Unlocking the SME insurance market through a holistic approach to building resilience.

I recently moved into an apartment above a popular Cape Town restaurant, the owner of which is also my landlord. Last week, the restaurant had a major leak that took a plumber three days to fix. Fixing a leak could reasonably be considered an infrequent, but “normal” business expense for a restaurant. However, this expense has occurred during a period that is anything but “normal”. My landlord mentioned that, as a result of government-enforced COVID-19 restrictions, his restaurant’s sales in 2020 were only half of what they usually are over the holiday season.

Across the world, small businesses like my landlord’s restaurant have been made increasingly vulnerable as the pandemic has dragged on over the last year, but they still face all of the other risks and expenses they would have faced in the absence of COVID-19. Some of the short-term fixes (such as credit) that have helped small and medium-sized enterprises (SMEs) through the early stages of the pandemic are also adding further stress to these enterprises. On top of “normal” operational expenses and risks, they are dealing with reduced revenues, supply chain disruptions and, now, loan repayments.

In principle, insurance should be at least part of the answer. We’ve been studying the role of the insurance sector – and insurance policy – in driving resilience, for a number of years. With the World Bank and FSD Africa, we conducted deep-dive studies across four sub-Saharan Africa (SSA) countries to really understand the dynamics of the insurance industry and what that means for resilience outcomes. The findings show that insurance matters for sustainable development and that supporting business resilience is one of the three primary transmission mechanisms. We found that even in more optimistic times, SMEs are vulnerable to a multitude of risks, all of which contribute to the high failure rate of SMEs. So, insurance should be able to help.

Yet, despite a clear need for effective risk coping mechanisms, only 2% of MSMEs in SSA have insurance – and most of that is personal rather than business insurance (Sahler & Gray, 2020). SMEs don’t see the value in existing insurance products or don’t trust insurers to pay claims reliably and in good time, while insurers struggle to find a commercial business case that enables them to design and offer tailored solutions for the diverse set of enterprises found across economies in SSA. Unlike with large corporates, it is not commercially viable for insurers to design and offer individualised solutions to SMEs.

What is required is a reframing of the question that insurance providers ask themselves, from “which insurance products can we sell to MSMEs?” to “what are the risks faced by MSMEs and how can we help them to address those risks?”. This reframing reflects the common refrain to take a customer-centric approach by understanding needs – in this case of small and medium-sized businesses. However, it’s the second part of the question – “how can we help them to address those risks?” – that requires the more fundamental paradigm shift among insurance providers.

SMEs don’t need insurance per se. What they need is to improve their resilience to risks. Building resilience requires a holistic approach to risk that incorporates understanding, prevention, management and mitigation. Insurance policies focus on the response to a risk event – being able to pay the costs by transferring risk to an insurance provider. The insurance mechanism, when it works well, enables policyholders to respond effectively to the immediate financial impact of a risk event. But this is just one component of resilience and hence just one part of what MSMEs require. The insurance industry’s understanding of risks makes them well placed to provide a broader offering to MSMEs, where businesses are better placed to understand and hence manage their risks upfront, mitigate the impact of risks and recover from it. So, insurance is just one of the components that contribute to building greater resilience. This broader offering covers:

• Helping SMEs to understand and assess their risk: Insurers are experts at understanding risk. Through direct engagement or group-based training sessions, insurers can provide guidance to SMEs on how to assess their own enterprise’s risks. Several tools exist (and can be further developed) that provide SMEs with a tangible mechanism to consider their primary risks deliberately and exhaustively.
• Engaging in risk prevention, management and mitigation: New technology increasingly offers the opportunity for SMEs to proactively monitor high-risk operations in real time, so as to be better able to anticipate and manage risks. Parsyl and Lumkani offer two examples of the innovative application of technology to manage risk:
  • Parsyl provides goods-in-transit insurance for perishable cargo such as vaccines. Its insurance offering is bundled with quality-monitoring technology. The sensors monitor the cargo’s temperature, humidity, location and exposure to light. Doing so provides significant and immediate customer value by reducing spoilage.
  • Lumkani, a provider of fire insurance in South Africa, offers customers early-warning heat detector sensors to mitigate the risk of fire. These sensors alert customers to fire outbreaks. If after 20 seconds the sensor still senses a fire, it signals to all the devices within a 60-metre radius that a fire is breaking out, thereby encouraging a community response as well as automatically contacting the fire department.
• Optimising their response: Insurance policies already provide a valuable mechanism for SMEs to cope with a risk. However, smooth, easy and fast claims pay-outs are critical to offer value to SMEs for whom cashflow is a critical concern. Furthermore, even with the most efficient claims pay-outs, there is typically some time lag to enable claims assessments. The pay-out also rarely covers the full scale and effect of the risk event. Therefore, insurers can consider bundling their insurance product with mutually supporting coping mechanisms, such as short-term trade credit.
• Supporting recovery: For insurers, the claims pay-out is typically viewed as the concluding stage of the process. However, for the SME, receiving a claims pay-out is just the start of the recovery process. Research that we are currently conducting on the impact of COVID-19 on MSMEs in Morocco[1] has highlighted that one of the greatest concerns for small business owners is the detrimental impact the pandemic is having on the mental health of their employees – to the extent that several suicides have been recorded in the industry. This speaks to a need for solutions that don’t just stop at a financial pay-out but that rather support a holistic recovery. In Bangladesh, for example, Green Delta Insurance company provides mental counselling, a trauma allowance and training sessions to entrepreneurs post-disaster.

These offerings can result in a win-win situation in which SMEs recognise tangible, valuable solutions worth buying, while insurers are able to gain more and better data on SME clients, which will enable them to enhance their risk modelling and reduce claims incidence if solutions support prevention and management of risks, rather than just response.

In summary, then, SMEs are not looking for insurance but rather for ways to deal with their risks and build their resilience. Holistic solutions that offer SMEs both greater tangibility and value are far more likely to be successful and resonate with SMEs than traditional insurance products. Getting this right will not only build the resilience of SMEs, which constitute the backbone of emerging economies but also provide a strong growth opportunity for insurers.

[1] In partnership with the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) and Allianz