By Jeremy Leach, Sandisiwe Ncube and Anand Menon; published by the Microinsurance Network; 2014; 49 pages; available at http://www.microinsurancenetwork.org/sites/default/files/MICRO_NetworkInvestor_PaperWEB.pdf
Microinsurance, a risk mitigation and management tool for people with low incomes, has grown from 78 million lives covered in 2005 to approximately 263 million lives in 2013, with a potential market estimated at 3 billion to 4 billion policies generating USD 30 billion to USD 50 billion in annual premium revenue. Total demand for microinsurance is growing approximately 10 percent per year, which the authors argue points to increasing investment opportunities and a promising business case for investors.
This growth is partially driven by innovation in distribution models. The use of mobile network operators (MNOs) in particular has facilitated the profitability of microinsurance for investors. Such distribution models have contributed to growth particularly in the African market, which is described by some investors as the next frontier for growth.
Among the major investors in microinsurance are multilateral institutions such as the Inter-American Development Bank’s Multilateral Investment Fund, development finance institutions such as the International Finance Corporation and other impact investors seeking to invest specifically in microinsurance or financial inclusion more broadly. The UK-based International Cooperative and Mutual Insurance Federation (ICMIF) invests in its member cooperatives and mutuals, and LeapFrog Investments, a dedicated microinsurance fund based in Mauritius, accounted for 7 of the 23 investments identified in the study.
However, relatively few investors have yet made significant and dedicated investments in this space, and those that did had to relax their typical criteria in order to make the investments. The majority of investees’ funding is received from internal sources (original shareholders and/or parent companies). Donor funding is mentioned as a secondary source despite investees citing equity and donor funding as the most appropriate type of funding for microinsurance. The authors argue that there is a need for more investors in the sector to bring the much-needed capital that could support innovative ideas and bring scale to proven business models, hence enhancing the supply of microinsurance services.
Why aren’t more investors getting involved in microinsurance? Microinsurance investments are considered to be quite risky, and investors are wary of numerous challenges such as the lack of proven business models. Costly due diligence processes were ranked as the most significant challenge facing microinsurance investors. Investors are also put off by regulation and a lack of identifiable and financially viable opportunities, as well as small ticket sizes, which might not prove profitable enough for private equity investors. Capacity is also an issue, as microinsurers are often not specialists in distribution, which the authors deem pivotal to achieving scale and profitability.
Despite these challenges, there are a number of investment opportunities available.
– Insurance regulators and supervisory authorities are developing microinsurance-specific legislation, sometimes allowing for the development of a separate class of microinsurance operators or microinsurers with limited prudential and market conduct compliance requirements.
– Investors could leverage existing financial inclusion investments, in microfinance for example, and the capacity therein to invest in microinsurance.
– As governments increasingly focus on microinsurance as a social protection mechanism, opportunities arise for private sector actors to roll out government-linked schemes.
– Insurers need expansion capital to replicate successful microinsurance operations into additional countries.
– Greenfield operations that utilise established teams with the necessary skills and expertise may present less risk.
– Investors can invest in microinsurance indirectly through distribution and technical service providers. Consider Sweden’s Bima Mobile (which raised USD 7 million in 2012 and USD 22 million in 2014), UK-based MicroEnsure (USD 7 million in 2012 and USD 10 million in 2014) and South Africa’s MFS Africa (USD 2 million in 2011) who act as technical service providers for insurers, MNOs, and banks and other credit providers.
– Investing in a fund that supports microinsurance in multiple countries distributes risk more widely than committing to a service operating in a single country.
These opportunities could be supported by strengthening advisory models to provide investees with stronger technical support to seek improved returns on investment. The authors also argue that investors would benefit from leveraging donor and government partnerships and that microinsurance investing principles and standards should be adopted to strengthen the sector through greater accountability and improving the reputation of microinsurance.
This paper wrap-up was guest-written by Julia Graham of the Microinsurance Network, which is based in Luxembourg and has 72 institutional members.
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