Chutes, Ladders, and Safety Nets: How Microinsurance Helps African Development
Thursday, December 8, 2011
James Abuh-Prah had owned a used electronics shop in a small market in Accra for 17 years before a flood took everything.
It was late one night in October, and the torrential rains hadn’t stopped for hours. “By 5 a.m. the water was up to my chest,” he says. He had taken out a $2,400 loan from his bank, Opportunity International, to use as capital to buy used televisions, stereos, and other electronics. Now, everything was destroyed.
It’s like a game of Chutes and Ladders,” says Richard Leftley, president and CEO of the U.K.-based MicroEnsure, a company devoted to serving the materially poor. The company embeds free or inexpensive insurance policies into products targeted at poor families-like loans, savings accounts, and pre-paid mobile phone credit. Founded in 2005, MicroEnsure now has more than 3 million clients worldwide.
If you are poor, you might take out a loan from a microfinance institution to start or expand a business. The loan is like a ladder, Leftley says. But if someone gets sick or a flood comes, you’re back where you started, or sometimes worse off. That’s the chute. Leftley was thinking about this cycle while talking with women in Zambia in 2001. It was then, he recalls, that “a light went off in my head: [the poor] need a safety net.” They need insurance, he thought.
Creating a safety net for millions of people is no easy task. How do you make insurance affordable enough that someone living on less than $4 a day can afford it? And once they can afford it, how do you convince them to buy it? In most of sub-Saharan Africa, insurance companies have poor reputations. Some prey on the poor by hiding extensive exclusions and policy conditions in the fine print, making illiterate clients especially vulnerable. Others give processors financial incentives to reject claims, MicroEnsure general manager Peter Gross says.
In 2010, Ghanaian insurance companies paid out just two dollars in claims for every 10 dollars they earned in premiums, according to reports published in the Ghanaian Business & Financial Times. “You see the frustration on the face of a client when they come and in the end they are not going to get any money,” says Leona Essiam, a MicroEnsure account executive who previously worked for another insurance company in Ghana. “The general perception about insurance is that is doesn’t work here in Ghana.”
Because of the distrust around insurance, “we had to redesign [it], so that rather than it taking months or years [to pay out a claim], it takes a matter of days,” Leftley says. While many life insurance companies exclude people with terminal conditions like HIV, MicroEnsure covers them. If someone dies, they don’t need mountains of proof. And the policies are so simple, you could write down the terms “on a napkin,” Gross says. “Most international insurance companies look at Africa and all they see is risk: famine, conflict, HIV/AIDS,” Gross says. ” Our people are in the markets every day. We know the risk is not that high.”