James Militzer

‘The Next Frontier of Financial Services’ (Part 1): Jeremy Leach, director at Bankable Frontier Associates, discusses microinsurance’s potential and challenges

Google “microfinance definition” and the following appears: “Microfinance: another term for microcredit.” Google isn’t the only one to conflate the terms, as microcredit has dominated headlines, and achieved market penetration, on a scale that dwarfs the other products that fall under the rubric of microfinance.

But there’s a growing recognition – articulated quite explicitly at the Microcredit Summit that’s taking place this week in Mexico – that this needs to change. As the impact of microcredit on poverty alleviation has drawn continuing debate, attention is turning to other financial products designed for the poor – including one that hasn’t typically gotten much attention. As Jeremy Leach, director and head, insurance at Bankable Frontier Associates puts it, “In financial inclusion there’s been a lot of focus, obviously, on credit over the past 30-40 years. There’s been quite a bit of focus around savings since the 1990s, and quite a bit of focus around payments since the 2000s – but insurance hasn’t had that much focus over those years.” However, he says that may be starting to change: “I see insurance as the next frontier of financial services.”

In part one of a Q&A with NextBillion Financial Innovation, Leach describes the current state of the sector, and speaks frankly about the challenges and opportunities in serving this market segment. You can read part two, which deals with the opportunities and risks of mobile insurance, here.

James Militzer: Could you give me an overview of the microinsurance landscape in developing countries in general: How common is it, what types of insurance are used and what are the obstacles to getting more people insured?

Jeremy Leach: I would say in most emerging markets, penetration rates vary from 2 to 10 percent of the population. So it’s pretty low. One reason why that penetration hasn’t increased is lack of appropriate incentives for the insurers to go into the lower mass market – because they are comfortable in that upper end segment, the corporates and the high net worth individuals, and they are pretty profitable on the whole. Also, there’s the challenge of distribution: The focus has probably been on the traditional models of broker and agents, along with MFIs, but that’s so limited in many of those markets. So the excitement now is around saying, “How can you use players like mobile operators, which have massive scale in those markets, where the majority of the population has access to cell phones?”

Education and understanding is quite a big challenge as well. Insurance has often been seen as a grudge purchase, or has a reputation for non-payment of claims. If you go to some of the countries where there’s compulsory motor insurance, everybody will say it’s a tax they are forced to pay, with a low likelihood of a claim being paid out. And that has undermined the industry as well, where the insurers have focused on collecting premiums, but not paying claims. They’ve basically forgotten that your claim is your shop window – that’s actually what sells your insurance business. But insurers haven’t really focused on that, unfortunately. So lack of trust undermines their ability to grow markets in those areas.

Another thing that’s holding us back, which is a bit controversial, is this donor focus around trying to get to the very bottom of the pyramid. And this has pushed insurance companies into markets beyond where they can go at our current rate of technology, rather than growing the market more generally and addressing some of the foundational issues, and some of the risks that financial institutions and other players work with. Donors have often pushed insurers to go to the hardest possible markets, the supra market zone, to test a product which is unproven rather than building the infrastructure, reducing costs, improving technology and making it viable. I think the idea of rushing to the very bottom of the pyramid without building up to it has also undermined the growth of this industry in the last decade.

JM: You mentioned the importance of actually paying claims, to build trust with customers who aren’t used to purchasing insurance. But the cynical view of insurance is that their business model is based on paying as few claims as possible. Since they are working with thinner margins when serving low-income customers to begin with, how do they balance these competing needs?

JL: That’s a very good point. But we did a study analyzing the value of microinsurance, and one of the things that struck me is that it is actually more suitable for that low-end market than it is for the upper-end market. Because as soon as you are wealthier, you can use your savings, or you can access credit to cover a shock. But if you’re poor, you can’t access credit, because you can’t afford the repayments. And you don’t have enough savings to be able to address that shock. So paying a small premium every month can actually help to mitigate the cost of that particular shock.

JM: I’d assume that poor people are going to be subject to more accidents, illnesses and maybe even natural disasters than other segments of the market. So they would probably need to be charged higher premiums because of that risk, which is exactly what they can’t afford. How does that balance out?

JL: Tough question. I certainly don’t believe that low-income people necessarily have higher risks. But there’s a downside of risk. This is perverse, but we actually found a client that couldn’t pay for a medical treatment and passed away. And then the family and friends donated more for the funeral than the actual cost of the treatment would’ve been. So, again, how can you help manage those risks, particularly those health risks – which is the holy grail of microinsurance – with an insurance product that is affordable, well-functioning and well-priced, and that works at scale? We’ve been searching for that.

JM: How do you see the industry changing in the developing world?

JL: What’s changing now is that we’re using lessons from behavioral economics, and we are now thinking about how insurance can be used as an enabler for core financial products, driving other services. For example, in Ghana, there is a basically free insurance product linked to savings, so the more you save, the more insurance you get. And it increased savings by 19 percent, which is significant.

JM: So you see insurance as potentially being an incentive to purchase or use other financial products?

JL: That’s my growing sense. There’s also been a focus on mobile operators, where the more you spend on your air time the more insurance you get, so again it’s seen as an incentive to drive your core product. But insurance is also an enabler for access to credit, by mitigating your risk, etc. So you can actually see it more as an enabler of broader market development or broader access to financial services – and not as a standalone voluntary paid insurance product, which is what’s typically looked at in the markets.

James Militzer is the editor of NextBillion Financial Innovation.

Base of the Pyramid, product design, scale