In the start-up world of Silicon Valley, failure is a badge of honor that entrepreneurs and investors wear proudly on their sleeve. In the social sector, however, failure is often swept under the rug or treated as a one-off exception. Over the past 12 years at Acumen, we’ve seen that a key part of successfully supporting emerging social enterprises is the ability to take a risk on an untested idea, and have the patience to test, fail, and re-test the idea until the model is proven. The mindset and ability to learn from failure is a critical success factor.
In 2005, the Aga Khan Agency for Microfinance (AKAM) launched a new company, First Microinsurance Agency (FMiA), with the help of a $5.4M grant from the Bill & Melinda Gates Foundation to test new micro-insurance products for the poor in Pakistan. Acumen invested $384,000 in equity capital. In addition, to help the company grow, Acumen and AKAM provided a $1.8M stop loss facility that would bear 90 percent of the company’s cumulative underwriting losses (i.e., the shortfall of premium income over claims payments) in order to encourage a mainstream commercial insurer to underwrite FMiA’s policies. The business plan envisaged that the firm would grow rapidly and break even within three years.
At the time there were no successful precedents for commercially viable health micro-insurance products for the poor; the company was as much an experiment as it was a business model, but one whose social impact had the potential to revolutionize the way poor communities access healthcare. FMiA’s approach was to leverage existing micro-finance networks to sell their micro-insurance products, and gradually increase their customer base until they could become financially sustainable. Their initial products focused on mitigating two commonly faced risks: death of a family breadwinner and hospitalization due to severe illness or maternity complications.
By the end of 2009, close to 21,000 people were insured through FMiA’s health products. Although the company was growing rapidly, it faced two significant challenges: a high claims ratio for their health insurance product due to low premium payments, and a claims management system that was susceptible to distortion. The low premium payments were partially a result of a campaign to entice new customers by lowering the initial price of the premium, and then a resulting inability to raise prices back to a sustainable rate. When FMiA’s management tried to bring in experts from AKAM to address the situation, an external factor (an armed insurgency in a nearby province) prevented them from completing the work on schedule, leading to a damaging time delay. By the end of 2011, the company faced heavy underwriting losses from the health product, and the decision was made to close down FMiA. Acumen Fund wrote off its equity investment in the company and withdrew its share of remaining funds in the stop loss facility.
By traditional investing standards Acumen’s investment in FMiA was a failure as it did not generate any financial return and ultimately had to be written off. However, the direct social impact created by the company was substantial. In spite of its financial woes, by 2011 the health micro-insurance product and the life micro-insurance product covered nearly 400,000 people combined. In addition, above and beyond the direct impact created through FMiA are the indirect lessons learned about what it takes to run a successful social business in the micro-insurance sector. For Acumen three key themes emerged:
- Quick iteration in the “validate” stage is critical: FMiA was not able to test and learn from what was successful and what failed quickly enough to make the necessary improvements in their products. Part of this was due to external factors (the armed insurgency), but it was also due to an unwillingness to slow growth until the kinks in the product were ironed out.
- Unit Economics: Before starting to scale, FMiA had not truly understood the unit economics of their health product. They did not understand the full ramifications when they lowered premium prices to entice new customers, and then were stuck with the low prices in the long-term. If the company had worked out the unit economics clearly it may have had greater long-term success, while sacrificing short-term growth. Over time Acumen has seen that clarity on unit economics is critical in all of our investee companies, no matter the sector.
- Leadership: In many ways FMiA was simply ahead of the innovation curve for micro-insurance products in Pakistan. They had the courage and audacity to sell a completely new product in an untested market and a geography that presents challenges even for traditional businesses, and the humility to understand that it was time to move on when the company was no longer viable.
FMiA’s initial ‘experiment’ may have failed in the conventional sense, but the lessons learnt and social impact generated is significant.
Equally important, after closing the business FMiA’s staff and assets were acquired by New Jubilee Life Insurance, a large, traditional insurance provider looking to move into the micro-insurance market. The pioneering work done by FMiA to develop a viable micro-insurance business is continuing to develop within NJLI, and the business plan for the former FMiA projects financial break-even in 2016. By embracing the lessons learned from early failure and readily accepting the consequences of placing capital at risk, Acumen, the Gates Foundation, AKAM and FMiA ultimately were able to create a template for providing sustainable micro-insurance products to the poor.
Farrukh Khan is director of Acumen Pakistan. Follow him on Twitter