Tailor insurance to small businesses’ unique risks

Jan 13, 2023

Nine out of 10 businesses in Kenya are micro, small and medium enterprises (MSMEs), contributing 40 per cent of the GDP, says the World Bank.

But despite their economic and social significance, they are prone to unique risks and susceptible to sudden failure, hence the need to underpin their long-term resilience and sustainability.

MSME mortality rate is 75 per cent within the first three years, says a 2016 Kenya National Bureau of Statistics report; for every 10 start-ups eight collapse before they break even. While insurance is no guarantee for business survival, it can improve its chances by mitigating the impact of cataclysmic events.

MSMEs are vulnerable to a broad array of risks like theft, fraud, accidents and weather-related disasters, the illness or death of the owner, insufficient capital, limited market access and poor infrastructure.

They also face supply chain risks resulting from the failure of a key supplier or customer and delayed payments by debtors. Minimizing or even eliminating the catastrophic financial consequences of such risks requires a well-thought-out mitigation strategy.

But many MSMEs are either unaware that many of these risks are insurable, or simply fail to appreciate the role of insurance in managing risk. Also, lack of access to credit due to their perceived high-risk profile starves many of the much-needed cash.

The “State of SME Insurance in Kenya 2021” report revealed that most MSMEs rely on a variety of coping mechanisms in lieu of insurance. These include the owner’s personal savings as a fallback during crises and others on the financial goodwill of the owner’s relatives and friends. Some even resort to selling assets. But such approaches may be unreliable or inadequate compared to insurance, especially when confronted with sudden, disruptive events.

So, apart from encouraging MSMEs to embrace insurance as a risk management strategy, insurers must innovate products that are responsive to their unique risk profiles. Insurers should not force products on MSMEs; it exacerbates apathy for insurance.

Instead, underwriters should come up with products that resonate with the distinctive needs of this under served market. For instance, they could consider policies that cover multiple risks— like fire, explosions, water, theft, weather, riots and business loss arising from sudden disruptions—as opposed to selling many products to one customer.

‘SUAVE’ criteria

Policies should be tailor-made to MSMEs as a distinct segment or customized for firms, and simple to deliver. Insurers can borrow the Simple, Understood, Accessible, Valuable and Efficient, or ‘SUAVE’, criteria developed by Microinsurance Centre.

Fortunately, digital innovation in financial services has made insurance products more accessible and affordable, besides facilitating the seamless purchase and claims processing. A small business can now buy insurance online in a matter of minutes, knowing they will not have to make endless visits to the insurer’s offices to get their claims paid.

Digital platforms are not only more transparent by allowing customers to compare product prices but also deliver convenience, thus saving business people time to concentrate on more pressing issues.


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