Martin Herrndorf

The Ugly Duckling Turned Rich ? Leapfrog?s Approach to Microinsurance

Microinsurance– the provision of insurance to the poor -has been overlooked due to the wide-spread focus on microcredit, but this might just be changing. Leapfrog, the first dedicated microinsurance investment fund, has gathered 137 Million US-Dollar to be invested into microinsurance projects around the world. Time for a closer look at the fund, undertaken together with LeapFrog founder Jim Roth.

The ground – the microinsurance challenge

In the shadow of microcredit, microinsurance has seen a fast and wide-spread growth over the last years. Driven both by local experiments, by cooperatives of microfinance institutions, and the involvement of larger, multinational insurance companies, the sector has developed. After the first wave of relatively easy products, like group-based life insurance, insurers are now looking to more complex issues: health, life-stock, or crop- and weather insurance for smallholder farmers. The dynamics of the sector can also seen in the surge of conferences on the topic, besides the traditional “family meeting” at the Microinsurance Conference hosted by Munich Re.

LeapFrog Investments is a new-comer to this scene. It is an investment fund dedicated to microinsurance, and has made a remarkable appearing with a 137 million Dollar fundraising success. With the money, LeapFrog wants to finance insurance companies, technical solutions providers and sales channels, to expand protection through insurance to people currently excluded from the market, and to yield a profit for its investors.

Standing on two legs – the fundraising success

On May 6, Leapfrog and the IFC gathered in Washington to celebrate their achievements. Getting the money together was based on a double-approach. While some of the funders are traditional market oriented investors, like JP Morgan or some reinsurance companies, others have a specific social or development mission, like the KfW, the Soros Economic Development Fund or the European Investment Bank. Jim Roth explains how Leapfrog has pulled in investors by satisfying both commercial and social motivations:

All investors were interested in the double bottom line, but the importance they give to the two factors may be varying. All of the investors are attracted to our social mission. With some investors that is much more important than the returns we get. But all of our investors, to be clear, want the return and some of our investors have invested in us very largely because they see microinsurance as an extremely exciting market, a commercial market – and they want to get in early.”

Getting this substantial amount of investments for market-based development projects is quite an achievement. Its even more remarkable, as LeapFrog does not have a track-record of investments in the field, but is a newcomer to “BoP” markets in general, and microinsurance markets in special. Others, like the Acumen Fund, have build their portfolio over the years, and could offer later-stage investors proofs that their investments work – financially and socially. Jim Roth explains the dynamics behind the process:

It is harder to raise 1 dollar in the beginning than 10 million dollars in the end. The first group in was the high-net-worth individuals, Pierre Omidyar of eBay, or Felipe Medina, a director of Goldman Sachs. This also included Calverts and Triodos Bank, who both have a strong social focus. While this first lot was more socially orientated, they still have interests in a double bottom line. It was in the final round when we really got institutions with a more traditional commercial focus – SCOR, Flagestone-Re, and JP Morgan.

Knowing that more socially oriented investors were already invested apparently helped to persuade commercially oriented ones to look beyond their traditional portfolios – which shows how the borderlines between the two sectors might further blur in the future.

Looking around – searching for investments

With this considerable amount of money, the next big challenge for Leapfrog is identifying investment targets. For this, Leapfrog does not exclusively cover the poor:

We are investing in businesses that provide insurances to low-income and financially excluded people. So we are also investing in businesses that provide insurance to wealthier people, who are for other reasons excluded from insurance markets. Our investments in All-Life, which provides life insurance to HIV-positive people in South Africa, is an example with a not-all poor clientele, some are fairly well off.

Within this scope, Leapfrog targets risks carriers, i.e. insurance companies, but also insurance administrators that provide new technical solutions to deal with the huge numbers of clients and interactions, and distribution channels that help to bring insurance to end-customers – like retailers or microfinance institutions. Leapfrog focuses their investments on certain countries – to accommodate the limited resources and size of their team:

We invest in Africa and Asia and we have a focus on South Asia, India in particular, on the Philippines, on South Africa, Kenya and Ghana. We had to make a cut somewhere. First, we looked at the amount of microinsurance that was taking place in these countries -they all have very active microinsurance markets. Second, we choose emerging market countries that have stable governments. Third, we went into places where other social investors like microfinance funds are already heavily invested, and where we as a team had experiences and connections and social capital.

While probably necessary, this focus has two effects. First, Leapfrog acknowledges that some exciting markets, like whole Latin America, are completely out of their focus. Second, investments like those of Leapfrog will not build a microinsurance market from scratch but rely on successes already achieved by other businesses, funders or investors. Past studies have shown that there are clear front-runners and laggards in current microinsurance markets, while promising to develop markets overall, the investments by LeapFrog might widen this gap.

Starting to walk – getting investments done

Leapfrog will invest the 137 million as equity finance, and thus get a direct stake in the companies. It plans a deep involvement with the companies. Besides looking for “strong positive returns”, Leapfrog will seek to apply social criteria in their interaction with their investees:

We commit our investees into selling high-quality, relevant and affordable products. Companies have to submit a social and environmental questionnaire on a quarterly basis. And we take a board seats on companies to ensure that they are meeting the social and environmental standards.

With this approach, LeapFrog seeks to cover some of the potential traps in microinsurance, being interested to monitor issues like “do clients understand the products that are being sold to them?” or “Is the insurance company paying claims relatively quickly and efficiently?”.

While LeapFrog has made only one investment so far, Jim Roth is satisified with the interaction they have with this company, called All-Life and selling health insurance to HIV positive people in South Africa:

The CEO of All Life publicly said how impressed he was. He said that, typically, investor took a step back when they heard that the company sold insurance to people that were HIV positive: One of the things he thought were amazing about LeapFrog was that we took a step forward. They are a brilliant management team, and we have a very strong relationship with them.

Leapfrog is currently scoping for further investments, in their target countries, with several negotions being underway.

Able to fly? The long-term impact

How this “double bottom line” strategy will work out in the long run is open. Microinsurance markets are typically well developed for relatively simple products like life insurance, which is highly profitable. But the overall social impact depends on the specific product sold – and for the wide-spread credit-life variety, it might be minimal even if additional benefits are offered (see the study on Indonesia reported in this pdf).

More ambitious projects, like health or crop insurance, are difficult to run profitably, especially over a longer time and on a larger scale. Still, these long-term, large-scale projects would be needed to absorb the investments amount of LeapFrog and yield the returns the companies envision. And natural disaster insurance, against floods or hurricanes, is often plagued by high losses – or low sales, when products have been priced to take into account higher risks.

LeapFrog still strongly relies on a market-based approach to microinsurance. Indeed, traditional grant-finance might cause problems, like the risk of crowing out existing investment plans of companies, or pushing them into problems they cannot sustain over the long term. Grant-based projects that run for a year or two might even harm the development of microinsurance markets in the long term: People that trusted the company to offer them a long-term option to better manage their risk are left disappointed, and might be susceptible to the promise of insurance in general.

Despite its commercial approach, LeapFrog does not depart totally from “free money”. They complement their investment activities with a grant pool, of 5 million dollars, and the technical support facility LeapFrog Labs, that provides direct support to the investees. With this, they soften their purely commercial approach a bit – but are in good company by other funds, that provide “soft” loans, or run support programmes for the investees that are financed out of grants, like the Acumen Fund Fellows program.

The confidence of microinsurance investors shows that the days of the Ugly Duckling might indeed be over. Let’s hope, together with these investors, that we get to see the beautiful swan, sooner better then later.