NB Financial Health

Tuesday
February 11
2014

James Militzer

Insuring Impact: A Q&A with the co-founder of HUGInsure, the world’s first social impact insurance

Few new products or concepts can be described as “the first of their kind.” But at the 2013 Annual Meeting of the Clinton Global Initiative late last year, Dalberg and Hollard Insurance announced the launch of what they believe to be the world’s first social impact insurance entity.

Going by the name HUGinsure, it applies rating methodologies and risk management principles to social impact funding. The goal: to facilitate the underwriting of loans to projects that can range from humanitarian aid and disaster relief to renewable energy.

We spoke with Ian Ross, ‎executive director of Hollard Insurance and co-founder of HUGInsure, about the new entity, and how it can improve social initiatives’ impact on the poor.

James Militzer: Could you briefly describe what HUGinsure will do and why it’s needed?

Ian Ross: Our first “product” will be a form of credit insurance for humanitarian project transactions that will enable funds to flow more quickly and freely into the project.

The background is fairly simple: there is a lot of cash that people want to invest into humanitarian projects – and more broadly into what I would define as social impact projects. But banks are having difficulty advancing cash to these projects under the current regulating environment, while still complying with all of the risk management criteria that they have as a bank. So you might have a philanthropic fund that makes a multi-million dollar commitment to an NGO. But since the NGO is often not a business of substance or capital, when the banks are approached to advance money, they say “But guys, there’s no security.”

So what happens is that the timing between the donor funds actually being able to release cash into the project can be a month, six months, or even a year. And in a lot of humanitarian projects, six months to a year can be measured in terms of human lives and human suffering. So what we asked ourselves was this: if we had an instrument to evaluate the quality of the donor and the donor funds, and the quality of the NGO, or project managers, or whoever it might be – then, if we are comfortable with the risk presented, could we provide a credit insurance product to the banks which would enable them to advance cash more regularly?

Now the answer to that question is yes – so we realized we could bring a product into the market that could possibly revolutionize the way funding takes place within social impact investment projects. We are actually taking the skill sets, the methodologies and the capital base of the insurance industry and applying it directly into social impact projects, ventures and investments. We believe it is the first platform for specifically directed social impact insurance projects.

In a nutshell we have two objectives: One is to make sure that HUGinsure itself becomes viable and successful. But the second, equally important objective is to bring the concept of social impact insurance to the attention of insurance markets globally – to say “Hey guys, there’s another way.” Our hope is that the insurance industry can look at social impact beyond what’s been done so far in narrow-focused initiatives like micro-insurance, finding ways of utilizing the vast amounts of capital that are tied up in the insurance industry globally.

JM: Are you anticipating that most of the organizations that take advantage of HUGinsure will be relief organizations, or do you think it will also include other NGOs and social enterprises?

IR: Well, we’ve done some analysis and scoping, and we see the need as two-fold. In the emergency relief environment, there’s often a short-term need to access cash. In institutions that are otherwise financially sound – some of which might have several hundred million dollars budgets and even more – their budgets are dependent upon cash flows and budgeted project expenditures. But when disaster strikes, they have a sudden need for cash, so they would definitely benefit from the product.

But there are other projects that we’ve identified that are not emergency relief. Let’s take the fight against malaria as an example: There are endless numbers of projects where individuals or NGOs have promised funds, but they just can’t get started because of the time-lag in actually getting cash released into the system. So, what we are hoping to do with the project, beyond cash, is bringing what we call “risk-management disciplines” into the process. We are saying to banks, “Look, here’s an insurance policy, your risk is protected.” But in order to get to the position where that policy can be issued, we have also done sufficient work in terms of assessing the project and its sustainability and the quality and availability of pledged funds. So we know enough to be able to say that this is viable.

And hopefully, this brings into the environment something quite organizationally new – a new discipline. So donors, funders and philanthropists can feel more comfortable because there’s an element of quality assurance and risk-management. We feel this could help the cause of social impact investing.

JM: Would the product be available for organizations and businesses of all sizes and stages, or do they have to have demonstrated their viability before you would get involved?

IR: There have to be certain qualifying criteria. I am hugely fortunate to be part of the Hollard Insurance Group where our shareholders are passionate about making a difference in the communities we serve. But not every financial market is like that, and not every insurance company on the planet is like that. So what we hope to do in the initial phases of HUGinsure is to attract some, let’s call them brand names – quality and internationally known organizations and operations. We would like to give the insurance market confidence that we have developed the concept. We see its value in social impact, but it has to be financially viable and sustainable, otherwise it can’t carry on doing what it has to do.

JM: You expect to accelerate over $400 million towards global development efforts by 2018. Do you anticipate that in that time other insurers will join the new sector that you are creating? And have you heard of any competitors interested in getting involved?

IR: I certainly hope so. We have held formal discussion with some of the leading global re-insurers and they have said, “Oh, this is interesting,” so we hope that as we progress we can bring them in. The enormous technical expertise represented by just a few of the leading global reinsurers can have a major impact on the development of social impact insurance. What we have to do, and this is part of the challenge, is to present it to the wider insurance industry in a shape and form that they can understand – because no one’s done it this way before. So in the context of the industry, we hope to demonstrate that social impact insurance is viable and effective and can and should form part of an insurer’s mainstream business activities.

We hope that by doing that, others will say, “Absolutely – let’s either compete or add our weight to develop new products.” You know, we have aspirations to take this from aid to the vulnerable poor, right up to renewable energy. We are focused on applying our risk-taking capital to projects and evaluating them not just in terms of underwriting the viability of profits, but in terms of what the project does for the environment, or for society as a whole. And the objective is to create a new way of thinking in the industry, where other insurers and financial institutions will say, “How socially relevant is our product?” And hopefully consumers will ask their insurance companies the question “What is your social impact insurance strategy?”

JM: Why has this taken so long to happen and why did it fall upon Hollard to be the first?

IR: Perhaps one of the main reasons is the huge amount of time and energy that has gone into the development of microinsurance over the last 10 or 15 years, and the attention given to financial inclusion at a product level. I don’t think that one ounce of energy that has gone into microinsurance is misspent, but I do think that because of the attention it has received, when insurers think of insurance for the bottom of the pyramid, they tend (for the most part anyway) to think only in terms of microinsurance solutions.

How did Hollard stumble into a different thought process? Some time ago, we recognized that much of our success actually came out of the emerging consumer market. We were addressing people that had some form of regular income – and it might have been a few dollars a day – but every time we tried to reach an even broader consumer base, we found that we were wrestling with the transactional cost.

Now, any insurer on the planet – and banks too, for that matter – will tell you that they’ve had exactly the same issue: transactional cost. So when we were wrestling with this problem and challenging ourselves to find solutions that would have a positive impact on not only emerging consumers but also the vulnerable poor, we had a moment of mind-numbing revelation when we said, “Well, if we can’t reduce the cost of the transactions, why don’t we reduce the number of transactions?”

It sounds so obvious, but for us it brought about a radical change in thinking and approach. It was our first move away from individual or consumer product/transactional based social impact solutions to a minimal transaction/high impact mindset. From there, looking at the elements of the social impact investment value chain and the challenges facing social impact investors and NGO’s, we recognized that with the status that our financial credit policy would give to social organizations, a single transaction in the form of one insurance policy could make a very big difference in a short space of time. This was a turning point for us, and of course we hope this will be a turning point in the way other insurers think and act in the social impact space.

Categories
Entrepreneurship, Impact Assessment
Tags
aid agencies, financial innovation, impact investing, lending, philanthropy, social impact