Sound Businesses: Profiles of companies and business models we are keeping an eye on.
Over the past decade, mobile phone technology has provided access to banking services like credit, payments and wealth management to tens of millions in poor areas of Asia, Latin America and Africa. But until recently, insurance had been a laggard. Not known for its creativity or technological savvy, the global insurance giants have steered clear of poorer parts of the world. In part, this is because of the difficulty of underwriting in areas with minimal consumer and actuarial data. But the lack of a model for serving large numbers of micro-policies is another problem. Even when big insurers see opportunities in the space, it’s the smaller agile startups that are making more aggressive strides in these markets.
“Just as these large institutions have been around for a while and are making money the old fashioned way, they’re obviously going to be slower at it than a nimble startup like ours,” says WorldCover CEO and Founder Christopher Sheehan, a former equities trader at Deutsche Bank. “We’re using algorithms to analyze the risk in a very quantitative way then using that to create these micro policies for customers that perform really well. This is the future of insurance.”
WorldCover offers crop insurance to farmers in sub-Saharan Africa based on the risk of drought in their area. Using satellites to fill the data gap, WorldCover typically underwrites a small farmer’s crop – for instance, ten pounds of plantains worth about $24 – at just a few dollars. Payouts occur automatically when satellite data indicates that drought conditions prevail, sent to a customer’s mobile phone, or in more remote regions, by mail.
Farmers in regions without irrigation are subject to the vagaries of weather more than ever as climate change alters historical rainfall patterns.
Sheehan spoke with Karma’s Contributing Editor Michael Moran about WorldCover’s plans to raise funds for expansion into other emerging markets and his hope that big insurers will someday come around to the potential of micro-insurance in rural areas of the developing world.
Michael Moran: What was the genesis of your company. Was it a Eureka moment or was this something that was brewing in someone’s mind for a long time?
Christopher Sheehan: It was brewing for a while, but then there’s also a kind of a Eureka moment. My background is in computer science and finance from M.I.T. and I was at Deutsche Bank trading the bank’s money and trying to add a few basis points to a multi-billion dollar portfolio. After a while I thought, ‘Is there a way that I could still use my finance skills, but do so in a way that actually impacts people’s lives at a more grassroots level. I thought I could become an impact investor, but then I started to learn about all the products in microfinance around the world since you know the Grameen Bank won the Nobel Prize in 2006 for creating these savings and loan microfinance groups. I then learned there was a movement to create something called micro-insurance, which were these really tiny insurance policies that would go to people to protect them from all sorts of things, like funerals or accidents or actually natural disasters and weather events. But had it really scaled very much and seemed like a pretty technically challenging problem.
Then I realized that micro-insurance (policies) are really financial derivatives, essentially options on weather events, these almost like catastrophe bonds that big insurance companies offer. And so I decided I could design them it in such a way that third-party investors and capital providers, impact institutions, family offices, whatever, could earn returns by offering micro-insurance to the millions of tiny businesses and informal traders in Asia, Africa and Latin America.
Michael Moran: Emerging markets can be tricky and insurance is a pretty well regulated business even in developing countries. What made you think you could just start writing policies in place like East or West Africa?
Sheehan: A key part of the story was my meeting Chris Udry, he’s now a professor of economics at Northwestern. He described this 2008 experiment that he conducted with a colleague in Ghana where he worked with 3,000 small farmers. He gave half of them just cash grants, essentially free cash. For the other half, he created an insurance policy that would pay them if there wasn’t enough rain or if there was a drought. In the end, the people who got the cash said ‘thank you very much, this is very helpful. I’m going to save it in case I have a health issue, in case I need to pay school fees for my child, in case something bad happens because risk is everywhere.’
But the ones who got the insurance actually borrowed from their friends and family from the local lender and then they invested 50% more in their farms. This was incredible to me. The ones who got free cash didn’t want to spend it because of all the risks they face. But the ones who got this piece of paper promising to cover those risks found a way even to get even more capital. Professor Udry showed that it’s not really capital that these people need first, capital is not their main constraint, it’s actually a risk constraint. So if we can remove this risk constraint then we can actually unleash all this capital and growth in the market.
Long story short, I got on a plane to Ghana in 2015 and interviewed about 100 farmers. Mostly I was interested in what worried them most. About 70% of them said, ‘I’m worried about the rain. My number one worry in my life right now because if it doesn’t rain, I’m not going to get my crop, I’m not going to be able to pay my school fees, you know I’m not going to be able to put food on the table.‘ Then I said: ‘How about this. I’ll pay you something if it doesn’t rain. I’ll pay you $100 — will you pay me a few dollars for this coverage?’ That’ really made WorldCover come together for me.
Michael Moran: How did you fund organize yourself as a startup structure. Did you bootstrap or did somebody come along and help you with some seed funding?
