Challenges and impact of extending inclusive insurance to MSMEs

Micro, small and medium-sized enterprises (MSMEs) are the engine rooms of many developing countries. yet countless millions of informal traders, micro-entrepreneurs and small businesses either can’t access or can’t afford insurance. The latest MiN Expert Forum, moderated by independent consultant Alice Merry from Peru, aimed to find out why so many MSMEs are exposed to risk.

Gregor Sahler, from the Global Initiative for Access to Insurance at GIZ, explained that you must define your market before you can target it. Micro-entrepreneurs - those with fewer than five employees - have insurance needs similar to individuals and are a fairly homogenous group. This is not true of Small and Medium-sized Enterprises (SMEs) - those with 5-250 employees - who often have very different needs. SMEs are crucial for national economy growth, employment and innovation. Insurance increases their resilience and encourages investment, as well as opening up new funding opportunities for SMEs, but there’s a lack of low-cost products tailored to their specific needs - leaving them in the ‘missing middle’.

Jeremy Gray, Senior Engagement Manager at Cenfri, expanded on the theme of the ‘missing middle’.  Insurers have challenges serving this market - sales and claims processes for SMEs are often difficult and expensive, and products often not suited to them. SMEs face a large range of risks requiring different solutions, both large and small, simple and complex. Unless insurers really make the effort to understand those specific risks and needs they will not be able to offer suitable products.

There’s also the challenge of distribution: insurers need to broaden their reach by using alternative distribution models such as mobile networks (MNOs), microfinance institutions (MFIs) and online market places which aggregate several insurers on one platform.

On the other hand, insurance companies need to leverage value chains to strengthen the business case of serving SMEs. Jeremy used the example of a transport logistics company in Ghana which had insurance at some stages of the value chain but not others. As a result, the truck drivers were the biggest risk because they were not covered.

Representing insurance providers, Siani Malama, Head of Business Development and Marketing at Hollard in Zambia said research showed only four percent of Zambian SMEs had insurance cover. 42 percent of those surveyed used their own savings or informal loans to cover losses - but this prohibits growth and risks the entire enterprise going under in the face of an uninsured disaster. The money they currently use as a safety net could be invested into expanding the business and a more sustainable future.

However, said Siani, it’s important not to underestimate the value of informal risk management. Hollard’s strategy is not to try and replace the informal sector but rather to complement and supplement it by offering formal insurance products tailored to specific SME needs. Many insurers struggle to make a business case for MSMEs, but there is a business case for every sector of the market if you go about it the right way.

Several participants asked how regulators were doing enough to ensure insurance works for MSMEs. In Gregor Sahler’s experience, it is important to understand how insurance regulators work - in many countries they are often the “neglected sisters and brothers” of the banking regulators and as such have limited influence. However, many regulators have market development as part of their mandate, and getting them to see that developing the SME insurance market is a significant part of that is vital.

Jeremy Grey thought that SMEs are often a high priority for policymakers in developing countries but that making sure they are insured is not a priority. It’s important to persuade policymakers that insurance can help reduce the high attrition rate of SMEs in developing countries, can help facilitate longevity and deliver growth potential.

Picking up on the role of digital and InsurTech solutions, Siani Malama said that traditional models, which tend to be costly and complicated, do not effectively serve MSMEs. Digital will play a key role, for example, in settling claims quickly. One of the biggest challenges for MSMEs is cash flow, and many small businesses can’t wait three or four weeks for a claim to be settled, it would kill them off. Digital can help settle claims quickly and efficiently.

The full recording of this Expert Forum is available to members here.

MiN Expert Forums are exclusive member-only events. Look out for upcoming forums on our website, and if you would like to suggest a topic, showcase your expertise or share your insights in microinsurance with your peers, we’d love to hear from you!