Insurance is not the sexiest business, concedes Tahira Dosani of LeapFrog Investments, but when targeted to low-income individuals, it can be a “purpose-driven” business: i.e., one that makes a social impact while generating decent investor returns.
Insurance—more specifically, micro-insurance—is LeapFrog's specialty. The private equity firm founded by Andrew Kuper and Jim Roth raises money to invest in companies “up the value chain” of the insurance industry in Asia and Africa. It closed its first private equity fund in 2010, and makes only equity investments, Dosani, director of global engagement and strategic projects for LeapFrog, told FINalternatives in a recent phone interview. “Typically minority stakes, some majority and our typical investment size [is] between $5 million and $20 million. Our average deal size to date has been around $12 million.”
A typical LeapFrog investment involves an established insurance company that has traditionally served the upper and middle-class segments of a population and now wants to tap into the largely unpenetrated low-income segment.
“[T]ake a country like Kenya,” said Dosani. “If you look at the population of Kenya and the demographics there, the upper class is the top 5-10% of the population. The middle class in Kenya is 2% of the population. That upper segment, the upper and middle class, that's not where the growth is coming from for an insurance company or for any financial services institution in that market. The growth is coming from that next 60-70% of the population—not the bottom 15-20% that's completely destitute, but that next 60-70% and that's what we call the emerging consumer.”
The “emerging consumer,” said Dosani, is someone with a home and a job and an income (a taxi driver, say, or a small shareholding farmer) who would pay for financial services if there were “relevant, quality and affordable” services available. Helping established insurers reach such consumers is where LeapFrog comes in:
“[W]e have deep operational expertise in the insurance space,” said Dosani. “We have three actuaries on our team. We have people that have built and run insurance businesses in these markets and so they really can sit across the table from the CEO and be an effective thought partner and say, 'This is what you need to do in terms of product and design. Let us have our actuaries look at your pricing structure and help you re-think pricing for this segment of the population. Let us bring our expertise in low-cost distribution and distribution in non-urban areas to your business so that you can drive down your operational costs and still have reasonable margins even though your prices are slightly lower for this segment.'”
The value of insurance to the “emerging consumer” is twofold. On the one hand, it provides protection against the unexpected:
“When you think about someone that's low-income,” said Dosani, “it's not that they're stuck in dire poverty forever. The reality is that they work, they scrimp, they save and they slowly build themselves out of poverty. But then something happens, the death of the primary bread-winner in the family, or an adverse health event, someone gets ill, or the motorbike that they take to the labor market breaks down. And because they don't have life insurance or health insurance or motor insurance they fall all the way back down into poverty.”
Insurance can “put a cushion under them, put a floor under them, serve as a safety net such that when that adverse event happens, they get protected.” But insurance can also enable people to take the kind of calculated risk that can raise them out of poverty:
“For example, a farmer that's looking at planting a new type of crop,” said Dosani. “And this new type of crop, a new type of seed, has a 95% chance of success...He still may not do it because that 5% chance of failure means starvation for his family and very few people are willing to play Russian roulette with their family's lives. But if he had crop insurance and had that cushion under him, it would enable him to take that risk, which is a smart, calculated risk that really can fundamentally help him emerge from poverty.”
The fund's latest investment, in Nigeria's CrystaLife Assurance Company, is a pretty much textbook LeapFrog investment: the fund has partnered with CrystaLife's new owner, Asset and Resource Management, the country's largest non-bank financial company, to expand the insurer's client base to include millions of uninsured Nigerians. Similarly, it has invested in Kenyan-based Apollo Life Insurance, the second-largest insurer in East Africa with operations across Kenya, Tanzania and Uganda, to help it expand down-market.
Another recent investment, though, offers a variation on the theme: LeapFrog has put money into Bima Mobile, a mobile insurance platform covering 2 million people in Senegal, Ghana, Tanzania, Mauritius, Sri Lanka and Bangladesh.
Mobile penetration is very high in these markets and by making their products available via mobile phone, insurers reduce their distribution costs and tap into “a massive segment of the population,” said Dosani.
“[I]n a number of these markets, they actually create partnerships with the telecom operators whereby the telecom operators will pay the premium for their customers. And the reason they do that is, in a number of emerging markets...people aren't on contracts or locked into a given operator, it's pre-paid or pay as you go. The cost of a SIM is $1 or less and most people carry around two or three SIMs or two or three phones and will literally arbitrage on a per-call basis. 'I'm calling my friend who's on this network at this time so it's cheaper to use this phone or this SIM card'...”
In such markets, said Dosani, the operator's goal is to get as many of its customers' contacts as possible on the network, so loyalty programs are important. Some operators offer bonus minutes, but such programs don't necessarily have the desired effect—“[Y]ou'll spend your $5, you'll get your sixth free dollar, and then dollars $6-10 you'll go spend with someone else because you don't have any deeper loyalty, really, to that operator.”
With Bima, operators can say, “For every $5 you spend on our network, we'll contribute $1 towards a life or health insurance policy.”
“It's a fantastic loyalty scheme from an operator's perspective,” said Dosani. “There's no incremental cost to them versus any other loyalty scheme, so they'll happily pay the premium and not only that, they educate the customer, because as part of their loyalty campaign they have to show the value in this, so they're educating the customer for the insurer. The insurer is tapping into a massive customer base and the end user, the customer, is getting, in many cases, free life or health insurance.”
Also interesting is the fund's investment in South Africa' AllLife, a company providing life insurance to people living with HIV.
“[I]f you're HIV positive in South Africa today, you cannot get life insurance anywhere else,” said Dosani. “Really, people who are HIV positive are seen as an uninsurable risk. And in South Africa, if you don't have life insurance, you can't, for example, qualify for a home loan. So you're excluded not only from getting insurance but from accessing a number of other critical financial services. And AllLife saw an opportunity.”
The insurer links health insurance with health program compliance: in other words, insured individuals must take their antiretroviral drugs to remain covered.
“[B]y linking people's life insurance policies to health compliance in that way, they can actually make people who are living with HIV a manageable risk, an insurable risk, and a profitable segment to serve,” said Dosani. “And not only that, they've found that their customers, within six months of becoming an AllLife customer, see a 15% increase in their CD4 count, which is a measure of their immune system health.”
LeapFrog has also invested in two Indian insurers—Mahindra, the country's leading insurance broker, and Shriram, which distributes a number of low-cost financial services, including insurance—and a Ghanaian insurer, Express Life.
LeapFrog's focus on investments with 'purpose' doesn't mean the firm is not interested in making money. Founder Kuper's vision, said Dosani, was to “create an investment fund that would be able to deliver top-tier returns.”
The micro-insurance market, she said, offers this opportunity:
“It's virtually completely unpenetrated. It's a segment that does have the willingness and ability to pay. Yes, it requires a different type of product design and a different type of pricing and a different type of distribution to serve this segment effectively but there's a tremendous growth opportunity there...It's a segment of over 2 billion people across the geography and the markets that we serve and it's a segment that has tremendous consumption power.
“[W]e're targeting above-market rate returns but there is a social mandate as well, and the way we see it, there's no trade-off between the two.”