Sheehan: We did a little of both. I quit my job at the hedge fund didn’t take a salary and did these activities like just flying to Ghana and interviewing farmers. So I did that for a while obviously at some opportunity cost. Having graduated from M.I.T. in 2006, Drew Houston, the co-founder and CEO of Dropbox, was just a year older than me, you know I would see him at plenty of social events. We incorporated the company and then I actually raised a bit of friends and family money from some of those entrepreneurs who’d had pretty good exits from their days at various startups and then a few folks from the financial industry in New York.
It was just good fortune to have these people who could write me $25,000 checks and that allowed me to hire some staff in Ghana and honestly build the thesis around the company. We then took it to Y Combinator and got accepted in 2015.
Michael Moran: Tell me a bit more about how the product works, how you find customers and assess risks in such a difficult environment.
Sheehan: There’s a technology called parametric insurance that’s been around for a while, which relates to using data in order to write policies and actually trigger claims rather than having customers file claims. Typically for an indemnity policy, a homeowner will say ‘Hey, my home burned down, can you come out, look at my house evaluate the value and then pay me?’
But a parametric policy would skip those steps. The policy determines through technology that there’s a wildfire in your area, or maybe an earthquake of 8.0, so we’re just going to pay the $100,000 or the $1 million sight unseen. This is used a lot in government contracting, but no one’s been able to apply this technology to these micro-policies until now. And the secret is that it vastly reduces costs both for insurers and for customers.
WorldCover is using remote sensing data from satellites from ground stations, some of it’s our own data, some of its other sources of data, and we’re using algorithms to analyze the risk in a very quantitative and to create these micro policies for customers that perform really well. This is the future of insurance. I think in many ways even as you look at IOT and all these other technologies as data gets better, as processing gets better, parametric becomes more and more possible.
Michael Moran: What about from the consumer side? What does the calculus look like to arrive at policy rates?
Sheehan: So let’s say you are growing rice in an area that’s quite wet enough, there’s enough rainfall. I might say, ‘Okay, if there are eight days without rain during your key period I’ll pay you a certain amount of money.’ But a farmer who is in an area that’s quite dry and so that eight-day period is quite likely, I might say it’s going to be 10 days for you in order to get that same level of payment. So the price that a farmer’s neighbor is paying and is actually the same and we make it very transparent for the customers so they can still decide.
Michael Moran: I see that you have just finished closing a Series A round for $6.1 million. What are your plans for that money?
Sheehan: We’re revenue positive but we’re really just emerging from an extended pilot period in three countries in Africa: Ghana in West Africa, and Kenya and Uganda in East Africa. We have about 30,000 policyholders that we’ve served across those markets and we’ve been keeping it constrained so that we could monitor performance and test the regulatory environment so that we could make sure that the capital providers are happy, and to make sure ultimately that the customers renew and come back to us.
Now we’ve tested all of that, now it’s time with this new round of funding for us to build out the distribution and scale that we need to demonstrate that this is a company that can grow not just in Africa but in Southeast Asia and Latin America. So profitability for us actually isn’t too far away. If you’re only thinking narrowly about a given market, can we generate enough net premium in Kenya to cover our costs in Kenya. That’s fairly close for us. But obviously with those profits we want to be plowing those profits and revenues back into research and making sure that we’re incorporating the latest and greatest data sources, modeling technique, honestly and building products that are going to perform better and better. Ultimately a future competitor will find it very, very difficult to reconstruct that and come after us.
Michael Moran: What’s your pitch to investors? Obviously, this is an impact investment of the first order, extending risk products to a population that lives with existential risk on a daily basis. But what do you tell investors about returns?
Sheehan: Like any venture backed company, entrepreneurs must understand that if you’re going for investors on Sandhill Road who are financial investors need a return you know you need to actually return multiples of their fund, you know in order to pay back their investors, justify their fees in the 7 to 10 year lockup. Then you’ve really got to be chasing a $1billion idea or more, you’ve got to be chasing and trying to build a company that could build really significant value. That’s what we’ve got to be focused. That impact is nice, it’s great to insure maybe a few thousand farmers, but what we really need to do is have this huge vision of you know someday taking market share from Swiss Re or reimagining how reinsurance and risk transfer is done. That’s where you start and that’s how you get investors excited. Then the story really has two prongs: One is the technology story and the other is the market story. From a market perspective, you have $163 billion dollars of uninsured value in the emerging markets according to Lloyd’s of London, that somehow Swiss Re, Munich Re, Orleans, AXA, Berkshire Hathaway and others are not getting to. That’s only getting bigger with climate changing, with weather becoming more volatile and then with countries like Indonesia or Bangladesh or Kenya and Nigeria just exploding in terms of population and economic output.
We position WorldCover as kind of the harbinger of that of that story. And it’s a story that honestly Axa, Allianz, Swiss Re and the rest are also trying to get behind. But just as these large institutions have been around for a while and are making money the old fashioned way, they’re obviously going to be slower at it than a nimble startup like ours. And we can recruit really good engineers and really good scientists to do so. So I think that kind of as a whole is is how we position the company, I think investors are really excited about that.