Insurance for MSMEs: Meeting the needs of an underserved market

There is a big opportunity that many insurance providers are missing. Micro, small and medium enterprises (MSMEs) currently make up around 90% of businesses worldwide yet, despite being vulnerable to risks that could impact their livelihoods, very few have insurance. For example, in sub-Saharan Africa just 2% of MSMEs have insurance. And, in most cases, it is personal rather than professional insurance. This leaves a gap – a “missing middle” – that inclusive insurance providers can fill, although not without challenges. 

The small, heterogenous and un-networked nature of MSMEs makes it difficult to scale targeted insurance products, and a lack of standardisation around data collection and usage only adds to the challenge. But just because it might be harder to access this market, doesn’t mean the insurance industry shouldn’t try. The independent African economic impact agency, Cenfri, for example is already exploring several areas to support MSMEs, from nuanced segmentation to systems mapping to intervention design. Their research, supported by other industry partners, informed an interactive workshop at the Microinsurance Network’s June member meeting, during which attendees discussed the different ways to overcome these distribution and product relevance obstacles.

The challenges around developing MSME insurance 

Insurers face several challenges when trying to serve this group. MSMEs have inadequate risk management strategies; their risk management needs can change rapidly to meet their risk perception; and they often lack awareness of how insurance could help. As Anne Kamau, Director at AB Consultants, who has worked with providers in Egypt and Kenya, explains, “the majority do not know about insurance or where to get it, or its place in their risk mitigation strategies. Those who know, think it is expensive and not for their type of businesses.” 

On the insurers side, there is sometimes a lack of knowledge about the needs and challenges of MSMEs which makes it hard to develop relevant products. Lemmy Manje, Founder & CEO of FinProbity Solutions explains, that while “MSME insurance has great potential, it requires investment in understanding the real non-life and life risks facing MSMEs; traditional products like fire and property may not be appealing.” For example, because these businesses are vulnerable to the risks of the owner, family members, employees and their families, solutions covering multiple risks are often more attractive than single covers. MSMEs are also difficult to reach as their heterogeneous nature means they cannot be naturally grouped together, and there are several regulatory barriers to serving this group fully.

If insurers can navigate these challenges, they can reap the benefits of this underserved market. One way they can not only support MSMEs but also get closer to the end beneficiary and develop more relevant products is by going beyond risk transfer to help manage the risk. Given that the insurance sector has a much better understanding of different potential risks, they are well placed to advise and support MSMEs. This can be done through incentive programmes, education and using technology to support safe and secure risk reduction practices. These services could be sold in conjunction with insurance, providing customers with more tangible value than simply protection for a ‘what if’ situation while simultaneously reducing the number of claims by encouraging less risky behaviour. Another way that insurers can provide value, according to Kamau, is to adjust the way claims are paid. “Smaller benefits paid sooner are a better value proposition than bigger benefits that take longer to verify and settle.”

When it comes to reaching MSMEs, it makes sense for insurance providers to strengthen partnerships with those that have more direct access. As Cenfri explains, these partnerships, often with unusual and non-traditional organisations, are a critical factor to success. For example, lenders already have existing relationships with MSMEs and have established platforms, systems and processes to facilitate financial transactions. They are also likely to benefit from an uptake of insurance as it helps to mitigate their risk. Clients that are protected are more likely to continue repayments, even during adverse events, thereby ensuring certainty for the financial institution, as well as generating more revenue. Value chain aggregators can also play an important role in distributing insurance to MSMEs. Like lenders, they have existing relationships with the businesses and unique knowledge of the risks they might face within the value chain they operate in. They are also better positioned to bundle insurance products into holistic resilience solutions. Finally, digital platforms can support insurance providers by offering opportunities to better target distinct segments of MSMEs by collecting and analysing data about users so they can offer more relevant products. 

MSME market segmentation holds the key

Developing relevant and targeted products is crucial to successfully penetrating the MSME market, and key to this is efficient segmentation. Their heterogeneity can make it difficult, but there are two useful parameters to segment this group by. First, survivalist/ informal vs aspirational/ formal. This separates MSMEs by the extent to which they differentiate between personal and business insurance needs, and their abilities and motivations. For example, a mid-sized export company that participates in an international value chain is likely to have different insurance needs to a skilled self-employed worker. 

The other parameter is economic activity or the value chain they operate in. According to Kamau, this is the most relevant and easiest way to deliver solutions. The nature of MSME business operations and the sectors in which they operate can lead to different contextual realities but, by mapping value chains, insurers can identify risks and needs experienced by all the businesses that operate there. These cross-sectional commonalities can help to create higher levels of homogeneity, making it easier to develop scalable products. 

To segment MSMEs in these ways, however, requires good quality and, where possible, disaggregated data that allows insurance providers to understand the different types of customers and their needs. This has proven difficult for the industry historically. During the breakout discussion of the June member’s meeting, the group discussed the industry’s access to data and how it is used, examining how it could be improved in future. 

Tackling the data challenge to create relevant products

To get the most out of customer data, insurance providers need to have an organisation-wide data strategy that guides what data to ask for and when, based on how it will be used to inform decision-making. Having lots of data can be counterproductive if not all of it is relevant, as it requires more time to clean and analyse. And asking for too much information immediately can put off potential customers if it makes the process for requesting information too arduous. However, all of this is irrelevant if the systems and processes to collect and organise data are not in place. 

Currently MSMEs are not a target group, so there is little data captured by insurers themselves, and limited investment in supporting technology. Instead, many rely on distribution partners - such as digital platforms and data aggregators. These partners are already using insights from their data to help insurers develop better products and improve claims pricing and discovery. They can also use predictive analytics to increase sales. Having access to this requires insurance providers to develop good relationships with their partners. 

There are also challenges around how to categorise data correctly and consistently when collected from different sources and countries, so that it can be easily analysed. This is particularly the case when using data from distributor partners. Each partner is likely to categorise their data differently, based on different definitions (e.g., of what constitutes an MSME) and on the data privacy regulations in the countries they operate in. These regulations are especially relevant for MSMEs, as there is often a blurred line between what is private and what is commercial data, adding an extra layer of complexity. Insurance companies will need to standardise all these different data inputs to extract useful insights about their customers.

Beyond customer data though, there are several alternative sources that insurance providers could leverage. For example, government statistics, information from industry associations, data from public institutions (e.g., satellite and weather data), and from social media. While these don't offer precise data about customers and users, they can help insurance companies understand MSMEs across different segments and the context they operate in more broadly. The quality and availability of this type of data, however, varies greatly across countries. Focus groups, surveys and active outreach to customers can also be used to generate more specific insight into the needs and challenges of these groups. 

Developing MSME products that scale

Data analysis and market segmentation hold the key to developing MSME products at scale, so managing this data challenge is essential for tapping into this huge, global market. By bringing together all these different types of consumer information, insurance providers can build a clearer picture of the range of needs MSMEs face and how to address them. Therefore, it’s crucial that insurance and data providers find efficient ways of collecting and analysing the huge volumes of available data to better understand the diverse needs of their customers. In doing this, they can tackle the challenges of this underserved market by developing relevant, flexible and timely products that can scale.