Hybrid Value Chain Case Study Micro-Life insurance in Rural Mexico: AMUCSS & Zurich Financial Services Case #1 Executive Summary The rural poor represent a vastly underserved market for life insurance. When a wage-earning relative dies, burdensome funeral costs and reduced household incomes often devastate already impoverished families, leaving millions of people vulnerable to needless economic shocks. The Mexican Association of Social Sector Credit Unions (AMUCSS) has partnered with global insurance giant Zurich Financial Services to ease that burden, designing and selling life insurance policies to rural, poor Mexicans. AMUCSS provides on-the-ground know-how and distribution networks for the operation, while Zurich assumes the financial risk. Their partnership now insures more than 25,000 indigenous Mexicans a year, helping to ease rural poverty and creating a new insurance market with broad potential for growth. Overview Less than 7 percent of Mexico s population has life insurance, compared with about 67 percent of adults in the U.S., according to Mexican experts and the insurance research group LIMRA International. Most of the country s insured live in cities, where they are covered through government or company jobs. But the rural poor are more difficult to serve: A majority live in widelyscattered, indigenous communities, where population density can be 70 times less than in low-income parts of Mexico City. That dispersion makes it hard for insurers to achieve the scale needed to distribute low-cost, low-margin policies; and most know little about the unique needs of rural, poor consumers. As a result, insurers generally stick to serving higher-income segments, where fewer transactions net higher margins ignoring the rural poor. Many citizen sector organizations, in contrast, know what kind of insurance the rural poor need and would be likely to buy, but they don t have enough other clients to be able to build the kind of diversified risk portfolio that would be necessary to sell microinsurance policies to low-income groups themselves. These complementary gaps in insurers market knowledge and in the citizen sector s ability to diversify financial risk offer both sectors a chance to work together to transform rural microinsurance markets into sources of revenue and social impact. AMUCSS and Zurich are working to do that, designing and delivering micro- life insurance products to the rural poor in an effort that others are starting to emulate.
The CSO: AMUCSS: Founded in 1992, the Mexico City-based Mexican Association of Social Sector Credit Unions, or AMUCSS, runs more than a half-dozen different rural finance programs across Mexico, designing financial products, building distribution networks and providing financial education and advice. To date, AMUCSS has built a network of some 69 local micro-banks, microfinance institutions and farmers groups, which have drawn more than US$7 million in savings and granted microloans to more than 160,000 clients in indigenous communities. Founder Isabel Cruz is an Ashoka fellow, elected for her work building this network of rural credit unions to help communal land-owners and farmers access credit. The Company: Zurich Financial Services: Zurich, the world s fifth-biggest insurer according to Forbes, began its global micro-insurance initiative in 2007 and now claims more than a million low-income customers in 11 countries including China, Russia and South Africa; Bolivia, Brazil and Mexico. Much of that work has focused on the urban poor, as cities naturally aggregate demand to achieve a high volume of sales. Across the world, Zurich says it focuses on strengthening distribution channels, partnering with local groups and selling policies through microfinance networks like AMUCSS s or at supermarkets, utility companies and mobile phone service points where customers regularly go to pay bills. Why neither AMUCSS nor Zurich could develop a micro-insurance product alone While the poor represent a large, untapped market, most insurers still focus on serving higher-income segments, which have slower growth rates but are more predictable, better-researched and logistically simpler to serve. Not surprisingly, industrialized countries accounted for 89 percent of the global life insurance market in 2008, according to Swiss Re, with coverage expanding by about 5 percent a year between 1998 and 2007. Yet coverage in emerging markets averaged double-digit yearly gains in that same period, offering a much greater potential for growth. If every low-income Mexican for example gained access to life insurance, the segment could mean an extra $2 billion in annual sales. But three main factors kept Zurich from seeking to tap that lowincome insurance market in Mexico: 1) It would ve had to develop new products customized to the socio-economic and cultural needs of rural poor families, but lacked key information to do so; 2) It would ve had to build a distribution infrastructure to reach their dispersed communities; 3) It would ve had to establish a credible reputation to attract potentially suspicious first-time buyers. AMUCSS, on the other hand, knew the segment s needs and had already built a solid local reputation selling micro-credit and savings through an existing distribution network of rural microfinance institutions. But it lacked the volume needed to diversify its risk portfolio enough to directly sell insurance.
