Technical assistance provided by LeapFrog Labs enables microinsurance companies to grow stronger and innovate. This article highlights LeapFrog’s investment strategy for microinsurance, describes the design and implementiation of its innovative technical assistance facility − Labs − and offers examples of how technical assistance, provided in this way, can achieve significant results.
Leveraging technical assistance (TA) resources alongside an investment fund offers a unique way to help portfolio companies grow and innovate. LeapFrog Labs (Labs) is the technical assistance facility of the world’s first microinsurance investment fund, LeapFrog Financial Inclusion Fund. With over EUR 3.5 million at its disposal, Labs is exploring new ways of structuring and implementing technical assistance resources.
By adding value to a diverse portfolio of companies at the forefront of microinsurance in Africa and Asia, Labs is helping to demonstrate that microinsurance is a viable, profitable business that provides low-income people with risk mitigation tools to help them weather economic shocks and pursue their financial/life goals. Labs works in partnership with portfolio companies to design and implement specific interventions that help these companies strengthen their businesses and stimulate innovation.
Providing quality insurance products for low-income communities
Microinsurance is insurance provided to low-income clients. Poor people, like everyone else, are exposed to financial shocks. But, unlike their wealthier counterparts, they do not have a cushion of assets to fall back upon when a family member dies or needs hospitalisation, when crops fail or their dwelling burns down. The impact of these financial shocks can be devastating: sometimes it means destitution for entire families. Accordingly, there is considerable interest among the poor to be able to manage their risk. Being able to mitigate risk through appropriately targeted and priced insurance products can significantly improve the personal and financial wellbeing of vulnerable individuals and households. However, this natural market for insurance products remains severely underpenetrated, with only 3% of people in the world’s poorest countries currently able to access any type of formal insurance (Lloyd’s, 2010; Roth, McCord and Liber, 2007; Swiss Re, 2010).
However, insurance can be provided at relatively low cost if companies are able to design simple products, utilize innovative distribution channels and create streamlined administrative systems. This requires both management commitment (to invest in a new and often misunderstood market) and technical expertise (to implement the business strategies to successfully reach the microinsurance market). The LeapFrog Fund offers both.
The LeapFrog Financial Inclusion Fund is the world’s first investment fund to focus on microinsurance. It offers capital investment (between USD 5-20 million), strategic leadership and expertise (active support from LeapFrog partners), and technical assistance (from LeapFrog Labs). It will be investing over USD 100 million of capital in companies serving target areas of Africa (Kenya, Ghana, South Africa and Nigeria) and Asia (India, the Philippines and Indonesia) that are poised to achieve scale with products which provide low-income people with critical savings and risk mitigation tools. It aims to reach 25 million beneficiaries, 15 million of whom are women and children.
Designing optimum structures to provide technical assistance
LeapFrog invests in companies that are committed to expanding the reach of quality insurance products to low-income people. These could be insurers, distributors, third-party administrators (TPAs), or pension funds. It backs companies with strong management teams that are committed to the ‘profit-with-purpose’ ideal. These dedicated entrepreneurs have a vision for where they want to expand using the investment and strategic technical assistance provided, allowing them to follow through on their business plans.
In the interest of catalyzing the impact of the Fund’s capital investment to rapidly expand the reach of microinsurance, some of LeapFrog’s investors, including Proparco (Fonds d’investissement et de soutien aux entreprises en Afrique – FISEA), European Investment Bank, The Development Bank of the Netherlands (FMO) and the German KfW Development Bank, have provided additional grants – over EUR 3.5 million – to help portfolio companies expand their business plans and identify opportunities for innovation. If leveraged strategically, these grants can provide an extraordinary opportunity for the Fund, its portfolio companies and the field of microinsurance, to fast-track innovation and rapidly scale up success within companies and across the portfolio.
In order to maximize the potential value of these grant funds for technical assistance, the LeapFrog team reviewed best practices and sought considerable advice from investors and industry practitioners. As a result, it identified what it embraces as its two critical factors for success: a dedicated and separate TA team and a commitment to customized TA. Labs incorporates these two critical factors and was established in 2009 as a not-for-profit company, alongside the Fund, with the sole purpose of managing TA grant resources.
