has the power to change lives worldwide. Leapfrog labs is the sister non profit grant making organisation of Leapfrog Investments, a profit with purpose emerging markets private equity fund that has reached 15 million people since inception in 2007. The two entities work together to invest and enable game changers to improve the lives of low income populations and have garnered the support of leading impact investors, entrepreneurs and global financial institutions. Their backers read as a who’s who list of development innovation and financial clout: Pierre Omidyar, George Sorros, the IFC, JP Morgan, Triodos, Calvert Investments, to name a few.

The tool for change that Leapfrog focuses on is microinsurance. For the global population living at “the bottom of the pyramid” (BOP) – the world’s poorest citizens forming an invisible and largely unserved segment – a lack of access to financial services has been a long acknowledged problem. Crudely defined as those living on between $2-2.50 a day on average, they're a major part of the 50% of the global population who do not have a bank account and usually live in developing countries with weak institutions and infrastructure.

However, even in these BOP societies, a lack of access to savings and credit is not necessarily the reason why people stay locked in cycles in poverty; but the lack of buffer which makes them vulnerable to life’s financial shocks. Leapfrog argues that insurance for the poorest and most vulnerable, is a sorely lacking financial tool preventing low income citizens from improving their living standards. The poor can save, but just one adverse scenario could wipe out their savings and mire them into debt rendering their savings efforts futile. Leapfrog also found that microinsurance fosters positive behavioural change: for example, a mother with health insurance may choose to send her child to school instead of encouraging him or her to work to earn money to save.
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Microinsurance is an instrument to protect the financially excluded against risk; as a concept it is the same as regular insurance but it focuses on low income people. Usually microinsurance offers protection against common risks, such as accident, illness, death and natural disasters: shocks that disrupt any individual’s life, but can prove to be devastating with lasting generational effects for the poor. The pricing of microinsurance premiums must also be tailored to the needs, income, cash flow and level of risk of the individuals. The product must strike a delicate balance between providing protection, ensuring sustainability for the insurer and not financially overburdening clients.

Often microinsurance clients have limited or no experience with insurance products, therefore they need to be simply designed and insurers may have to offer education – in some instances street theatre has been used to educate people on insurance. It’s not always an easy sell since in general people often underestimate the likelihood of idiosyncratic risks, or live in such hand-to-mouth scenarios they end up responding to disaster rather than preparing for disruptive events. For microinsurance to work, Leapfrog has a few lessons to share:
  • Economies of scale matter. A wide distribution network keeps costs down and pools risks; with the additional benefit of reaching large groups.
  • The easier to understand the better. Many clients don’t have the time or experience to understand complex insurance products. Clear, ethical and comprehensible marketing is important for uptake. 
  • Trust in, ease of and speed of payout is essential for large-scale penetration and renewal rates which will not only ensure business sustainability for the microinsurer, but also potentially reduce insurance costs for the client.
A wonderful example of microinsurance having a major impact is in HIV microinsurance in South Africa. It used to be impossible for HIV positive persons to purchase insurance before AllLife arrived on the scene (which now also offers diabetic insurance). AllLife is an insurance business, not a charity, and is able to thrive in South Africa where the government provides treatment and regular blood tests to monitor developments for free. With appropriate treatment, a HIV positive person can have up to  25+ year life expectancy upon diagnosis.

By requiring its customers to receive appropriate medical treatment and blood tests in South Africa as part of the insurance agreement AllLife is not only able to select customers who have more of a likelihood to live for longer and pay for  their insurance – but also incentivise clients to take treatment benefitting their health. Since there is still much stigma attached to HIV in South Africa, the government had struggled to encourage people to take the free treatment, but AllLife provides a good business case to challenge that conception. AllLife’s business model therefore not only enhances profitability, but supports the kind of positive behavior change that benefits society.

Microinsurance alone won’t solve problems of poverty, but it can provide financial and also mental security to allow low income individuals to plan for the future. The sector remains nascent, but as the needs of the poor are becoming better understood, microinsurance looks set to be a big story.