ZULUINSURANCE:

REDUCING POVERTY WITH

MICROINSURANCE
Creative Shock ’19 Preliminary Case Study

ATTENTION: Data provided in this case study is

fictional and is presented for illustrative
purposes only. All calculations should be solely
based on the numbers provided.

2019
ZULUINSURANCE IS A MICROINSURANCE COMPANY IN ZULULAND PROVIDING
PROTECTION FOR COTTON FARMERS AND FINANCIAL EDUCATION TO PEOPLE IN NEED
WHAT IS ZULUINSURANCE?

• About the company | ZuluInsurance is a social business in Zululand providing

microinsurance services for disadvantaged people, who are ignored by traditional
insurance companies. Every year the company reinvests profits into business to
increase social impact or invests into training Zululand citizens about financial literacy.
• Service | Currently, one of many plans of ZuluInsurance is microinsurance for farmers
that are growing cotton, which is a crucial source of income to most families in
Zululand. ZuluInsurance has covered 150 000 cotton growing individuals in 2018 and
expects an increase in demand for 2019.
• This insurance plan is distributed through 5 main channels: ZuluInsurance Headquarters
in Zulucapitale, employed travelling salesmen, churches, post offices and mobile
application.
• The premiums are fixed for all groups of clients and are paid per acre of land. The
payments are tied to rainfall index and if precipitation does not fall into specified range,
the ZuluInsurance will pay benefits to every client according to how much rain there
was outside the interval in millimeters (mm).
• Future plans | Currently, the company is planning about the expansion and they hired
you as an independent consulting team to help them. Your assigned tasks are to help
them understand their current situation of cotton plan. Moreover, they want to
understand how they could improve their company and evaluate an option of building
new facilities to increase the social impact.

Creative Shock Preliminary Case Study ’19

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ZULUINSURANCE IS A SOCIAL BUSINESS THAT TACKLES 3 SOCIAL DEVELOPMENT
GOALS…
STRATEGIC GOALS OF ZULUINSURANCE TACKLED SOCIAL DEVELOPMENT GOALS

• ZuluInsurance is characterized as a social business due to its 2 main goals:

• To be financially self-sustainable and not dependent on donations or
grants.
• Constantly increase social impact by using earned profits to reinvest into
business or spend it for philanthropic causes such as financial literacy
trainings.
• ZuluInsurance cares mostly about social impact rather than the profit
maximisation which differentiates it from traditional business. It also differs from
non-profits as it is self-sustainable.
ZULUINSURANCE’S SOCIAL IMPACT ON PEOPLE

• Life before ZuluInsurance | Cotton farmers are one of the most vulnerable group of
people as they are dependent on many uncontrollable factors such as weather
conditions and international price fluctuations. Moreover, farmers in these regions tend
to have large families, which puts extra pressure on farmers. Therefore, one bad year
could lead to much more than a temporary setback – it can lead the family to crippling
debts, malnutrition and even death due to inability to purchase the necessary
medicine. Risks are also increased by the fact that most farmers are ill educated and
due to long and tiring hours are not able to have other sources of income.
• Life after ZuluInsurance | However, due to ZuluInsurance the lives of many farmers and
their families have become better. Now, in case of extreme weather they will still be
able to sustain themselves. Moreover, as they are protected, they are less stressed
about the future, which helps them to be more productive in their work.
• Financial literacy courses also help people to have a decent life quality.

Creative Shock Preliminary Case Study ’19

3
BY PROVIDING MICROINSURANCE WHICH IS AN ALL-INCLUSIVE INSURANCE HELPING
THE POOR TO BE PROTECTED FROM SHOCKS…
CHARACTERISTICS OF MICROINSURANCE

• Target group | Microinsurance refers to insurance products specifically targeting low-income markets that cannot get traditional insurance due to low and irregular
income, lack of credit history or other reasons. Of all socioeconomic groups, the poor are the most vulnerable to financial shocks but are the least protected. They
usually cope with financial crises by reducing expenditures, using their savings, selling assets or taking loans with high interest rates.
• How it works | Microinsurance works by risk pooling its purchasers who seek protection from various types of risks. The purchasers pay monthly premiums through
electronic payment systems or third parties. In case of insurable event, they get a predetermined amount of money. Microinsurance providers are funded solely by
the premiums coming from different plans.
• Principles of microinsurance | Client perspective for microinsurance companies should be at the center of activities. Products must be designed to match the client
need, claim procedures should be simple, underwriting minimal and accessibility to clients enhanced by various creative channels because majority of the market is
rural and does not have access to bank accounts and cannot reach insurance points. All should be done with high efficiency and low-cost for the company.
• Short-term | Microinsurance is short-term insurance, where the client pays premiums only during the time of insured activity that can last from a month to a year.
DELIVERY CHAIN OF COTTON MICROINSURANCE

