A subsistence farmer in South Africa gets regular text messages on his cell phone reminding him to take his antiretroviral medication, so his HIV keeps from blossoming into full-blown AIDS. In exchange, he gets life insurance, for the equivalent of about $35 a month. With his $35,000 life insurance policy in his pocket, the farmer can finally qualify for a mortgage or business loan. Slowly, the financial world that was closed off to him starts to unfurl a ribbon of possibility.
He’s getting ahead for the first time because he has microinsurance—the next frontier in the microfinance movement. From online donating through nonprofits such as Kiva.org to microcredit organizations such as Grameen Bank, the practice of lending the world’s poorest a bit of money to get on their feet has grown tenfold in the last decade. Today more than 150 million low-income people in developing countries are improving their families’ futures through microloans, according to the World Bank, with the vast majority of borrowers repaying their notes.
And as workers grow their microbusinesses, they want insurance. All it would take is a flood, a feudal war, or the death of a breadwinner to wipe out bank accounts. But more than 90 percent of people in the world’s 100 poorest countries do not have access to insurance. LeapFrog Investments, the first for-profit private equity fund dedicated to providing microinsurance, is out to change that. Incorporated in 2007 by a group of South Africans with Cambridge University PhDs, the fund has ties to some of the world’s most influential leaders, including Grameen Bank founder Muhammad Yunus, Bangladesh Rural Advancement Committee founder Fazle Abed, and former President Bill Clinton.
“Every night around the world, the poor lie awake worried they are going to lose everything because that’s what being poor is—it’s being on the edge,” says LeapFrog founder Andy Kuper.
At the Clinton Global Initiative in 2008, the former president introduced Kuper to the crowd as the “Insurer to the Poor,” and compared his foresight to that of Yunus, who is credited with creating the microloan system. “I was standing between Clinton and Tony Blair,” Kuper says. “Clinton said we’d raise $100 million in 10 years. I thought, ‘no pressure.’”
BREAKING THE LOOP
The LeapFrog team’s plan was to ask big investors to chip in, so the fund could invest in small companies that already were providing affordable microinsurance to cover health, life, and property protection in Asia and Africa. They targeted India, Pakistan, South Africa, Ghana, Uganda, Kenya, and the Philippines, where small insurance companies, churches, and banks were already offering a few insurance programs. LeapFrog found, on average, that microinsurance policies cost $1 per month and provide $250 in benefits to customers. Although the payout is quite small, it’s a significant sum for a poor family.
Kuper, who ran the Global Academy for Social Entrepreneurship at Ashoka, says poverty is a closed-circuit loop: always borrowing from one person to pay another, scrimping and saving, and collecting money at a snail’s pace.“The poor are constantly involved in multiple financial transactions, and when they slowly cross the poverty line all it takes is one adverse event, a death or a flood, and they get shocked back into that cycle of poverty,” he says. “Studies show they don’t ever really recover from that shock. Microinsurance can break that loop.”
Microinsurance provides a safety net, but it also gives the insured the confidence to take business risks they might otherwise avoid. “A struggling farmer in India typically won’t plant an experimental crop, because he will be risking a one in 20 chance of failure if there’s a flood,” Kuper says. “His family will starve. Or a woman wants to send her daughter to school, but is afraid to lose her business so she keeps her child home to work. Insurance provides a floor for risk taking and feeds innovation. This creates a macroeconomic impact that’s deeply underappreciated.”
At first, investors weren’t buying Kuper’s pitch. Few had heard of microinsurance, and they weren’t sure how risky it was. “We were at a disadvantage,” Kuper says, “We didn’t fit in anyone’s boxes. A lot of work had to be done articulating the value to people.” Everything changed once Clinton endorsed LeapFrog in September 2008. Within 18 months, LeapFrog had raised $137 million—right in the middle of a global economic crisis. Investors included J.P. Morgan, TIAA-CREF, Flagstone Reinsurance, the Soros Economic Development Fund, the International Finance Corp., KfW Bank, BMZ, Proparco, the Waterloo Foundation, and the ACE Group.
