Dr. Andrew Kuper is President and Founder of LeapFrog, the world’s first microinsurance fund, which he founded in 2007. He was previously a Managing Director of Ashoka, a support organization for social entrepreneurs. He has worked with microfinance institutions Grameen and BRAC, and is the author of two books on globalization. He holds a PhD from Cambridge University in the United Kingdom.
MC: First of all, congratulations for creating a demonstration effect on the conversation about microinsurance.
Andrew Kuper: Thank you. LeapFrog is about demonstration not remonstration. Our focus has been to raise significant capital, to source exciting ventures that are innovative in the microinsurance and related low-income financial services markets, and to execute for both profit and impact. We want to grow these ventures to deliver quality products to 25 million low-income and financially excluded people, profitably. We are pleased now to be the largest dedicated investor in microinsurance: the industry needed to be taken to the next level, both in terms of establishing a new asset class (the microinsurance fund) and in terms of demonstrating that microinsurance is a strong business and investment proposition. That success is the swiftest way to open the gates of the capital markets, and make a real dent on mass poverty.
MC: Have you made any investments yet?
Andrew Kuper: We recently invested in an extraordinary African insurer, a company that will change a lot of people’s minds about who is insurable, so watch out for the announcement. We have been rapidly developing several other exciting prospective investments. We think that LeapFrog has first-mover advantage in terms of deal sourcing because we are the only microinsurance fund out there.
As a fund with significant capital to deploy, we’re naturally open to being approached with microinsurance investment opportunities – by insurers, microinsurers, microfinance institutions, and other distributors such as retail chains and mobile telephone networks. We can partner and invest with each of these players, bringing our distinctive expertise in microinsurance to bear, to lower risk and increase scale, not to mention increase speed to market and profitability.
Once you see that microinsurance is a natural adjacency to various products, and that the transaction infrastructure you already have in place can often be mobilized for insurance, the opportunity is really striking. We want to back teams and ventures that seize that opportunity ambitiously.
MC: What is the capitalization of the fund?
Andrew Kuper: LeapFrog has already raised approximately USD 44 million from a range of public and private investors, who are leaders in the microfinance and social investment fields. They include the European Investment Bank, the Omidyar Network, FMO, Triodos-Doen and Hivos-Triodos, Accion International, Calvert, and Felipe Medina (a senior Goldman Sachs wealth manager). The LeapFrog team has also put our personal money into the fund, committing USD 1 million. We believe that the returns to the fund will be strong, and we are entirely aligned with our investors and portfolio companies around long-term value creation. USD 44 million is an achievement, but we are not satisfied with that level; we are targeting USD 100 million, which we anticipate raising quite swiftly.
MC: Is there any geographical mandate for fund investment?
Andrew Kuper: The fund focuses on Asia and Africa. Our initial target countries include South Africa, Kenya, Ghana, India, Indonesia, Pakistan, and the Philippines. These are all relatively large and important emerging markets, with significant low-income populations that stand to benefit tremendously from microinsurance, and markets where microcredit investments have already shown themselves to be worthwhile.
We also recognize that these countries are vital markets of the future for many investors. If you are an insurer or reinsurer, or investor in financial services, you know that growth is going to come largely from emerging markets – especially given the impact of the global financial crisis on developed economies. The vast majority of people in those emerging markets, often 80 or 90 percent, are low-income consumers. You can’t afford to ignore 8 or 9 out of every 10 potential customers. Moreover, as we see in countries like India and China and South Africa, today’s low-income is often tomorrow’s middle class – and microinsurance earns the loyalty of upwardly-mobile clients, early and firmly. So the strategic opportunity in microinsurance is something that private investors are starting to appreciate.
MC: What is the profile of groups you will invest in?
Andrew Kuper: Generally we seek to invest $5 million to $10 million in a company (this could be tranched over a few years). We don’t do Greenfield investing or charitable giving. We don’t make investments unless we believe they are likely to be strongly profitable. We don’t make investments unless the portfolio company can provide quality, affordable, and relevant products to poor and vulnerable people. We always expect rigorous financial and social metrics to be applied.
With those parameters in view, there are three kinds of investments we will consider. The first is where there is an existing microinsurance company that needs substantial capital in order to increase its scale and/or operational guidance on any parts of the value chain – such as improvements in transactions, processing, or product design. One competitive advantage in any investment by LeapFrog is that our team brings advisory and operational experience across the value chain – so we can help fill gaps in partners’ knowledge and capacities.
Second, we will consider joint ventures and co-capitalizing companies with microfinance institutions (MFIs) and other large distributors. If an institution has a large client base to which it has successfully been selling microcredit or other products, we are able to help them access an insurance license or develop an insurance distribution company. They can then use their existing transaction infrastructure and client relationships with low-income people to sell adjacent insurance products.
The third kind of investment we will consider is co-investment with an insurer that seeks to develop an insurance product and distribution networks specifically to reach low-income markets. We bring expertise in market-specific product design and distribution, as well as access to distribution via channels such as churches, retail chains, mobile phones, or MFIs.
MC: What is the social value proposition? What insurance products provide the best return on investment in social terms?
Andrew Kuper: Studies show that insurance is often the first or second most-demanded financial product (along with savings) among low-income people. Credit (which is also absolutely vital) tends to come third or fourth. This is because many people want to start businesses or have consumption needs, but many more people lie awake at night fearing that they will lose everything. Hence the demand for microinsurance is very extensive and intensive. The 100 Country Landscape Report (by the Microinsurance Center) estimates the market for microinsurance to be 1 billion people.
