The attractive microfinance space is throwing up distinct niches. Enter Leapfrog Investments, a microinsurance fund, which is looking at allocating close to $40 million from its $110-million global fund in India. The fund, whose investors include names like Soros Economic Development Fund, International Finance Corporation and Omidyar Network, is looking at replicating some of its successful affordable insurance models in Asia and Africa in India. In an interview with VCCircle, Jim Roth, Principal, Leapfrog Investments, says, “the future of financial inclusion lies in microfinance beyond credit.” Edited Excerpts:-
What is the opportunity set for a microinsurance fund in emerging markets?
While there were 43 microfinance funds globally in 2004 which grew to about 103 funds in 2009, we are the only fund solely focussed on microinsurance. Over one billion low-income people in India are seeking and able to pay for insurance but the market penetration is less than 9%. In 2009, the non-life microinsurance business alone pulled in over Rs 1,300 crore in premium. There are currently 24 microinsurance plans registered with the Insurance Regulatory and Development Authority by 15 commercial life insurers in India. Yet there is a huge growth opportunity as only 5 million people, or 2% of the poor, have microinsurance.
We have raised $110 million and are committing $30-$37 million in India. This is by far our highest allocation to the country. We have investments in the Phillipines, South Africa and Asia. One of the key things about microinsurance is that it involves a low premium and low coverage limits, designed to service low-income groups and businesses not served by typical social or commercial insurance schemes. Since the ticket size is small, you have to capture large markets with huge population. In countries with a small population like 3 million to 5 million, the market size is small. Large countries offer a rapid growth in financial distribution networks.
What are you making of the Indian market?
India is characterised by high level of economic growth and has a huge low income premium paying customers. For a PE fund, it also provides for future exits of our portfolio. We feel that these low income groups could be tomorrow’s middle class. The penetration in these markets is very low. There is also a huge amount of skilled staff which can work as insurance agents/MFI agents to sell products and services.
What are the kinds of insurance products and services suited for the low income population?
The existing premiums offered by the commercial insurance companies in India which only includes death benefits and not life benefits have premiums as low as $0.20 per month. Our product range will vary from providing insurance to three- wheelers and social security insurances – a person will have a job but say 10 people in the family will not have one.
Our definition of low income is not necessarily how the IRDA defines it. It is not necessarily very low income but also to those who are socially excluded from getting these kinds of insurance products. We have an investment into a South African insurance company called AllLife that serves people living with HIV and diabetes. They provide insurance products and services which is a distinctive and a profitable business model. We will sell such products here also as all these people are potential premium paying customers.
What will be your differential investment strategy in India?
Unlike a lot of funds focussed on microfinance which provide debt, we only provide equity. We provide more patient capital and have a longer horizon of about 5-7 years. We will make investments into MFIs to the extent that the proceeds are used in providing insurance benefits. We will invest in third party distributors, financial distribution companies and also pick up stakes in commercial insurance companies. We will partner with banks, development institutions and NBFCs. One of the key advantages that we see in India is the huge mobile market. There are a lot of mobile companies which sell insurance products taking advantage of value added services). We will invest $5 - $15 million across portfolio companies.
There is a perception that MFI loans are being pushed to groups without ascertaining the repayment capacity of the ultimate borrowers. How will you check that?
The future of financial inclusion lies in microfinance beyond credit. We are a private equity fund and have an on-the-ground advisory team in India. We have a very extensive due diligence process and, every quarter, we will monitor the team, the premium charges, client numbers and awareness about these products. We have to make sure that we back good quality management teams and make sure that they make microinsurance a social and financially-relevant product.