Barriers in the Rural Life Insurance Market PRODUCT DEVELOPMENT DISTRIBUTION & LOGISTICS SALES & MARKETING PAYOUT & RISK DIVERSIFICATION Limited information on low-income consumers High-end products not relevant to lowincome market Logistical constraints Low-margin transactions Limited distribution infrastructure Consumers lack financial education Insurers lack trust among low-income consumers Need high sales volume in order to diversify client portfolio and risk How AMUCSS and Zurich unleashed a new market AMUCSS and Zurich s Mexico division work together to tailor insurance products to the needs of rural, low-income consumers in Mexico for example by slashing insurance premiums and payouts to more affordable levels. After a decade of experience in the rural segment, AMUCSS decided to design seven different policies that range in price from 25 pesos to 500 pesos (about US$2 to US$40) a year, with payouts between 5,000 pesos and 100,000 pesos (about US$385 to US$8,000). It convinced Zurich to forego requirements for policyholders signatures, which are costly to collect in rural areas, setting up a system of scanners to collect paperwork from remote locations instead. It also decided to cut monthly collection costs by requiring consumers to pay a onetime premium for annual coverage upfront. AMUCSS provides the infrastructure needed to distribute these new products, using its RedSol network of nearly 70 existing microfinance institutions known as cajas to promote and sell insurance in rural areas where each caja is already known and trusted. AMUCSS trains caja employees to sell insurance, and uses focus groups and support from the International Labor Organization to identify better financial education methods, such as offering sales information in local indigenous languages. Zurich Mexico, in turn, assumes all the financial risk, which amounts to a tiny fraction of a percentage point of the company s total expenses. Cajas keep 20 percent of sales up front to cover distribution costs; while administrators say AMUCSS keeps 15 percent and Zurich gets the remaining 65 percent. Cajas also gain the chance to learn about insurance from AMUCSS and Zurich and see their local credibility climb with every insurance payout. By expanding product offerings to include micro-insurance, cajas grow their customer base, too, deepening the local economy. As Cruz notes, someone who might not need a microloan may be willing to buy insurance, bringing new cash into the financial system in the process. Neither of us could exist alone, says RedSol director Alicia Govea. To be able to sell, they d have to sell a lot, and how are they going to sell a lot if no one knows them in the market? The one the buyers trust is the caja. We convince the caja and the caja trusts us. It s a chain. For us, the most valuable thing about working with AMUCSS is learning how to develop a good flavor, a good approach, a sense of how to handle this segment and respect its needs, says Eduardo Becerril, director of mass markets at Zurich Mexico. We have a clear idea that in the future it s going to be an important business and important social work for our country.
Zurich Financial Services Gains : Accesses a new market Reinforces brand and image Assets : Has capacity to assume financial risk Has flexibility to adapt product to rural market Hybrid Value Chain Ashoka Hybrid Value Chain Access to quality of life enhancing products and services at scale Scaling up enabled through partnerships between companies, CSOs, and governments Market-based competition delivers quality services at lowest cost to empowered consumers AMUCSS Gain s : Boosts social impact Taps new source of revenue Assets : Knows rural customer Has rural distribution infrastructure Trains micro-banks to sell and administer insurance Educates consumers Impact Micro-insurance sales by AMUCSS and Zurich have climbed from 1,336 policies in 2005, the initiative s first year, to 25,196 across seven rural states in 2008. AMUCSS aimed to have sold 50,000 policies in 2009 and 100,000 in 2010. As of June 2009, the average-sized policy was 19,000 pesos, with a 20,000-peso policy costing 100 pesos a year. More than 100 deaths have been paid out since 2005, averaging some 23,000 pesos each. Payouts exceeded sales revenue in 2008. The impact in poor, rural communities has been immediate. Families are left less financially vulnerable upon the death of a policyholder usually their primary wage-earner easing associated economic shocks and allowing them to plan more solid futures. Some beneficiaries even deposit part of their insurance payouts in local cajas, building collateral that they can later tap to start a small business or to hedge against future crises helping to develop local banking systems and to fight rural poverty. For AMUCSS, gains have also been large: It has become a microinsurance specialist, learning to set prices, to manage risk and to collect and pay out on premiums. In 2010, it plans to register the RedSol network as an independent civil society organization, remaining on its board but giving microfinance members greater say in operations. It expects the initiative to be self-sustaining by 2011, when a two-year innovation grant from the International Labor Organization runs out. Beyond that, Cruz says AMUCSS plans to keep building its distribution network and diversifying the insurance products it offers; and it may one day explore micropensions and health insurance, too, according to RedSol director Alicia Govea. fraction of one percent of sales in Mexico, according to Eduardo Becerril, the executive in charge of mass markets and microinsurance at Zurich Mexico. But the company is nonetheless gaining knowledge and establishing a foothold in what Becerril calls an enormous potential market for micro-insurance. He says that while 6 million Mexicans, about 6 percent of the population, are insured today, some 56 million others could enter the market it in coming years, including a large number from low-income segments seeking smaller policies. In the near term, Zurich plans to introduce other mass-market products that might benefit the rural poor including broken-bones insurance for about 80 pesos (US$6) a year; while an online platform launched in 2009 should help local microfinance institutions access information and boost insurance sales, Becerril said. Almost no one