A SIMPLE NAPKIN EQUATION
Although it may seem risky to insure the world’s poorest, who have gone without health care for much of their lives, investors are actually clamoring to get involved with microinsurance in its infancy, says LeapFrog board member Jim Roth, former vice president of the Microinsurance Centre in Appleton, Wis.
“In the developed world, the insurance markets are saturated, there are a thousand companies competing the hell out of one another to cover middle Americans for health or life or home insurance,” Roth says. “The unpenetrated market is in the developing countries, because there’s space for meaningful growth. So insurance companies are flooding into the developing world. It’s a race right now.”
It’s a simple napkin equation: More than 80 percent of the world’s population lives in developing countries, accounting for 40 percent of the world economy, Roth says. Yet few have any type of insurance. Investor banks know that if they are the first to start relationships with low-income clients, they stand a better shot of keeping them once the clients rise to the middle class. Once brand loyalty sets in, the banks can link with generations of new customers.
It’s not an idealistic assumption, says Roth, who conducted the largest-ever 100-country study on microinsurance, at the behest of the Bill & Melinda Gates Foundation. Roth discovered that there are 135 million people currently covered by microinsurance, which amounts to less than 10 percent of the potential market. The rest, an estimated 1.5 billion people, are willing and able to pay for it, he says.
Although commercial insurers, nonprofits, and churches provide microinsurance in a piecemeal fashion, LeapFrog is the first equity fund to dedicate itself to insuring the poor on a large scale, intending to insure 25 million with mini-policies. To protect the poor from fraud, LeapFrog developed a “social and environmental monitoring system,” with input from three leading global development banks, that requires insurance companies to submit data quarterly.
NO PURPOSE, PROFIT TRADE-OFFS
On World AIDS Day, Dec. 1, 2009, LeapFrog announced its first investment, $6.7 million in AllLife in South Africa to provide life insurance to people previously regarded as uninsurable—HIV patients and diabetics. In a unique arrangement, clients promise to manage their health, by heeding text, e-mail, and phone reminders about doctor visits and medications, and provide the insurance company with copies of their blood work reports.
Last year, membership in AllLife grew by 250 percent, and there are now 5,000 clients whose monthly premiums range from under $20 to $100, depending on their age and gender. With the LeapFrog capital, AllLife is hiring more workers and expecting to reach 200,000 more clients. The company reports a 15 percent improvement in its clients’ health since 2005, when it began insuring people with HIV, according to AllLife co-founder Ross Beerman.
“We do something nobody else in the world does—we don’t look back,” Beerman says. “In the normal life insurance model, your past behavior is considered indicative of future behavior and you will be priced accordingly. We don’t care how you used to behave, because you will commit to behave appropriately going forward.”
When a for-profit company takes a financial risk on the side of future health, clients with HIV start to plan for their futures. Beerman has seen policyholders enroll themselves in school, invest in businesses with friends, and buy homes. “They go from being withdrawn, basically waiting to die, to becoming active members of their communities again,” he says.
One of the first clients to sign up was a single mother of three with HIV, who had heard rumors about AllLife, but was certain it was too good to be true. She called, and after she was assured AllLife was not some fly-by-night charity, she inquired about a policy. When she found out she could reduce the $170 monthly payment she was already paying to a traditional life insurance company to $17, she wept. It meant she could keep more of her salary and provide better care for her babies.
Beerman argues that such positive changes to clients’ health profiles, along with the company’s financial support from U.S. insurance and equity funds, enable AllLife to provide much cheaper life insurance. “When we help our clients manage their disease, the result is that they become dramatically healthier, hence a much better insurance risk,” he says.
It’s exactly what Kuper and his partners had in mind when they created LeapFrog. The equity fund is carefully researching which company to invest in next. “I think you can make a case with microinsurance that there’s no trade-off between profit and purpose,” Kuper says. “People have been waiting a long time to find a way to generate financial and social returns.”
Meredith May is an award-winning feature writer for the San Francisco Chronicle. She also teaches journalism at Mills College in Oakland, Calif.