Microinsurance: more hype or sensible investment?

For a long time the development of microcredit, with all its positive and negative effects, had the hallmarks of a fad. In its wake, however, microinsurance has now evolved as an interesting alternative for responsible investors. Ingo Weber, who sits on the Investment Committee of Leapfrog Investments, gives us a quick Q&A on this new type of financial service:

What does microinsurance mean?

Microinsurance is the word used to describe cheap insurance policies for people on low incomes or for people who normally can’t get cover (e.g. those with HIV/Aids). The actual products include life and accident insurance, health insurance, weather and failed harvest insurance, vehicle and liability insurance, etc.

Who needs microinsurance products?

In essence, everybody in the world needs a degree of protection against risks, and cover for things that could go wrong in their lives. In developing countries in particular, families and small businesses often face greater risks (e.g. because of natural disasters) than in developed countries. At the same time, social insurance is often very weak in poorer countries, so people only have themselves or their families to rely on for any kind of protection.

Microcredit was touted as a way of fighting poverty; does microinsurance also have social benefits?

Microinsurance has great social benefits. Imagine being a father who has to feed his whole family from his income. If you fall ill or have an accident, your income disappears and, unless there is any kind of social assistance, the family will have to use up its savings, or get into debt to pay for the doctor’s fees and cover the cost of living. Things like this often push families back into poverty. The good thing about many life insurance products is that they also provide an opportunity to save money for future investments, so as well as insuring against risks they help people build up their assets.

Who provides microinsurance?

Microinsurance is usually offered by local insurance companies. But in many countries there is very little provision if any.

Why are the big insurance groups still not active in this sector?

Owing to the limited growth opportunities in industrial nations, large insurance companies are increasingly investing in emerging markets. However, their focus is often on traditional business with mid-to-high income groups. In order to be able to offer insurance products for the lower income segment profitably and on a large scale, dedicated expertise needs to be developed in things like product development, distribution, risk management, administration and claims handling.

Microcredit is sometimes criticized these days for pumping too much credit into the market, doling out loans too easily, pushing borrowers into excessive debt and so pushing down the quality of the credit and actually making poverty worse. Are there similar risks with microinsurance?

It’s not like credit because the customer has to pay a premium before he or she gets the cover or receives an insurance benefit. People will save the money or spend it elsewhere before they ever become “overinsured”. There is a danger that insurance brokers might not always look after the customers’ best interest, or that they sell them unsuitable products (miss-selling). But these kinds of problems exist in developed countries too.

How do you think the microinsurance market will develop? Which continent shows the greatest potential?

According to a study by Lloyds, there are around 1.5 billion potential microinsurance customers around the world – i.e. people who are willing and in an economic position to pay the required insurance premiums. Swiss Re has estimated the size of the overall microinsurance market at around USD 40 billion. There is a lot of potential especially in the emerging markets of Asia (e.g. India, Indonesia, the Philippines) and Africa (e.g. Kenya, Nigeria, Ghana).

How can investors invest in microinsurance?

So far, investors have had little opportunity to invest in this segment. LeapFrog Investments has set up the world’s first private equity fund focused on microinsurance. It’s a USD 135 million fund that pursues social aims, like supplying 25 million people with appropriate insurance products, while at the same time targeting a financial return comparable with that of other private equity investments in emerging nations.

Share on Facebook
Bookmark this on Delicious