Inside Microinsurance: Why Insuring Female Micro-entrepreneurs has a Ripple Effect
As Tropical Storm Isaac hit Haiti in late August, all eyes were watching to see whether the country would be overwhelmed by the latest storm. Though the winds and rains didn’t cause widespread damage, small business owners felt its impact acutely, especially when profits must provide for the needs of an entire family. Many women, some of whom earn only a few dollars a day selling small goods, have no safety net to bounce back from the devastation of losing inventory or suffering damage to a home. Since then, MiCRO is handling more than 3 million in payouts to women with small businesses in Haiti after Hurricane Sandy.
Through MiCRO, a reinsurance company formed in March 2011 by Mercy Corps and Fonkoze with SwissRe, these female microentrepreneurs will receive an insurance payout triggered by Isaac’s high winds and heavy rains to replace goods and repair damaged businesses. MiCRO also is handling more than 3 million in payouts to women with small businesses in Haiti after Hurricane Sandy.
James Kurz, Mercy Corps senior technical advisor and former senior financial analyst at Fonkoze, talks about the value of microinsurance in disaster-prone regions.
Kyla Springer: Who can receive MiCRO insurance?
James Kurz: MiCRO’s product has first been offered to Haitian entrepreneurs through Fonkoze, Haiti’s largest microfinance institution, which only works with women. In the future, MiCRO will offer products in other countries.
KS: Why does MiCRO target women?
JK: Women are often the most vulnerable people with the fewest opportunities. They are more likely to be involved in informal business activities, but have difficulty accessing capital through traditional means. However, women can also be resourceful entrepreneurs. When women earn income, they are much more likely than men to reinvest it in education, medical care and general support for their families. Investing in women is a smart bet.
Fonkoze saw female entrepreneurs struggle to climb the ladder out of poverty—again and again they were knocked down by catastrophic losses from high winds or heavy rains. Fonkoze had provided loans for women to build their businesses, but had no insurance to offer them to help cover their losses. MiCRO’s product solves this problem – giving Fonkoze a way to offer their borrowers a payout to rebuild their businesses and escape a poverty trap.
KS: How do women learn about MiCRO’s insurance product?
JK: Fonkoze has built a network of roughly 60,000 women entrepreneurs across Haiti over the past 16-17 years. Fonkoze’s 46 branches are subdivided into “solidarity centers,” groups of 40-60 women who meet twice a month to repay their loans, learn savings and business-building tips, and discuss issues affecting their lives. This is the forum through which Fonkoze communicates about MiCRO’s micro-insurance product, called Kore W, or “Reinforce You” in Creole.
KS: How much do small business owners pay each month for the insurance?
JK: Women who take out a loan with Fonkoze to start or grow their business must also purchase the Kore W product. The insurance premium costs clients three percent of the loan amount. So a woman taking out a $250 loan would pay $7.50 for the Kore W insurance. That may not sound like much, but for a woman who makes $2 a day or less, it’s a significant investment.
Catastrophe insurance is a totally new concept for Fonkoze borrowers, so the fact that they’re willing to pay to help manage their own risk is quite remarkable. The insurance is becoming understood–and even popular–among Fonkoze clients.
However, the 3 percent figure does not cover the full cost of the insurance premium. Fonkoze partially subsidizes this. They wanted to make sure that their borrowers could afford the insurance, and felt that a partially subsidized premium got them to the right price point.
KS: How does MiCRO make up the gap between the premium paid and the actual cost of the insurance?
JK: The MiCRO product is a work in progress. We’re still figuring out how to get to a premium that microentrepreneurs are willing and able to pay, and that will cover all of MiCRO’s costs and eventually make the company profitable. We’re not there yet, but we’re always tinkering with the service and premiums.
In the interim, donors are helping us fill the gap. The UK’s Department for International Development is a great supporter of MiCRO. The Swiss Development Corporation is also supporting this effort through a grant to Fonkoze. Our goal is to get to a point where we no longer need donors to fill the gap because MiCRO will be self-sustaining and profitable.
KS: How are payouts distributed? Does MiCRO use mobile phones or is payout typically through brick and mortar banks?
JK: All loan clients have deposit accounts with Fonkoze. Insurance payouts are made into the deposit account of each client affected. Clients must physically go to the branch location to make a cash withdrawal, but Fonkoze has 46 branches throughout the country.
Mobile phone payouts may be possible but we’re not doing that yet. That would probably be integrated into a broader Fonkoze initiative, which would offer a full range of services via mobile devices.
KS: What doesn’t the insurance cover?
JK: The insurance does not cover loss of life or personal injury – that’s a different kind of insurance. MiCRO’s product covers loss or damage to inventory or homes due to a catastrophe like a hurricane, tropical storm or earthquake. Many of the women who are Fonkoze borrowers don’t have separate shops or other places of business – they work out of their homes or keep their inventory at home and sell it at local markets. So damage to a home is really damage to a business.
KS: What makes this insurance policy a ‘hybrid’?
JK: Most disaster-related reinsurance policies have to choose between being very fast or very accurate. Fast policy payouts are triggered quickly and damages are estimated according to predicted damage from high winds, rainfall or the earth shaking, but they don’t give the most accurate view of real damage on the ground. The other option is a claims-based process that can provide a more precise picture of real losses. This process can take a lot of time, and in very poor countries with tough terrain, insurance companies have a difficult time getting claims officers out to all of the impacted areas. People who’ve been hit by a catastrophe, and in these cases it’s people who are already extremely vulnerable, can be left waiting for a payout for a long time.
