The president of LeapFrog Investments shows how the principles of microfinance can apply to the insurance industry.
Andrew Kuper: Andrew Kuper, President and Founder of Leap Frog Investments.
Question: What is microinsurance?
Andrew Kuper: Well, microinsurance is very simple, it’s an insurance policy sold at a low premium to a purpose with a lower payout but that payout matters hugely to them. So a woman might need to go to a hospital but she has no safety net, no resources to fall back on, so she’s forced to either bankrupt the family or spend all their savings or not go to the hospital. And the consequences for her and her family can be profound. Now, what insurance allows her to do is pay a small premium each month, it might be a dollar, it might be $4, it might be $7, but fundamentally that allows that poor woman, if an unexpected event happens, to be able to go to the hospital, to be able to get medication to recover and not bankrupt the whole family or lose all their assets, the same is true of life insurance, people save and save for years scrimping, people earn very few dollars everyday and slowly accumulate assets and then one day as happens to all of us, four years in or two years in, some terrible event happens, the breadwinner dies and they can immediately have all their debts that they have to repay, they can have the funeral cost which can often be significant in parts of Africa and necessary for continued participation in the community and they lose all their assets, everything they’ve been working for and a whole family business that supports say the three kids and all their kids can go down the drain and these are real stories, I’m not making this up.
And what insurance will ask people to do is to recover from that shock so the breadwinner dies within two days there’s a payout, people can pay for the funeral, people can pay off their loans, people can have some money to continue the business and get it to a point where they can run it 6 months later.
This insurance may seem like a small thing because it only costs a few dollars but it provides people with the ability to recover from shock and actually globally studies have shown particularly the work Nobel Laureate [IB] has shown that the poor remain poor often because they have these adverse shocks. They do actually accumulate assets overtime and they may fall back into the poverty line so the importance of this cannot be underestimated, I think it is the one of the most central development interventions in the world and the exciting is that it’s profitable.
Now, just to take a step back, why is it profitable? Well, if you think in pure auctorial hardnosed business terms, insurance is about risk and it’s about predicting what’s going to happen and insurance companies takes money, tries to predict what’s going to happen and promises to make a certain payout at a later date and it takes some money in doing that and for sharing the risk; for organizing a risk pool.
Now, what makes something predictable, well, it has large numbers. You would rather have a million people you’re ensuring at a lower cost than a thousand people you’re ensuring at; for a higher premium that they’re going to pay. So the incredibly exciting thing about microinsurance is you can sell a huge number of policies at low margins to huge numbers of people and your risk pool becomes quite predictable and that makes it much easier to manage so eventhough you’re taking a smaller cut on each policy, you’re actually doing fundamentally in some ways a better business. Now, the important thing is you’ve really got to get your costs low because if you’re selling a policy for $7 adding on 50 cents here or there is going to create real problems.
So one of the really exciting things is the technology and the systems that allow you to do this so microinsurance is now being sold through cellphones, people are working through groups like churches where in South Africa, three million people come the [IB] Church every Sunday and they buy, a lot of the buy microinsurance and it’s a very successful scheme part earned by the largest [insurance] in Africa, microfinance institutions. When people walk in for a loan, you add 2% and suddenly those people have covered so that the load is repaid, so that they’re covered in the event of the death of the breadwinner and so they have a better outlook. Now, the last exciting thing here is it’s not just about protection in terms of social impact, it’s hugely important because it’s enabling. So think of a farmer, I myself have had bad experiences, failed development experiences where I went to India and tried to get farmers to adopt certain drip irrigation technology and others have done this with seeds, trying to give them seeds that really help increase productivity and farmers said no and we couldn’t work it out.
We thought, “Look, this has a 95% change of success, they’re going to triple their income, your family is going to climb out of poverty. Why are these farmers not doing it?”
And the answer is there is a 5% chance of failure and 5% chance of failure of any new business, for these people means that their children starve.
So how many of us are going to undertake a new business when there is 1 and 20 chance that our children starve? Now, what microinsurance can do with things like crop insurance for instance is help people to take worthwhile risks so people know that the assets of their family are protected, that their loans are repaid if they die, that they aren’t going to leave their family destitute. They know that if the crop fails because of something entirely outside of their control, that they’ll be able to get a payout. So they’re able to engage in new forms of economic activity, they’re able to take risks that allow them to dramatically in some cases increase their income. So it’s not only protective microinsurance, it’s enabling and that is what I think makes it one of the world’s most important development interventions.
Recorded on: May 1, 2009