CLIENTS PAY PREMIUMS RAIN FALLS DOWN EVENT OF CLAIM PAYMENTS

• ZuluInsurance receives premiums
every month* from cotton farmers
according to acres insured that
specific year.
• Payments are tied to the rain index.
If during a full month the rain in
millimeters (mm) exceeds or is
below a certain range, Zuluinsurance
pays benefits to clients.
• The payment per acre depends on • Benefits for previous month are paid
millimeters of rain above or below in 10 days after the month finishes.
the range and amount of benefits • Benefits are distributed through 5
paid per 1mm. ZuluInsurance delivery channels.

Creative Shock Preliminary Case Study ’19 *Assume that all people get an insurance on March and end insurance on November and does not skip any payments
4
AND FINANCIAL LITERACY COURSES THAT HELP POOR PEOPLE TO MANAGE THEIR
ASSETS MORE EFFECTIVELY
DESCRIPTION OF FINANCIAL LITERACY COURSES
• Activity | ZuluInsurance provides one weekend financial literacy courses to people
that helps them manage their income more wisely. These courses are a response to
some individuals prioritizing spending for unproductive leisure, unnecessary things,
nutritionally low-value food and more instead of beneficial spending. Financial literacy
courses are held through out the year if there are remaining net profit from last year.
• Location | The courses are only held in HQ in Zulucapitale, but could be expanded to
other cities also if new facilities are build.
• Material | During the courses people are taught about the benefits of saving money
for the future, budgeting, accounting, importance of prioritizing spending and more.
• Social goal | The goal of the business is to train as many people as possible.
• Cost structure | It was estimated that it takes a total of 4.5 Zulu Franc (ZFr) to train
one person in Zulucapitale. Analysts also estimated that the costs will stay the same in
other regions too.

Creative Shock Preliminary Case Study ’19

5
ZULUINSURANCE HAS ITS HEADQUARTERS IN ZULUCAPITALE AND OPERATES IN OTHER
3 REGIONS OF ZULULAND
STATISTICS OF KEY REGIONS OF ZULULAND MAP OF ZULULAND REGIONS

ZULUCAPITALE ZULUCITY ZULUTOWN ZULUVALLEY

TOTAL
10 000 000 8 000 000 6 000 000 3 500 000
POPULATION

POPULATION ZULUCITY
GROWING 20% 18% 12% 22%
COTTON

AVERAGE YEARLY ZULUTOWN

INCOME PER 1 780 1 438 1 395 1 380
CITIZEN IN ZFR

LAND AREA IN
80 000 75 000 50 000 40 000
KM2* ZULUVALLEY
ZULUCAPITALE

COTTON CROPS
11 000 10 300 8 000 8 200
AREA IN KM2

Creative Shock Preliminary Case Study ’19 *1KM2 = 247.105 Acres

6
ZULUINSURANCE HAS INSURED A TOTAL OF 480.000 ACRES DURING 2018 WITH
MAJORITY OF CLIENTELE LIVING IN POOR CONDITIONS
CLIENTELE OF ZULUINSURANCE FOR 2018
• ZuluInsurance has insured 480 000 acres in 2018 and forecasts an increase in the number of acres for the next year by 14%.
• The majority of ZuluInsurance clients are poor farmers that earn below 4ZFr per day.

NUMBER OF ACRES INSURED WITH COTTON PLAN % OF INSURED ACRES OWNERS WHO GET A CERTAIN DAILY INCOME**
+14%
547 200
100%
480 000 90%
80% 35%

70%

297 600 60%

50% 30%
208 000 40%
30%
20% 26%
60 800
10%
9%
0%
2015 2016 2017 2018 2019* 1-2 ZFr 2-3 ZFr 3-4 ZFr >4 ZFr
*Forecasted amount
Creative Shock Preliminary Case Study ’19
**Assume that this distribution of clients will not change in the upcoming years 7
 ZULUINSURANCE’S TARGET GROUP IS COTTON FARMERS THAT CAN BE CHARACTERISED
BY HIGH SENSITIVITY TO PREMIUM CHANGES
OVERVIEW OF COTTON FARMERS GROUP
• Currently the only ZuluInsurance target group is cotton farmers. However, their income patters are very irregular. Usually farmers receive the largest amount of
income during the months of November and December, when they sell their crops. During other months, their income is negligible.
• Farmers are reacting positively to ability to defer premiums until the crops are sold. Deferring payments until November* would increase demand for insured
acres by 5%.
• 75% of farmers in Zululand have a phone with sim connection. Out of these having a phone, 16% have a smartphone with an active mobile money service, which
means that they can send and accept payments. ZuluInsurance has 25 000 clients that pays premiums and receives claims online.
• 33% of people in Zululand, who earn 3 ZFr per day or more has a bank account. Poorer people cannot afford it due to fees.
• ZuluInsurance’s survey results below showed that the poorest people are the most sensitive to the increase of a monthly premium.