MiCRO’s product offers the best of both worlds. Weather triggers provide a timely picture of what kind of payout might be needed. Simultaneously, Fonkoze meets with its local borrower groups to figure out the actual losses. This process can be done relatively quickly because of Fonkoze’s close relationship with, and organization of, its borrowers.
MiCRO then pays out the weather-triggered amount combined with any additional amount from on-the-ground claims. This is all done in about three weeks so that Fonkoze gets the right amount of payout to cover their borrowers’ real losses.
There’s currently no one else offering this type of hybrid product in the microinsuance world. But we know that other groups are watching and learning to develop MiCRO-like products.
KS: Are there arguments against offering a hybrid model?
JK: A hybrid model is more difficult to get right than index insurance, where the amount of payout is determined exclusively by a set of weather-related triggers. The problem is that the triggers don’t always accurately predict damage and, sometimes, triggers don’t go off at all but there’s still damage on the ground. This deficiency begs for some kind of damage assessment and claims process. This can be tough, but Fonkoze has great relationships with its borrowers; it’s very connected to those communities and can get damage assessments relatively quickly so that MiCRO can cover both the triggered payout and the actual losses above and beyond that trigger amount.
But there’s no easy formula here. It’s complicated to get triggers that are as accurate as possible, a claims process that runs smoothly and a premium price that borrowers believe is worth paying. Doing all of that in a very impoverished and chaotic environment like Haiti is hard work. MiCRO’s clients – like Fonkoze – have to be ready to do the difficult work of an aggregator, claims assessor and monitor. Fonkoze also subsidizes the premium, so it’s a big investment for them.
KS: What happens if the payout is triggered by extreme weather, but the local committees find that actual damages were not sustained in the area as expected?
JK: People in different geographic areas are not all affected the same way so damages vary. When weather triggers allocate payouts for areas where Fonkoze then determines that damages were not sustained, Fonkoze can then reallocate those to cover other affected areas. This is a major feature of the hybrid model.
On the back end, once the amount of actual damages is determined, if it matches the triggered amount, then that’s what Fonkoze receives from MiCRO. If losses are less than the triggered amount, Fonkoze can receive the full triggered amount and maintain the overage to go toward future disaster-related damage payouts. If actual losses exceed the estimated payout, MiCRO will pay Fonkoze the triggered payout plus the amount needed to fully cover real losses.
KS: Can you estimate the percentage of total payouts that fall into the immediate payout category versus payouts based on actual assessments?
JK: In very broad terms, MiCRO’s policy is designed for a balance of about 80/20.
KS: How unique is the policy with a payout based on the presence of a disaster, as opposed to the destruction of assets?
JK: The notion of a payout linked to a specific event is not particularly unique, per se. Relative to the overall global insurance market it represents a small proportion of total policies, but index-based schemes can be found around the world.
KS: What other kinds of microinsurance does MiCRO provide in Haiti (for example, life insurance)?
JK: MiCRO only provides reinsurance for entrepreneurs’ catastrophic losses. MiCRO does not offer any other products in Haiti. Fonkoze is its sole client, so far, and Kore W is its sole product, so far. Fonkoze, however, offers a credit/life product covering client mortality through its local partner, AIC.
KS: What role does Swiss Re play?
JK: Swiss Re provides the actual reinsurance policy that is the foundation for the index-based portion of Fonkoze’s Kore W product. MiCRO takes that policy and works with their client – in this case Fonkoze – to tailor it for their needs and the needs of their borrowers. By providing the policy, Swiss Re is also our connection to the global insurance market, and that’s critical. A key idea behind MiCRO is that people in impoverished countries who are vulnerable to natural disasters have a very difficult time absorbing the huge losses they’re often exposed to. It’s extremely helpful if the people of Haiti, for example, can transfer some of their risk to global insurance markets. Previously, they’d had no connection to that market. Through MiCRO and Swiss Re, now they do.
Swiss Re has played a much greater role in this project than a traditional reinsurer. Aside from a monetary donation, they have offered countless hours of pro-bono expertise. As a virtual organization with no staff, and little funding to have a staff, this expertise is essential. In an event period, Swiss Re’s role is much more formalized. The contracted calculation agent (in this case CaribRM) informs Swiss Re of a triggering in their reinsurance contract with MiCRO, Swiss Re verifies the claim and remits payment. This business is conducted through Swiss Re’s normal business channels while other work has been conducted through the Global Partnerships team of Swiss Re, which focuses on the public sector and development of frontier opportunities.
In addition to Swiss Re, there are other strategic partners involved. A company called Guy Carpenter is the insurance broker, and CaribRM provides technical assistance to determine the weather-related triggers and resultant payouts.
KS: Does MiCRO have plans for expansion within Haiti? What are Mercy Corps’ plans to replicate the MiCRO model elsewhere?
JK: MiCRO has made presentations to ANIMH, the Haitian Microfinance Association which houses most of the main MFis in Haiti. Several, including ACME, one of the largest MFIs, have expressed interest.
Mercy Corps is actively involved in incubating new business for MiCRO in the Philippines, Guatemala and Colombia but these are all early stage. Additional proliferation, especially in vulnerable countries where Mercy Corps has offices, is planned. When expansion happens, it won’t be an exact replication of what Fonkoze’s offering through Kore W. That’s the beauty of MiCRO: The product can be tailored to the needs of whatever client organization we’re working with and the people they serve.