Locked down? Business interruption insurance, low-income MSMEs and COVID-19

Friday, April 24, 2020

On 16 April 2020, the Microinsurance Network organised an Expert Forum webinar to explore how insurers can contribute to addressing the pain of business interruption in developing countries, particularly given the current lockdowns due to COVID-19. Here we provide highlights of the discussion. The full webinar – exceptionally made available free of charge to the general public – can be accessed here.

Chanda[1] is a small informal business owner in Lusaka, Zambia. He owns a couple of small shops and employs four people. At any given time, he might have up to US$ 3,500 in stock, and earns anything from US$ 350 and US$1,200 per month from all his businesses. His workers earn about US$ 94 a month – the minimum wage for Grade 1 shop workers.

Hollard Zambia has been exploring how micro-entrepreneurs like Chanda can overcome the many challenges that face them. They began by asking micro-entrepreneurs to identify the business and financial challenges that are of greatest concern. While some of the challenges identified could be mitigated by better access to finance, others could certainly be eased through insurance. Equipped with this understanding, Hollard set about designing a business insurance product that bundles property assistance cover, business interruption insurance and financial assistance following fire and/or storm damage to business property, or a payout in the event of forced temporary closure.

“Not everything has an insurance solution,” says Siani Malama, Head of Business Development, Marketing and Micro Insurance at Hollard Zambia. “But it is important for us to understand the challenges of being a micro-entrepreneur from a business and personal perspective. How can we extend BI beyond simple physical damage to property, to cover where there is no actual physical damage? How can we get cash quickly into the hand so of entrepreneurs so that we can cushion the blow that they face?”

The current COVID-19 crisis has shone a spotlight on the plight of billions of formal and informal micro-enterprises and their employees around the world. Business interruption insurance is typically the domain of large businesses. Even in wealthy countries, SMEs are unlikely to have business interruption insurance. For example, a 2015 survey of American SMEs found that only one third had any form of cover to protect them in case of business interruption. This lack of cover – or the availability of suitable products – represents a systemic risk in the global south, where MSMEs – both formal and informal – play a crucial role in the economy, not least as employers.

Designing business insurance for these MSMEs is not without its problems. According to Siani, pricing BI risk is highly challenging. “The biggest problem when designing products for this market segment is the lack of data,” he said. “The majority of entrepreneurs do not keep formal records - these guys trade and live day to day. It’s very difficult for them to differentiate between personal and business income, 75-80% have no bank account and most use their mobile money wallet for both personal and business expenses. It’s very difficult to price a business properly, so we have to make assumptions based on the data that we have.”

Leveraging technology to reduce costs and reach scale is essential for this kind of BI product to work, as is the case for any microinsurance solution, as is a robust process that allows for fast, efficient claims payouts and a positive customer experience.

In Latin America, the Microinsurance Catastrophe Risk Organisation (MiCRO) has been leveraging technology in a different way to provide MSMEs with cover for their productive activity in the event of natural disasters such as drought, excess of rain and earthquakes. The insurance covers indirect losses, such as income decrease, or expense increase after a disaster has occurred. Because – unlike traditional loss-adjusted insurance – MiCRO’s products are index-linked, payouts are triggered automatically. There are no exclusions, no need to file a claim, no paperwork, no deductibles, no risk inspection, no loss adjustment, no moral hazard and agile payouts. Using satellite technology, a calculation platform detects trigger events and automatically informs the insurer, who is then able to identify the affected customers and instantly authorise variable payouts depending on the severity of the event.

This model could be adapted to the coronavirus pandemic, says Carlos Boelsterli, CEO of MiCRO. “It allows you to expand the traditional boundaries of insurance, to include consequential financial losses caused by reduction of income from natural hazards Of course it isn’t a magic formula to solve all the problems, but it is a valuable risk transfer instrument.”

Pricing a product to protect workers’ income is even more challenging. “You have to make assumptions because of the lack of data,” says Carlos. “You have to see what customers can afford, see how we can add value to protect the minimum wage. It would need to involve the government to see how we can make use of their resources - collaboration and partnership would be key.”

“It depends on the design of the product, what is the sum insured, when do you want to start triggering it and how long the person is covered,” agreed Siani. “I’m not an actuary but I would like to think that something like COVID-19 is not very frequent, so the risk premium should be something affordable.”

Asked how private insurance companies can support countries with less well developed social and healthcare systems during the pandemic, Carlos replied, “There is a huge protection gap which needs both bottom up and top down solutions,” said Carlos. “Governments and international organisations should implement macro-level solutions, but at the micro-level we have to ensure payouts get as directly as possible to the final beneficiaries.”

“Public-private partnerships (PPPs) between insurers and governments could help extend the capacity to deal with the pandemic,” said Siani. “It’s a high risk for the private sector who are constantly looking at their bottom line, and it will take collaboration.”

Finally, Sarah Ebrahimi of the IFC offered this observation: I would argue that now more than ever, the value of insurance and the need for a safety net is critically salient. Through communication and connecting with customers, coming out of this, insurers should be able to more easily convey the value of their policies.”

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[1] Fictional name