Micro small and medium enterprises (MSMEs) are a vital part of the global economy. They account for 90% of businesses and are a source of more than 50% of employment worldwide. In emerging markets, they contribute up to 40% of the national income. Despite this, they face many challenges, particularly when it comes to accessing financial mechanisms such as insurance.
To begin with, financial mechanisms can be hard to access for MSMEs, particularly those in rural economies. Many, such as farmers, work in remote areas which are physically hard to access, and a high proportion of MSMEs lack the financial education to know that insurance is available and how it can help. Of those who do, many simply don’t trust it, particularly when they are required to pay an up-front cost for which they don’t immediately see the benefits.
However, MSMEs in developing countries are one of the groups who could gain most from insurance. Given the types of climate-dependent industries they work in, the current trend of rising temperatures, heavy rainfall and extreme weather events puts their livelihoods at risk. Unfortunately, this risk has also typically made them less attractive to insure.
The Microinsurance Network’s Insurance for MSMEs Best Practice Group (BPG) has been working to address these challenges since it launched seven years ago. Most recently, the group has focused on one of the biggest barriers to insurance uptake among MSMEs: the lack of tailored solutions.
This is largely due to the lack of data available to truly understand this group. As BPG member, Violet Kapekele from Hollard Zambia explains “Data plays an important role in understanding the risk profiles of the MSME’s, and the market dynamics. By understanding these risk profiles, insurers can develop customised insurance solutions that provide adequate coverage while remaining financially viable for both the MSMEs and the insurers.”
Tackling the data problem
To be able to tailor products, you need good quality, disaggregated data that can be segmented to understand the different requirements of MSMEs. As Leticia Gonçalves, Disaster Risk Finance Expert at the WFP Regional Bureau for Latin America and the Caribbean, highlights “Data is fundamental in understanding the nuanced risk profiles and coverage needs of MSMEs, which are dynamic and vary significantly across different sectors and regions.” However, given this heterogenous nature of MSMEs and the diversity of their needs, it has been difficult to standardise data collection at scale to capture each type of business.
This has been the crux of the problem until now, and one that several BPG members have been tackling. In November 2023, the BPG organised an Expert Forum to explore and understand effective methodologies for collecting, analysing and using MSME data. Here, Maximilliano Selva of Varese Brokers explained how they have been using several data sources to build a better picture of MSMEs across the regions they operate in. This includes public documents (e.g. government records), focus groups, in-depth interviews and public surveys. They also work with partners that already have relationships with MSMEs, including local governments, NGOs, financial institutions, logistics companies and mass consumption service providers.
As he explained “We have found that mass consumption service companies are very useful as they have interesting data on MSMEs that we can use. We can understand how they spend money on these kinds of services and that would allow us to provide them with a safe expense plan, for instance.”
One of the key innovations they have incorporated is leveraging technology to gather data, for example, using an AI chatbot to survey users via WhatsApp. However, Selva explains that while that is good for collecting large amounts of data quickly, in-field work is needed to understand real behaviours and concerns. This is something that Rahab Kariuki from the Busara Center for Behavioural Economics agrees with.
At the Expert Forum, she explains that experimental research is necessary to be able to develop products that are actually useful to MSMEs. She recounted how, when working for an agriculture insurance company she noticed “a gap between what we were expecting farmers to do and what they actually ended up doing.” Experimental research is particularly useful for determining pricing of products for example. Here, directly asking what someone would pay for a product is unlikely to return realistic results compared to presenting them with different options and analysing their behaviour around decision-making.
Using data to develop better products
Many insurance companies are already focusing on data collection at scale and actioning the insights they get from them. With data collection, Vera Neugebauer, Senior Research Associate at Cenfri highlights “Despite the increasing availability of data, much of it remains siloed and untapped.” They are hoping to tackle this through an open finance model where data is shared between financial service providers (FSPs) and/or third-party providers based on consumer consent. In 2023, they successfully completed a study around the feasibility of open finance in Rwanda which culminated in a tailored multi-year implementation plan, and they are repeating the process in Zambia.
Other companies are using their own data to better understand the MSME market and recommend relevant products. During the Expert Forum, Charl Reyneke from Old Mutual South Africa explained how they used the 190 years’ worth of data from different parts of their business to develop personas that reflect the different types of MSMEs that might use their products. From these, they were able to guide an MSME to the relevant product by asking just a few questions. And over time they observed how customers were responding to the recommendations and using the products to further refine the personas.
Some companies have used data analysis to develop tailored products for their MSME customers. For example, Micro Insurance Catastrophe Risk Organisation (MiCRO) and their partners, developed an index-based insurance, “Mi Inversion Protegida.” Since its launch in 2019 it has covered more than 28,000 MSMEs - including hair salons, food trucks and agricultural businesses - against earthquakes and excess rainfall for all insureds and drought for insureds in rural areas.
So far, it has triggered over 18,000 individual payouts, many of which relate to the recent La Niña phenomenon. As MiCRO's Head of Products, Iker Llabres, explains “The quality of the indices increases over time as more and better information can be collected and used to iteratively improve the modelling of the perils covered, in more detail understand the vulnerability of the target group and finetune payouts to the beneficiaries.”
The WFP has also been using data to develop products that support resilience in some of the poorest countries in the World, such as Haiti, where, Gonçalves explains, “constant monitoring and evaluation have led to product enhancements that improved coverage.” In 2022 they introduced their R4 Rural Resilience Initiative to address both climatic and non-climatic drivers of vulnerability. After implementing it throughout 2023 and monitoring how the 10,565 smallholder farmers covered were benefitting from the index-based insurance, they were able to make notable improvements. For example, now, whilst the average sum insured is unchanged, there has been an increase in the payout frequency.
Ensuring data supply in the future
All these examples highlight the importance of leveraging data to develop effective products that meet the needs of MSME consumers. Whilst there are clearly challenges around how to collect relevant information for such a varied group of users with diverse requirements, using data to inform decision-making can help improve the chances of success for both insurers and the insured.
As Kapekele explains “For MSMEs, access to tailored insurance solutions can foster confidence and stability, enabling them to focus on growth and innovation without being bogged down by the fear of unforeseen risks... for the insurance sector, embracing data-driven approaches can lead to enhanced profitability and sustainability. By accurately assessing risks and tailoring solutions accordingly, insurers can reduce the likelihood of underwriting losses and claims payouts, thereby improving their bottom line. Moreover, by catering to the specific needs of MSMEs, insurers can tap into a vast and underserved market segment, unlocking new growth opportunities and diversifying their revenue streams.”
Given the importance of gathering and analysing data for this sector, the MSME BPG is developing a toolkit to help the inclusive insurance sector use data insights to help MSMEs access and benefit from insurance products which will be released soon. In the meantime, BPG members Andrea Camargo (WFP), Raimund Synders, Violet Kapeleke (Hollard Zambia), Carlos Boelsterli (MiCRO), the Nigeria Microfinance Platform, and CNSEG representatives engaged in data work in Brazil are available for consultation.