prepares to die. Those are moments of extreme human vulnerability, and for poor people, it s worse, says Cruz. To be able to support a family in those moments is the greatest satisfaction you can find. In our office, everyone fights for the chance to go and pay out on the policies. If we do this right, we ll find we can help a lot of people in Mexico and also find something profitable, some kind of balance between our social responsibility and the responsibility we have to shareholders, says Becerril. This is going to be an important business and important social work for our country. Families really suffer this kind of loss because we already live dayto-day, 65-year-old Concepcion Hernandez Pascual told AMUCSS after her youngest son died, leaving his family in Hidalgo state to collect on a 25,000 peso policy. Without the micro-insurance, I would ve had to sell my animals to pay for the funeral, but luckily this money helped us pay for everything without any problems. Zurich s international website still describes micro-insurance as part of its corporate social responsibility practice rather than as a business in itself, and micro-insurance represents far less than a
Actionable Insights Third-party facilitation helps. AMUCSS was formed to promote micro-lending, but was drawn to micro-insurance after Cruz met a young insurance broker at a conference who was eager to tap the rural market. He worked with AMUCSS to design a range of products, forming the RedSol network in 2005. Knowing the initiative needed stronger financial backing, he approached Zurich, which agreed to partner up. AMUCSS cut ties with the broker in May 2009 to work directly with Zurich, but his collaboration had been key to their launch. Separately, AMUCSS also won a 2009-2010 innovation grant from the International Labor Organization, which bought time to improve its model before requiring sustainability. New markets require new mindsets. AMUCSS works with local cajas and consumers to change attitudes towards life insurance. The group has sought to counter local superstitions that buying a policy in fact causes death, or the impression that it profits insurers with little benefit to buyers. On the other hand, AMUCSS also pushes Zurich to embrace the rural segment s low-margin, high-volume business model, striving to illustrate that working with the poor can ultimately be profitable. Partners must be flexible. Success has required both partners to adapt to new discoveries, tweaking micro-insurance products to best suit their clients emerging needs. Through trial and error, they for example realized that they needed to ease requirements for hard-to-obtain original signatures and that they should cut monthly collection costs by requiring one-time annual premium payments instead. Transparency is essential. AMUCSS and Zurich agree that transparency is central to their partnership. For Cruz, the ability to talk directly with Zurich about pricing, commissions and products is key to overcoming traditional antipathies and suspicions between CSOs and private companies; while Becerril notes that transparency helps to protect Zurich s corporate brand, reassuring shareholders and holding the partnership accountable to them. Source: Interviews conducted with AMUCSS s Isabel Cruz and Alicia Govea and with Zurich s Eduardo Becerril in Mexico City in June and August 2009. Chronology Conclusion The alliance between AMUCSS and Zurich is pioneering ways to design and deliver life insurance to the rural poor across Mexico, with each partner filling the other s unmet needs in order to reach this vast and underserved segment. In devising a sustainable, low-cost, but sufficiently high-volume model, they re showing other citizen sector groups and insurers that, through partnership, rural micro-insurance markets hold great potential. That example could transform not only the insurance sector, but the lives of millions of rural, poor consumers. 1992: Mexico City-based AMUCSS formed by 17 rural credit unions. 2005: RedSol network created to sell micro-insurance to the rural poor; sells 1,336 policies. 2008: RedSol sales increase to 25,196 in seven Mexican states. 2008: AMUCSS wins grant from International Labor Organization to subsidize RedSol through 2010. 2009: AMUCSS severs relationship with broker to work directly with Zurich. 2010: RedSol to be registered as an independent CSO. 2011: RedSol intended to be financially self-sufficient. For more information, see: AMUCSS: http://www.amucss.org.mx or RedSol: http://www.microseguros.org/ Zurich: http://www.zurich.com/main/insight/globalinitiatives/ microinsurance/introduction.htm LIMRA: http://limra.com/newscenter/pressmaterials/08lifefacts. pdf Swiss Re: http://www.swissre.com/pws/research%20 publications/sigma%20ins.%20research/facts%20and%20 figures/facts%20and%20figures1.html
About Ashoka About the Full Economic Citizenship Founded in 1980, Ashoka is the world s working community of more than 2,000 leading social entrepreneurs. It champions the most important new social change ideas and supports the entrepreneurs behind them by helping them get started, grow, succeed, and collaborate. As Ashoka expands its capacity to integrate and connect social and business entrepreneurs around the world, it builds an entrepreneurial infrastructure comprised of a series of global initiatives that support the fast-growing needs of the citizen sector. Ashoka s vision is to create change today, for an Everyone A Changemaker society to become the reality of tomorrow. Ashoka s Full Economic Citizenship is promoting a new way of thinking about housing, healthcare and small producers. It seeks to enable Hybrid Value Chains (HVCs), or business-social alliances, to develop the products and distribution channels of these untapped markets. Hybrid Value Chains (HVCs) represent a systemic change in the way businesses and CSOs interact. They are strategic alliances that leverage the resources of their partners, who clearly understand their risks and rewards. These commercial collaborations extend markets to new segments or create new markets that redefine value in significant ways. Headquarters 1700 North Moore Street Suite 2000 (20th Floor) Arlington, VA 22209 United States T: 703.527.8300 F:703.527.8383 Get Involved Do you know of any other Hybrid Value Chain stories? Please let us know by emailing us at fec@ashoka.org.