Microinsurance has two powerful combined effects, protective and enabling. First, protective: it provides a safety net that doesn’t exist at an adequate level in emerging economies. Cycles of poverty continue due to adverse shocks that occur every few years. For a low income person, this may cause their savings and business, along with their livelihood, to be wiped out. Microinsurance helps end the cycle of poverty by cushioning shocks and allowing for the steady accumulation of assets. Second, enabling: There are many instances of poor people being too risk-averse to try a new business line (such as a farmer planting a new crop) or technology (such as using drip irrigation to increase crop yield) or mode of income generation (such as moving into value-add processing of the raw materials). This is due to the financially disastrous consequences their families would face if the new business line failed. Without insurance, people cannot afford to take that small chance that their children will starve or be left destitute. With insurance, they have a stepping stone on the path out of poverty.
One product type that can have a profound impact is health insurance – it is almost invariably the most demanded product, given the costs of hospitalization and medication. People are faced with tragic choices – preserving their health or lives but bankrupting their family, on the one hand, or getting sicker without healthcare but preserving family resources, on the other. No one should have to face such a terrible choice. A study in Uganda shows that people who are insured and have chronic illnesses go to the hospital within 2.5 days, while those who are uninsured take 9.1 days; this tremendous difference has obvious personal and public health consequences.
Another socially very valuable product is life insurance, which is generally the second most demanded product. This is generally easier to provide than health insurance, because health insurance requires a health infrastructure, whereas life insurance can be sold along with credit products or other schemes. Moreover, the ability to engage in behaviors with moral hazard is more limited – after all, it is easier to pretend to be sick or to need drugs than it is to pretend to be dead.
Other products that offer significant social value include low-income housing insurance, property and casualty insurance, and index insurance – such as crop and livestock insurance that could help farmers in rural areas. LeapFrog is open to investing in companies providing any of these kinds of insurance, as long as they meet our firm financial and social objectives.
MC: What has been the most instructive failure you’ve had in your career so far?
Andrew Kuper: Over a decade ago, when I was working in India, I tried to support farmers in the Thar Desert in Rajasthan to adopt drip irrigation. I couldn’t understand why it was so difficult for them to do so even after learning of the possibility of tripling their income. There were points where I really thought they were irrational, because the technology presented such an immense opportunity for them and their families. Then I realized that the small chance of failure meant that their children would starve – which in turn meant that they were actually highly rational, risk averse actors. Those of us on the outside didn’t have a full understanding of those realities. For me, this experience was part of the appeal of LeapFrog launching a microinsurance fund. It was crucial to understand that people not only need safety nets to defend against catastrophic events, but that the safety nets can enable daily choices and activities that move people out of poverty.
MC: What about a success that was very formative for you?
Andrew Kuper: As a Managing Director of Ashoka, one of my roles was running the Global Academy for Social Entrepreneurship, working with both Muhammad Yunus of Grameen Bank and Fazle Abed of BRAC to develop and market their social ventures. These two leaders and their institutions have lifted tens of millions of people out of poverty and have helped raise the life expectancy of an entire country by quite a number of years. When I looked around, I saw all sorts of social entrepreneurial ventures that simply weren’t reaching the same scale, and became dissatisfied with that. A genesis of LeapFrog was saying: Let’s create a large-scale and socially intelligent capital source that helps the most vital social enterprises to reach tens of millions more people. This vision was shared by the insurance and investment leaders who became Principals of LeapFrog, and with whom I have been so fortunate to co-build the institution.
MC: What about the trends that you foresee into the future – specifically regarding microinsurance or more generally?
Andrew Kuper: We think microinsurance provision is going to expand very rapidly. It is a one billion person market that’s only three percent penetrated, and we are seeing reinsurers and insurers enter the sector, including Swiss Re, Munich Re, Zurich, Allianz, and AIG. We think that people have been dipping their toes in the water, but are seeing the increase in demand, as well as the social impact and profit potentials, and diving deeper. In the future, we are also going to see dramatic increases in investment in microinsurance. The range of products for low-income clients will expand significantly from predominantly credit life (on the back of loans) to high-value products like health, ‘life plus’, property and casualty, and index-based products. As competition between providers increases, there will be significant improvements in the quality of products, speed of payout, transparency, and affordability. We will see products designed to serve people further and further down the income pyramid. We will also see large trade sales and successful IPOs.
Finally, it will become evident that microinsurance is not just for low-income people. It is also for people who are financially excluded because of factors such as disability or pre-existing illness, for example diabetes or HIV. This “impaired life” market too is a huge potential market for the coming decades. This is another reason LeapFrog is excited to have significant capital and distinctive expertise at the ready, and to have the opportunity to make a catalytic contribution to the industry’s growth and success.
MC: What do you think are the three most important barriers to the massification of microinsurance?
Andrew Kuper: Three of the most important barriers are: 1) Availability of data in a number of markets. 2) Unfamiliarity or the lack of knowledge of how to design, administer, and distribute products that are appropriate for low-income clients. 3) Availability of intelligent capital to drive microinsurance businesses to scale. No one we know of has the level of dedicated capital or expertise that LeapFrog brings to the microinsurance space. We hope that in the not-too-distant future there will be 100 funds like LeapFrog – working on deals together, competing, and transacting. But right now, we are the only fund, and the industry leader.
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