Microinsurance: the Next Generation of Impact Investments
In December 2013, Leapfrog Investments, a specialist investor in emerging markets and financial services, sold an insurance company in Ghana to a gargantuan British insurer for an undisclosed sum. This sale, of Express Life Insurance Company of Ghana to Prudential Plc, was the first reported exit by a microinsurance investor. It provided evidence that microinsurance in emerging markets can become an attractive investment to global players interested in having an impact in emerging markets and building sustainable businesses.
Microinsurance, or insurance aimed at the low-income and mass markets, is a relatively nascent market with a growing client base but a small number of investors. To better understand microinsurance’s growth as an investment class, the Microinsurance Network commissioned Bankable Frontier Associates to undertake a study called Exploring New Frontiers - The Potential of Impact Investments in Microinsurance. The study highlights that:
- Microinsurance is a growth market: Since 2007, the microinsurance industry has expanded from an estimated 78 million clients tomore than 263 million in 2013. Total demand has grown more than 10 percent per year, and premium growth has surpassed that in the developed markets.
- Innovations in microinsurance are creating new investment opportunities: Consider Bima Mobile ($7 million was raised in 2012 and $22 million in 2014), MicroEnsure ($7 million in 2012 and $10 million in 2014) and MFS Africa ($2 million in 2011). These companies act as technical service providers for insurers, banks, credit providers and mobile network operators, and they are increasingly attracting investments and creating platforms for growth in microinsurance.
Despite this growth, there is still a contradiction between this apparent potential and the reality of investing in microinsurance, which is harder than it looks:
- Microinsurance investment is a small niche: Insurance is already recognized as a niche market by private equity specialists – microinsurance even more so. The study identified only 23 microinsurance-related investments and one exit (Express Life) after a global scan. The investments are also split between early stage and late stage, with little between – so there is less variety for investors with different appetites for risk or funding levels.
- Microinsurance investors are limited and traditional private equity funds are run by competitors: The research showed few investors in microinsurance. Leapfrog and IFC are the two largest, with seven investments each. In addition, many private equity funds, including Leapfrog Investments, are funded by other insurance companies. This means that when microinsurance companies look to private equity investors for funding, they are essentially revealing their business plans to larger insurance companies and competitors..
Innovation around financing models, especially efforts to address the challenge of delivering services that deal with small incremental payments, is a trend to watch as more players begin to enter the market. With that in mind, and considering the apparent contradiction between a high growth market and a challenging class of business, we recommend the following to impact investors:
- Leverage broader financial inclusion portfolios: Investors have a tremendous opportunity to take advantage of their broader investments in microfinance institutions, banks, and payment companies to encourage microinsurance. Financial Inclusion is already the largest class of impact investments, so there is significant scope. Insurance is becoming an enabler of broader market and financial sector development since it can be used to incentivize savings or transactions or manage credit risk or even non-financial products such as spend on airtime or pharmacy products.
- Integrate advisory support for microinsurance investees: Investors should build support structures to advise and support their microinsurance investees. This would help ensure that lessons are learned fast and impact is proven.
- Explore the potential of public-private partnerships (PPPs): As a recent study looking at scale in microinsurance reported, PPPs are a source of growth for microinsurance and yet require considerable private capital to grow. This could be through investing in the insurers or parts of the value chain that support these models.
It is also clear that governments and donors have an important role to play in supporting investments in microinsurance. Many micro-insurers , for example, do not know who their potential investors are. Governments and donors should help connect investors with investees, through ‘trade fairs’ and other exchanges or forums.
Microinsurance is a relatively nascent market with a small number of investors now, but its growing client base and investments signal exciting potential for impact investors. By leveraging existing financial inclusion portfolios, integrating advisory support for investees, and exploring public-private partnerships, investors can lead the way on microinsurance as the next generation of impact investing.
I quite agree with the comments. I also think Insurers should start Investing in direct delivery channels for Micro Insurance. It is becoming more apparent that the Loss Ratio in this segment is very low- generally profitable though the uptake is still low.