PARTNERS AT THE LAST MILE: INSURANCE COMPANIES

PARTNERS AT THE LASTMILE:

INSURANCE COMPANIES

Summary of the Last Lecture

• Insurance Companies Face the Channels Challenge

• Direct Sales• The Partner-Agent Model

The Microagent Model: Barefoot Agents

• The next model seeks to get even closer to clients by turning selected clients into insurance agents.


• Due to the Indian government requirements to issue policies in the low-income market, many insurance companies work with MFIs through a partnership model like the one AIG developed in Uganda.


• AIG’s Indian affiliate, Tata-AIG, attempted to do the same, but some members of its staff were concerned about the problem of continuity of coverage.


• Since most Indian MFIs offer loans but not savings accounts, the insurance policies were in effect only as long as the customer had a loan outstanding.


• Customers who were “resting” from credit received no coverage. The Tata- AIG staff believed that life insurance coverage should be continuous and was not compatible with short-term loans.


• Tata-AIG then began experimenting with a “barefoot agent” business model. In a move analogous to using small mom and pop shop owners as banking agents,


• Tata-AIG trained local women to become salaried representatives, selling and servicing policies to their village neighbors.


• The product designers found that the barefoot agent model worked best if the representatives grouped themselves into small brokerages they termed “community rural insurance groups.”


• Tata-AIG works with local NGOs to help recruit representatives. This program achieved moderate scale, covering 21,000 rural, low-income, and landless people with term life and endowment insurance.


• Costs in this model are higher than with the partner-agent model; however, the microagent model may be a good solution in areas without institutions that can become partners.


• There are myriad variations of microinsurance distribution models. Seguros Mapfre, a Spanish insurance company, built upon the consumer lending operation of Colombia’s electric utility and sells directly through utility bills sent in the mail.


• Azteca’s insurance company works through all Banco Azteca outlets. New microinsurance initiatives in Venezuela (Cruz Salud) and Mexico (Paralife) have recently been created. Cruz Salud reaches some of its clients by placing prepaid cards in retail stores.


• Clients can buy health coverage the same way a U.S. customer might buy a Starbucks gift card.


• Opportunity International, a global Microfinance organization, has established the Micro Insurance Agency to assist insurers to reach BOP clients.


• The pace of innovation during the past few years on this front has been dizzying.

MODELS OF FINANCINGINCLUSIVE FINANCE

• If you are not a bank, an insurer, or a retailer, how can you participate in inclusive finance? You can invest in microfinance institutions.


• Investing in microfinance has become something of a fashion in recent years, but not long ago it was nearly impossible to interest private investors in MFIs.


• Until quite recently, almost all investors in microfinance were social or public-sector investors. Now Wall Street actors, both mainstream and specialized, have decided that microfinance is worth taking more seriously.


• J.P. Morgan, Citigroup, TIAA-CREF, and Standard & Poor’s are just a few of the names that appear in the following pages. Landmark deals by mainstream investment firms continued to occur until slowed by the financial market contraction of late 2008.


• We chronicle many “firsts”: the first international securitization of microloans, the first mainstream venture capital investment in a microfinance institution, and the first IPO.


• While the financial crisis slowed investment in microfinance, there is confidence that it will pick up again as investors rebound.


• After comparing the performance of microfinance institutions against small developing country banks, analysts at J.P. Morgan concluded,


• “MFIs will certainly be affected by the financial crisis ricocheting across the globe, but we believe that the sector is fundamentally sound. . . . Valuations may change, but we believe the long-term outlook for equity investment in microfinance is positive.”


• The evolution of private investment in microfinance institutions reminds me of the way children learn to swim. Children step into shallow water holding their mothers’ hands, feet touching bottom.


• Then they paddle around with life jackets and practice strokes and breathing. Only after all these steps can they swim freely and unassisted in deep water.


• The funny thing about this analogy is that it works both ways. It describes the gingerly advance of investors into the microfinance industry, and it also describes the gradual immersion of MFIs in the capital market.


• Both headed for the deep water but needed support (often from the public sector) to gain the knowledge and confidence to swim there.


• These advances were very slow until they accelerated in the early part of this decade. The first deals, in the late 1980s—mainly bank loans to MFIs—were rarely more than $1 or $2 million, and heavily guaranteed.


• Today, the top deals are in the hundreds of millions, with far less support. Foreign capital investment in microfinance debt and equity grew rapidly in the years leading up to 2007, where it reached $5.4 billion.


• We will look closely at the path from shallows to depth after providing some context on the scope for investment.

Supply and Demand

• The growth and commercialization of microfinance opens new opportunities for investors.

Supply and Demand

• According to the Microfinance Information Exchange, a microfinance industry information resource, there are over 2,207 MFIs from 100 countries, reaching over 77 million clients.

Supply and Demand

• Among some 890 MFIs tracked in the Microfinance Information Exchange (MIX) industry benchmarks series, there are over 60 million borrowers and a combined portfolio of $36 billion.

Supply and Demand

• These numbers were unimaginable 10 years ago. The MIX reports a 23 percent median annual growth of borrowers through 2007. By that year there were 55 MFIs with loan portfolios of $100 million or more, and 74 institutions reaching over 100,000 clients.

Supply and Demand

• In some cases microfinance institutions are more profitable than mainstream commercial banks in their countries, and sometimes more stable.

Supply and Demand

• If MFIs resume their annual growth rates at 15 to 30 percent, Morgan Stanley calculates that there will be a need for $2.5 to $5.0 billion in portfolio capital each year through the near future, and $300 to $400 million in additional equity to support such lending.

Supply and Demand

• International investors have grown increasingly eager to supply much of this debt and equity.

Supply and Demand

• As of 2004, foreign public and private investors had set aside $1 billion for microfinance and had actually committed $680 million of that to MFIs.

Supply and Demand

• Most of this investment was quasicommercial, made by development banks (known as international finance institutions, or IFIs) and by socially motivated private investment funds financed by both public and private capital.

Summary

• The Microagent Model: Barefoot Agents

• MODELS OF FINANCING INCLUSIVE FINANCE

• Supply and Demand

PARTNERS AT THE LAST MILE: INSURANCE COMPANIES

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