In the midst of the COVID-19 crisis, insurance should be a primary mechanism for many people across the world to cope. Instead, the limited penetration of insurance products in developing countries has pushed insurance to the periphery.

However, all is not lost. Insurers still have a key role to play in getting societies back to work through the support of enterprises and, in doing so, building consumer confidence in the insurance sector more widely.

Productive risk-taking is a concept that is central to how insurance can contribute to business growth. In simple terms the role of insurance products in contributing to enterprise development – and, by extension, economic development – is threefold:

1. By offering a pay-out to enterprises in the event of a named risk occurring, insurance enhances the resilience of enterprises.
2. Enterprises with insurance cover will, in turn, be incentivised to take greater risks that have the potential to enhance their productivity, i.e. engage in productive risk-taking.
3. Insurance can enable greater access to credit, by reducing the risk for lenders.

At present, only 2% of MSMEs across nine sub-Saharan African countries have any form of insurance – just 1.2 million self-employed individuals out of a total of 75 million across the nine countries.

The first role is fairly clear and well established. For this role to play out, however, enterprises need to purchase insurance policies before the risk event takes place. The opportunity for insurance to play this role in response to the COVID-19 crisis has unfortunately long passed. At present, only 2% of MSMEs across nine sub-Saharan African countries have any form of insurance – just 1.2 million self-employed individuals out of a total of 75 million across the nine countries. To make matters worse, even for the fraction of those insured enterprises that do have some form of business interruption risk insurance, pandemics are typically excluded.

Although equally important, the second role of enabling productive risk-taking is often less clear. Smallholder farmers provide a good example to illustrate this principle. Even when some crops or varieties of seed are found to be more productive than others, many smallholder farmers choose to grow less productive crops or seeds. 

This is due to smallholder farmers having very little capacity to take on additional risk. A lower yield in a given season, because of the wrong crop choice, can mean starvation for their families. Insurance, or similar products, entirely changes this equation. A crop yield insurance product now means that a farmer’s risk is transferred to the insurer and so the farmer is willing to take the risk and switch to the more productive crop. The key point to note here is that the farmer is better off with the insurance policy, as it has facilitated a shift towards a crop with higher yields, even when there is no pay-out. The same principle can be applied more widely and to MSMEs in particular. This has benefits both for the individual and the broader economy. The COVID-19 crisis represents an opportunity for this second role of insurance to take centre stage.

The COVID-19 crisis represents an opportunity for this second role of insurance to take centre stage. Across the developing world, the economic shutdown in response to the COVID-19 crisis has caused widespread hardship. With lockdowns being lifted, enterprises that are now restarting their operations are facing substantive risks. Not only do they face the risk of their employees getting sick, but they are also confronted with liability and reputational risk if consumers fall ill when engaging with them. Moreover, enterprises face the risk of another lockdown at short notice. This means that planning horizons will be short term in nature. For some enterprises, these risks, combined with the likelihood of reduced consumer demand and greater trading restrictions and regulations (as social distancing continues and purchasing power is reduced) may outweigh the benefits of reopening, or in the worst case, mean that they are unable to continue operations entirely. For the sake of individuals livelihoods and the broader economy, governments and societies need MSMEs to restart operations and ensure that they continue to operate sustainably.

Lastly, access to short-term liquidity, primarily in the form of credit is a critical priority for many MSMEs in order to navigate the economic crisis. Many COVID relief programs for MSMEs heavily rely on relatively short-term loans to overcome liquidity crunches. However, these loans have to be repaid during a time of recession/low growth and probably high uncertainty. This adds another layer of risk to MSMEs. This means that lenders will be very cautious to lend in the short term given the high risk of an inability to repay. Insurance can help to mitigate some of these risks for both enterprises and for lenders to those enterprises. This also implies an opportunity for partnerships between insurers and lenders to offer innovative solutions to support the sustainability of SMEs.

The role for insurers

This is where insurers can step in to play a key role in rebalancing the risk-reward equation for MSMEs; incentivising them to restart operations sooner and to engage in longer-term planning.

Insurers can:

1. Offer tailored insurance solutions that address the implications of COVID-19 for small businesses. This doesn’t mean providing an opportunistic pandemic cover but rather developing products that will address the specific needs of small businesses, such as the health risks to staff, the liability risks to customers and the potential business interruption risks of further lockdowns or trading restrictions.)
2. Help enterprises to understand and manage these risks. Offering advice and risk management services to enterprise policyholders; even going as far as providing PPE to enterprises for their staff and consumers and thermometers to enable ongoing testing of temperatures, for example; can both support their ability to mitigate risks as well as reduce the likelihood of claims to the insurers themselves.
3. Work with local and national government to understand the major risks, how to model them, how to mitigate them and how to take a risk-based approach to addressing these risks. Insurers have a unique capability to assess risk in a way that few governments do. For example, since 2014, Santam has partnered with municipalities around South Africa to provide disaster risk management capability support, which includes understanding the drivers of flooding, evaluating the capacity of the municipalities and communities to deal with the impact of floods, and proposing recommendations to assist in dealing with these events more effectively. This illustrates the unique supportive role that insurers can play to work with and advise governments’ understanding of risk.

Why should insurers step up?

Stepping in to support a government’s response and to help businesses get back to work comes at a high risk and a potential cost for insurers, at least in the short term. However, acting now should be seen as an investment in future returns:

• UNECA forecasts that economies across sub-Saharan Africa will shrink for the first time in more than two decades, by between 1.8% and 2.6%. Insurers’ existing market will undoubtedly shrink as enterprises fail and incomes reduce. Insurers should therefore consider however much can be done to sustain small enterprises and to retain jobs as a direct investment in future revenues.

This is the time for insurers to illustrate that they will be there amid the biggest global crisis in a lifetime. When typhoon Haiyan hit the Philippines in 2014, Pioneer Insurance had to pay out a large number of claims. The customer experience was so positive, that Pioneer benefited from three consecutive years of exponential revenue growth following the event. They had illustrated that they would be there for their customers when they were most needed. In contrast, some of their competitors started rejecting claims during the crisis and have never been able to fully rebuild trust.

Developing and offering insurance solutions amid the ongoing pandemic are risky and likely expensive for insurers. But now is the time for insurers to step up and play their role, to illustrate the value they can offer and to demonstrate to clients that they will be there when they are most needed. Long-term thinking may just result in long-term rewards.

This article was first published on Access to Insurance Initiative (A2ii)’s website. It forms part of the Risk, Remittances and Integrity programme, a partnership between FSD Africa and Cenfri.