Chutes, Ladders, and Safety Nets: How Microinsurance Helps African Development
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.S.-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 it 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.”
MicroEnsure currently operates in three of the continent’s most stable countries: Ghana, Kenya, and Tanzania. The company plans to expand to three or four more countries within the next year. Over the past year, Microensure’s client base has increased 10-fold in Africa to some 1 million people. Within two years, the company expects to serve more than 5 million people in Africa, the vast majority of whom have never had access to formal insurance, Gross says. “[Insurance] is unusual in the development sense. It is not going to make someone rich, it’s not going to feed them,” says Leftley. But it can prevent someone like Abuh-Prah from sliding back into poverty.
When Abuh-Prah took out his loan, his loan officer explained that the terms included life insurance for him and his family, disability insurance, and property insurance to cover his business against catastrophic loss—a package that cost 1 percent of the value of his loan. He submitted his claim the day of the flood. “I told them [what happened] and they asked me to take pictures,” he says. A couple of days later, “they called me and told me my claim was accepted.” His insurance paid off his loan of $2,400, and he received $120 in cash to help him make ends meet in the wake of the flooding. When I saw Abuh-Prah three weeks later, his shop was filled with goods to sell, and he seemed unable to stop grinning. “I’m very, very happy,” he said.
In the past year, MicroEnsure has nearly doubled the number of people with life insurance in Ghana by partnering with a telecommunications company, Tigo; another microinsurer, Milvik; and Vanguard Life. Since August 2010, the partners have signed up over 400,000 new insurance customers. The big draw? It’s free. “Tigo wants to reward loyal customers and increase their client base,” says MicroEnsure account executive and Tigo liaison Caroline Afedoe. Tigo figures they can attract more clients by giving out a free insurance product. And, Afedoe says, “insurance encourages customers to stay with Tigo.”
Tigo customers who spend $3 per month in airtime qualify for $140 in life insurance for themselves and one family member. The more they spend each month, the more life insurance they can earn, up to $700 per person. MicroEnsure and Tigo have launched the product in Ghana and Tanzania. An 18-year old named Juliana Boye from the slum of Jamestown received 400 Ghana cedis, or about $250, when her brother died because he used Tigo and listed her as his beneficiary. Boye put the money in the bank. “I’m going to use the money for university [tuition],” she said from outside her school in Accra.
MicroEnsure also delivers insurance to the poor through savings accounts. “We market it like, 'the more you save, the more insurance you earn,'” says Fiona Laryea, a client relations manager with MicroEnsure. “Once you reach a balance of about $65, you get $200 of life insurance cover. When you increase your balance to $130, you can cover your entire family, with no deduction from your account.” The bank pays MicroEnsure a tiny fee from what they would normally pay a client in interest, and is then able to market that as “free” insurance.
One of MicroEnsure’s partner banks, which serves 100,000 low-income depositors, saw an increase of 130 percent in its lowest band of depositors after MicroEnsure’s product launched. “The product is a win-win-win: The client gets free insurance, the bank gets more deposits, and the insurance company gets wide outreach, which reduces its risk,” Gross says. “We try hard to focus on simple products that provide social and financial benefit to everyone in the value chain.”
The insurance also makes microfinance more effective. Microfinance institutions typically require low-income members to take out a loan in a group; if one member does not pay back the loan, other members of the group may not be able to take out new loans. Peer-pressure provides incentive to pay back your loan. This model, championed by Nobel Laureate and Grameen Bank founder Mohammed Yunus, worked well in Asia, but hit some speed bumps when imported to sub-Saharan Africa. Leftley says one difference was the high prevalence of AIDS. In countries like Zambia, where life expectancy is 36, it’s not unusual for group members to die, leaving other members have to pay the deceased’s obligation. “That’s why we come in with the insurance,” says Essiam. “If any member dies, it doesn’t become the responsibility of the other members to pay back their loan.”
MicroEnsure is not a profitable company yet—the company is still reliant on donor money—but Gross says it will be sustainable. When asked if there will be an ethical conflict in making profits off of low-income clients, Gross says no. “Our cost structure is so much lower than every other insurance company… [and] our senior management makes about half of what they made before," he says.
Leftley says the company makes about a 20-cent commission on each insurance policy, but they sell thousands at a time through the loans, the savings accounts and the telecommunications company. “We think you need to have a rigorous business approach in insurance, but it doesn’t mean you have to give up your principles,” Leftley says.
This is the second story in our series on social enterprise in Africa by Laura Burke, a reporter based in Cote d'Ivoire.