As a dedicated TA facility it avoids the pitfalls of TA as an ‘add-on task’ for investment officers. Instead, Labs’ staff are dedicated to the implementation of TA and to ensuring that each project is aligned with the vision of the portfolio company and LeapFrog, is strategic and focused to achieve results, and is implemented by world-class experts. In addition, a dedicated TA facility can better capture lessons learned and apply best practices across the Fund. Labs maintains its independent ability to raise additional grant funds and to build partnerships in the field. In this way, it is separate from the immediate pressures of the investment, and is able to serve as a partner to portfolio companies, by helping to identify and deploy the resources that can facilitate their rapid growth and encourage innovation.
From vision to implementation: the mechanics of technical assistance
LeapFrog Labs provides technical assistance to LeapFrog’s portfolio companies. It can deploy between EUR 100,000 to EUR 400,000 of grant support (in addition to company contributions) to help portfolio companies address challenges, innovate and scale their businesses. LeapFrog is committed to ensuring that portfolio companies provide clients with quality, relevant and affordable insurance products. To this end, Labs also supports portfolio companies in collecting and analyzing key metrics to help assess the social performance of their businesses, with an emphasis on microinsurance.
Labs has a small team that works closely with the investment partner leading the deal. It usually begins interacting with the portfolio company during the pre-investment phase, when it is introduced as a value-adding member of the team. On finalizing the deal, Labs begins working with the senior management of the portfolio company and the deal lead to identify an initial change-inducing TA project as part of the first 100 days of the investment. Labs and the portfolio company define the project/s and source consultants required to implement it (often tapping into Lab’s extensive database of international experts).
Over the course of the investment (4-7 years) the company may work with Labs to implement several TA projects; each defined to achieve a specific goal set out by management to strengthen their business and stimulate innovation. While each project is tailored towards the needs of the particular company, there are some recurring aspects, such as support-to-social-impact measurement, agent training, product design, etc. Over time, it is anticipated that the sum of the TA projects will contribute to the success of these microinsurance companies, and strengthen the microinsurance industry (as successful innovations may be adapted in other markets).
Labs also carries out some targeted research and development. In target markets, Labs supports specific research projects to strengthen knowledge of critical microinsurance issues and opportunities. As the portfolio expands, there will also be opportunities to identify learning opportunities and economies of scale across the portfolio (8-12 companies). Labs will support efforts to facilitate and share this portfolio learning.
Building the evidence: one company at a time
Labs has been built on the premise that TA works best when it is led by a dedicated team that can work closely with the Fund and with portfolio companies to design and implement strategic and critical interventions. Over the coming years, Labs expects to add value to a diverse portfolio of companies in Africa and Asia that will be at the forefront of the microinsurance industry. These companies will add to the body of evidence demonstrating that microinsurance is a viable, profitable business that provides low-income and excluded people with risk-mitigating financial products. In turn, these products help impoverished communities to weather economic shocks in a way that allows them to preserve and pursue their financial goals.
For LeapFrog, the critical aim of TA is to support the success of portfolio companies by allowing them to overcome key challenges and encouraging them to innovate with new approaches and products. Its aim is also, over time, to build a pool of knowledge on microinsurance and to be able to identify and share the successes of companies that have a strong social impact and robust financial returns. For innovative industries that provide new products to new market populations, technical assistance can be an invaluable contribution alongside investment − helping to speed up innovation and to achieve rapid success.
References / Lloyd’s and the Micro Insurance Centre, 2010. Lloyd’s 360 Risk insight: Insurance in developing countries: Exploring opportunities in microinsurance, report. // Roth, J., McCord, M., Liber, D., 2007. The Landscape of Microinsurance in the world’s 100 poorest countries, Micro Insurance Centre, report, april. // Swiss Reinsurance Co., Ltd. Economic Research and Consulting, 2010. Microinsurance – risk protection for 4 billion people, Sigma study, no. 6.