% OF ZULUINSURANCE ACRES OWNERS THAT WOULD STAY INSURED NEXT YEAR IF MONTHLY PREMIUMS INCREASE BY SPECIFIED AMOUNT**

Increase by: 0.5 ZFr 0.75 ZFr 1 ZFr 1.25 ZFr 1.5 ZFr

1-2 ZFr 61% 55% 50% 24% 19%

Daily income

2-3 ZFr 64% 62% 56% 43% 37%

3-4 ZFr 72% 67% 62% 44% 41%

>4 ZFr 79% 78% 75% 63% 52%

*The company has enough liquid money to be able to defer payments.

Creative Shock Preliminary Case Study ’19 **Those people that stay insured will not reduce the current number of acres insured due to increase in premiums; proportion of acres will
stay the same for upcoming years
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COTTON MICROINSURANCE PLAN IS TIED TO RAINFALL INDEX, WHERE THE PAYMENTS
INTERVAL DIFFERS FROM MONTH TO MONTH
OVERVIEW OF COTTON MICROINSURANCE PLAN
• ZuluInsurance is providing index-based microinsurance plan for cotton farmers, based on rainfall in mm per month. With index-based insurance all the payouts are
related to this index, which is closely correlated to agricultural production losses. This method allows to avoid expensive claim investigation costs and moral
hazard.
• The payouts are standard for all people, where the client would pay 0,67 ZFr per month for one acre. In case of rain exceeding or falling behind the threshold, the
ZuluInsurance would pay the beneficiary 0,45 ZFr per 1mm in 1 acre of rain above or below the threshold.
• The insurance plan is available from March to November, which is correlated to the time when farmers start growing cotton and when they harvest it.

RAINFALL INDEX RANGES FOR EVERY INSURABLE MONTH IN MILIMETRES

MM
200
190
170 170
160 160 160
150 150

100 100 100 100

80 80 80 80
60
50 50

20
10
0
March April May June July August September October November
*If monthly mm amount exceeds or does not reach the blue interval, then ZuluInsurance will pay benefits depending by how much the
Creative Shock Preliminary Case Study ’19
rainfall exceeded or did not reach the interval 9
SIGNIFICANT PART OF COSTS FOR ZULUINSURANCE COMES FROM DELIVERY CHANNELS

DELIVERY CHANNELS OF ZULUINSURANCE

Travelling Salesmen Churches Post Offices Electronic Payments Headquarters

ACRES INSURED BY
DELIVERY CHANNEL 160.000 96.000 80.000 80.000 64.000
IN 2018

Each salesman earns 2 Marketing expenses of

ZFr per day and works 2
DESCRIPTION OF days a week. For every
THE CHANNEL acre insured they get a
yearly bonus of 0.1
ZFr.*
rd
3 party receives 3%
from premium paid by
signed clients during the
insurance year.
rd
3 party receives 3.5%
from yearly premium paid
by signed clients during
the insurance year.
Transfer costs of 2% from
the total sum of
premiums received + 0.05
ZFr per transaction***.
200 ZFr per month all
year.
Other administrative
costs of 1 600 ZFr per
month all year.

OVERVIEW OF DELIVERY CHANNELS OF ZULUINSURANCE

• The company employs 100 travelling salesmen that goes from town to town to promote and sell microinsurance plans. Moreover they pay the claims to people
living in rural areas who are unable to reach other insurance points. The salesmen are compensated with fixed wage plus yearly bonuses for each acre insured.
• ZuluInsurance also pays bonuses to third parties (churches and post offices) for signing people. The amount of bonus is paid from the total premiums paid by
signed clients through out the insurance year.
• Some individuals, who have access to electronic payment systems, can pay premiums and receive benefits via phone. the only costs for this channel is fixed
transfer payment per single transaction*** plus the % from the total sum of transaction.
• For the HQ the main costs are marketing and administrative costs, which includes electricity, salaries and more.
*Assume that salesmen work for a full year without taking any holidays/sick days and their number does not change.
Creative Shock Preliminary Case Study ’19 **Assume that there are 28 days in every month.
*** Each payment to separate individual is considered to be a transaction and transaction costs are only incurred while paying claims
10
ZULULAND IS AN ATTRACTIVE COUNTRY TO GROW COTTON

