From Fragility To Resilience: The Case For SME Insurance

The COVID-19 pandemic heralded unprecedented disruption that permanently redefined our post-2019 concepts of business ‘normalcy’.

Among the worst affected were Micro, Small, and Medium Enterprises (MSMEs) that struggled to adapt to the new normal, requiring a robust disaster preparedness strategy for business continuity.

According to a 2021 survey by the United Nations Development Program (UNDP) and the Micro and Small Enterprises Authority (MSEA), MSMEs were hit particularly hard by the COVID-19 crisis due to their small size, limited liquidity, restricted access to capital, and informal nature.

Almost half of the MSMEs had to shut down during the pandemic, with 46 percent of them closing for a year or more. The financial impact was evident, with a staggering increase in restructured MSME loans and Non-Performing Loans (NPLs).

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With one of risk management’s key tenets being insurance, the arch between MSMEs, resilience, risk management, and now insurance becomes irrefutable. Entrepreneurs often argue that insurance is merely an unnecessary cost and that their attention and capital should be prioritized towards their core offerings.

However, insurance serves as a safeguard for MSMEs against financial losses arising from business, owner, or employee risks. By doing so, it prevents the need to resort to expensive coping mechanisms like depleting savings, taking out more loans, or limiting business reinvestment. This underscores the importance of resilience and highlights the contrast between effective insurance coverage and costly coping strategies.

According to the Microinsurance Network, less than 2 percent of all MSMEs in Sub-Saharan Africa have any form of insurance. This damning statistic is corroborated by MSEA in its 2022 survey, which indicated that only 6 percent of MSMEs had insurance, with the proportion of insured MSMEs dropping even further in the manufacturing sector to 1.2 percent.

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What makes this even more apparent is that while MSMEs account for over 90 percent of private sector enterprises and 93 percent of Kenya’s total labor force in the economy, according to the Kenya Micro and Small Enterprises Policy for Promoting Micro and Small Enterprises (MSEs) for Wealth and Employment Creation, only less than 10 percent of MSMEs in Kenya are insured.

The above notwithstanding, considering that most MSMEs employ less than 10 staff and are heavily reliant on each employee’s contribution, insurance solutions such as medical, workmen’s compensation, personal accident, and key-man insurance provide MSMEs with necessary coverage in case of accidents, injuries, or illnesses. This not only supports the employees and their families but also helps businesses reduce the financial burden and potential legal liabilities associated with workplace incidents.

MSMEs also face a litany of potential legal liabilities such as product defects, professional errors, or even third-party injuries on their premises, not to mention growing General Data Protection Regulation (GDPR) violations. Liability insurance such as product liability, professional indemnity, general liability, and cyber risk insurance offers protection by covering legal defense costs, settlements, or damages awarded against the business. This prevents substantial financial losses and safeguards the MSME’s reputation.

With other conventional risks such as fire, property, political violence, and terrorism, as well as emerging risks such as climate change becoming more commonplace, it is evident that the greatest risk an MSME faces today is that of being uninsured.

To reverse this situation where close to 95 percent of our MSMEs are uninsured, MSMEs, risk advisors, financial institutions, sector regulators, and even the National Government must work together towards the creation of homegrown solutions that speak to MSME challenges.

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Firstly, the government should seek to ease MSME formalization as informal businesses cannot access insurance services without tax incentives introduced to offset the potential cost barriers expressed by MSMEs.

Secondly, sector regulators, especially those in insurance, banking, and trade should spearhead training and sensitization initiatives in their respective sectors aimed at inculcating a proactive risk management approach in MSMEs.

Thirdly, as more MSMEs seek additional liquidity from formal lenders, lenders should compel MSMEs to take up adequate insurance coverage to access funding, and even consider a business’ insurance undertaking in their overall risk assessment. This will not only guarantee the long-term viability of their loan advances to MSMEs but also ensure the sustainability of the enterprises they lend to.

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Fourthly, risk advisors, especially underwriters and intermediaries, need to innovate simple, affordable, and adequate insurance solutions for MSMEs, catering to their various specialties and idiosyncrasies, while enhancing the availability of these solutions through traditional and digital distribution channels.

Finally, the not-often-said fact about the reputation of a business is that becoming adequately insured is one of the most responsible business decisions made toward resilience. This way, owners of uninsured businesses focus their attention and capital to mitigate various risks.

While insurance is not a panacea, it can offer security and resilience for MSMEs. Providing adequate insurance coverage is a responsible business decision that helps protect their future. The road to recovery might be challenging, but with the right measures, MSMEs can overcome the obstacles ahead and thrive in the post-pandemic era.

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Mwenda Kimathi is an Associate General Manager, Business Intelligence & Analytics at Minet Kenya