Micro, small and medium enterprises (MSMEs) are the backbone of many local communities; they contribute substantially to employment and innovation, bringing goods, services and employment opportunities to local people, especially women and those seeking low-skilled jobs. The impact of MSMEs, however, is not just confined to where they operate.
Accounting for 50% of global employment and 90% of all businesses, MSMEs are vital drivers of global economic growth. Despite this, many of them are underfinanced and underinsured.
For those in climate-vulnerable countries, this lack of financial security can have devastating consequences. With limited resources to manage and mitigate risks, let alone recover following a crisis or climate-related event, MSMEs are left vulnerable and exposed – meaning they often fail within the first few years of trading. Considering their relevance to the global economy, this is a serious cause for concern.
Acting as a tool that can help MSMEs bounce back from disasters, insurance is, in this sense, a solution to building business resilience. And it can even help MSMEs become more sustainable – by providing access to tools, support and education, insurers can help them better manage risks, and make more productive and sustainable investments.
However, despite the benefits insurance can bring, uptake within the MSME market remains low. This – as Natalia Silva Niño, SMEs and Compensation Manager at Seguros Bolívar explained during the MiN’s Expert Forum on MSME Insurance – is because MSMEs often view insurance as a “grudge purchase”.
“We need to make MSMEs see us not as an expense but as an investment,” Niño said. “It is about MSMEs seeing insurance companies as a partner, to help them be sustainable, to help them cover losses. But to do this, insurers need to give them the services, education, and products they actually need.”
Changing perceptions
From a business perspective, the uninsured represents a USD 252 billion opportunity; for insurers, surely this is an opportunity they cannot afford to miss out on. So, what is causing current setbacks in MSME insurance uptake?
Product design – and size – seems to be the first port of call. As Brandon Mathews explained during the MiN’s 2022 June Member Meeting (JMM), for insurers to successfully access this market, they need to provide MSMEs with policies that offer smaller premiums. Of course, this does mean smaller commission values for agents. However, the wider financial benefit of such policies cannot be ignored. For the insurance industry to survive, global economies need to thrive. Delivering MSME insurance products is not, however, a simple case of restricting cover and claims pay-outs to lower premiums. These products need to meet the needs and expectations of MSMEs; in short, they need to help them succeed. Training and education for insurance professionals is therefore vital.
Resources such as the GIZ Compendium, compiles knowledge building products, training concepts for MSMEs and the insurance industry as well as innovative approaches to design and deliver insurance and risk management services for these businesses.
Of course, to design such products, insurers need data. Without it, insurers will neither have the capacity or ability to determine exactly what these potential policyholders are looking for and establish what risks they face.
When it comes to climate-related policies, for example, insurers need data to determine what access MSMEs have to risk mitigation tools. Without such knowledge, MSMEs will be unable to develop appropriate risk management strategies, leaving them open and susceptible to risks.
The MiN coordinates a Best Practice Group on the topic, encompassing our global network of members to help share data, regional knowledge and experiences and even success stories, with a view to helping insurers deliver worthwhile products that not only deliver value to MSMEs, but help build trust – an element which often acts as a major barrier to insurance uptake.
Perfect partnerships
Trust, however, isn’t the only barrier impeding uptake amongst the MSME community. Limited access to financial education and technology, and even geographical location, can make reaching these groups a challenge. However, thanks to the wider uptake and investment in the digital sector – a movement accelerated by the pandemic – opportunities for partnerships with technology providers are growing. Such partnerships are key for reaching MSMEs, not only for distribution purposes, but for bundling insurance products.
Take crop-advisory apps, such as Plantix, for example, which helps farmers diagnose and treat various crop-related issues. Due to its base content and aim of helping farmers mitigate risks and protect their livelihoods, such technology can – as Cenfri recently highlighted – lend itself to being bundled with crop insurance. From a distribution point of view, the target audience can be reached through an already established and trusted partnership; and what’s more, the potential policyholders are already taking steps to reduce and mitigate their risks, meaning claims are reduced, and premiums can stay low and affordable.
And as Cenfri points out, such approaches need not just be focused on agricultural businesses. Technology providers for early-warning heat detector sensors, for example, can lend themselves to be bundled with fire insurance, while cyber security software could lend itself to be bundled with cyber insurance, etc.
The power of ecosystems
The benefits of the digital transition do not cease there however. As revealed in the MiN’s 2020 Landscape Study, digital platforms are also providing new opportunities for insurers, especially when entering markets in Africa, Asia, Latin America and the Caribbean, where uptake in digital platforms is on the rise, especially in how they support the distribution of insurance to the MSME segment.
iBuild, a digital platform for self-build constructions, is just one example of how insurers can harness the opportunities presented by digital platforms. As Lew Schulman, CEO and Chairman of the Board of iBuild Global, explained during the aforementioned Expert Forum, the iBuild platform acts as an ecosystem, providing users access to everything build-related, from contractors and workers, materials and timetables – and thanks to a partnership with Britam, it offers users insurance.
A key element of encouraging users to take on any associated insurance products, however, is education. In the case of iBuild, users are educated on what would happen if workers sustained an injury, or if property was damaged or stolen; users are then educated on how insurance can cushion the financial blow of such an event. As Schulman explained, having the time to teach people about the value of insurance, and how it not only improves the quality of their lives but their loved ones as well, is vital to uptake.
From an access perspective, by leveraging such digital platforms, insurers are able to reach more MSMEs than ever before. From a resilience perspective, by supplying MSMEs with adequate insurance coverage, insurers are helping increase their resilience to external shocks and adverse events. All in all, it’s about bringing the world one step closer to closing the protection gap.
The value of supply chains
As well as partnering with technology providers, insurers can further increase their access to MSMEs – and therefore increase product uptake – through different distribution channels, such as banks and financial institutions (through credit-linked products), brokers, and even value chain aggregators.
Building insurance into supply chains is proving to be a popular avenue of exploration for insurers, and it has come as little surprise. As Mathews pointed out during the JMM: “Every small business is either selling a product to supply chains, or selling products of those supply chains.”
With a whole network of MSMEs using supply chains, value chain aggregators often present potential product-bundling opportunities for insurers; not only do they have established relationships with MSMEs, but they are well-known for offering value-added services as well.
Combined with their unique knowledge of the value chain and the risks faced by MSMEs, value chain aggregators can even help insurers design the right products for their target market, which when bundled into supply chains, can help reduce risk and build resilience.
When embarking on this distribution method, insurers have several key and important points to consider – especially when it comes to ensuring buy-in from value chain aggregators to distribute insurance and/or to bundle their existing value-added services with insurance.
This is a key focus of the V20-led Sustainable Insurance Facility (SIF), which is aiming to provide climate and disaster risk insurance for MSMEs in 55 vulnerable economies through distribution channels and aggregators. As Sara Jane Ahmed, Finance Advisor at the V20 said during the PSI after 10 years conference, such action will not only help move the V20 countries away from vulnerability, but it will steer them in the direction of resilience and prosperity.
From a global and economic perspective, this could be the solution the world needs. It is, as Chair of V20 Ken Ofori-Atta, Minister of Finance of Ghana, concluded, “all about building a stronger and more resilient future, one where enterprises are protected from future shocks and can prosper.”