PRECIPITATION GRAPH OF ZULULAND IN MM FOR 2018*

199
200 MM
165 139
150 120
100
100 83 99
100
47
50 22 40 20
0 MONTHS
1 2 3 4 5 6 7 8 9 10 11 12
COTTON INDUSTRY IN ZULULAND

• Zululand is a large cotton producer. The cotton in Zululand is grown only by

farmers in territories below 4 hectares where artificial irrigation is not used.
Cotton is handpicked, which ensures high quality and consequently such
cotton is in high demand.
• It takes six months from planting the cotton to harvesting it. First 5 months
are growth phase and requires at least a total of 500mm of rain. During the
last month the cotton needs dry climate.
• After the harvest, cotton seeds and fibers are separated from each other
and thin coating of wax that surrounds the fibers is removed.
• Cotton is grown from March to November. During other months farmers
grow other plants to recover depleted land from cotton.
• On average 600kg of cotton are grown per acre without artificial irrigation.

Creative Shock Preliminary Case Study ’19 *Assume that precipitation graph will stay same for upcoming years
11
ZULUINSURANCE IS CONSIDERING MAKING LONG-TERM INVESTMENT IN OPENING
NEW FACILITIES
LONG-TERM INVESTMENT DESCRIPTION

• Plan | ZuluInsurance is planning to build 3 new facilities in Zulucity, Zulutown and Zuluvalley
in 2019 through which they will distribute insurance packages and do financial literacy
trainings.
• Duration | It would take exactly 1 year to build the facilities before they will be available for
operations. They would be finalized at the end of 2019
• Demand increase | It is expected that such investment would increase insured acres of
cotton by 1% every year from a base forecast of 2019 level for a total number of 10 years.
The increase is compounded.
• Capital investment | The initial investment (at the beginning of 2019) is paid immediatelyan
would amount to 9 000 ZFr
• Cost structure | There would be 20 ZFr costs every month per facility for electricity, staff,
and other miscellaneous expenses. These costs would be paid at the end of each year,
including the first year of building facilities.
• Delivery and administration costs in 3 new regions are expected to be 0.2 ZFr per acre
insured. Claims probability and amount paid per acre would stay the same as in 2018
• Immediately after establishment of facilities, 10% from yearly cashflow balance if positive
would be used for financial literacy trainings.
• The discount rate used by ZuluInsurance for starting long term projects is 4%.
• Pricing | For this project as it is long-term, the board of directors of the company thinks that
the price of premiums should be reviewed and raised to 0.69 ZFr per acre to be able to do
more financial literacy trainings. No loss in demand due to this raise is expected.
• Social impact | The management would consider this investment to be socially profitable if
in year 2024 (year 2019 is the initial investment time) they would have trained 200 people.
Creative Shock Preliminary Case Study ’19 *Assume that building of facilities will happen during year 2019 and no increase of demand is possible.
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 YOUR TASKS (submit your answers here: https://forms.gle/FF4bTfmCwo57ywCS8)
TASKS 1. Current situation
1.1. Calculate the premiums received in 2018.
1.2. Calculate the payouts paid in 2018.
1.3. Calculate the costs which were incurred by the following channels in 2018:
• Travelling Salesmen;
• Post Offices;
• Electronic Payments.
1.4. Calculate total net profit in ZFr for the plan for 2018.
1.5. Estimate the total maximum market size in ZFr for the cotton plan and the market share
taken by ZuluInsurance for 2018 assuming every person is capable of paying the premiums.
2. Short-term strategic decisions
2.1. Choose the best strategic option by calculating net profit from each of the decisions for
the next year of 2019:
A. Raising the amount of premiums from 0.5 ZFr to 1.5 ZFr by 0.25 ZFr increments
(assume that due to change in microinsurance delivery channels pricing the
average one time per year delivery costs would be fixed at 0.2 ZFr per acre);
B. Allowing people to defer premiums till November (assume that due to change in
microinsurance delivery channels pricing the average one time per year delivery
costs would be fixed at 0.2 ZFr per acre).
2.2. Which strategic option is the best?
3. Long-term strategic decisions
3.1. The company is thinking about building 3 new facilities in key regions to increase its
social impact. They would consider this investment to be a socially good decision if 200
people would be trained by the end of year 2024.
A. Will ZuluInsurance reach their social goal? How many people they would manage
to train by the end of year 2024?
B. What is the total revenue from premiums collected earned from additional
facilities and the total amount of money that would be spent for trainings during
the period of 2019-2028?
Creative Shock Preliminary Case Study ’19 C. At which year the NPV of investment would break-even? What would be the value 13
of NPV at that year?