Opportunities await insurers and tech providers who are willing to work together

Insurance is a key tool that provides businesses with protection and resilience against risks and that enables them to better bounce back from shocks experienced. However – despite its potential positive impact – micro, small and medium enterprises (MSMEs) largely view insurance as a “grudge purchase” that does not provide them with any value. This is reflected by a clear gap in MSME insurance uptake, especially in developing economies. For instance, only 3% of MSMEs in Malawi and only 2% of MSMEs in Lesotho have insurance cover.

Yet, MSMEs are often in dire need of protection against shocks, given that a vast share of them are either unable to cope with shocks or rely on unsustainable coping mechanisms. This is reflected in the findings of a FinScope study from 2018, which reveals that 31% of MSMEs in Uganda did not have any strategies in place to cope with risks faced, such as loss of livestock and crop failures. As a result, even a relatively small shock like a water leakage or electrical fire can severely threaten MSMEs’ continuation and survival. The COVID-19 pandemic made the cracks in MSME resilience more visible than ever, forcing many MSMEs to shut down – an ILO study conducted across eight countries in 2020 found that 70% of surveyed MSMEs had to shut down due to the pandemic.  

Given that MSMEs form the backbone of many economies, we need to ask ourselves: Where does this lack of perceived value of insurance stem from? It is not only the often cumbersome and unreliable claims processes but also the lack of tailored solutions that really speak to the needs of MSMEs. Insurers often only rely on off-the-shelf products, partially due to a lack of sufficient data on MSME needs and risks.  

To better serve MSMEs and to offer this segment real value, a new approach is required – one that fosters business resilience by offering solutions that speak holistically to MSMEs’ needs. Tech providers already offering value-added services that speak to MSMEs’ needs offer a promising avenue to achieve this, especially in light of the accelerated uptake of digital solutions due to the COVID-19 crisis. According to a study conducted by UNECA in 2020 in sub-Saharan Africa, 65% of surveyed MSMEs have reported that COVID-19 has accelerated their digital transition, while 36% shifted to new technologies. For example, Nomanini (a South-African-born fintech offering value-added services such as digital payments, supply chain management support and loans to MSMEs) has more than doubled its customer base between 2020 and 2021. Bundling these technological solutions with insurance will enable the design and offering of a tangible solution and unlock a simpler purchasing process that does not require MSMEs to purchase the tech solution and the insurance cover separately.  

So, the value for MSMEs in bundling insurance with tech solutions seems clear, but what do insurers stand to benefit from it? We see four main advantages arising for insurers from partnering with tech providers: 

• Unlocking the developing of tangible products. Since insurance is usually only useful in an event of a major shock, bundling it with a technology solution that assists MSMEs in addressing their day-to-day needs provides more tangibility to MSMEs. This can enable insurers to overcome longstanding trust and lack of value barriers. For example, crop farmers usually experience risks that affect their crops. They often struggle to deal with such risks, which then results in production and profit losses. Plantix is a mobile crop advisory app (developed by a German AI start-up) that helps farmers diagnose pest damages, plant diseases and nutrient deficiencies that affect crops, and it offers corresponding treatment measures. Bundling a crop insurance with a technology solution like Plantix does not only provide protection and financial benefits to farmers, should they experience large-scale crop losses due to natural disasters or other risks, but it also assists MSMEs in managing the risks of crop diseases.  

• Reduced exposure to claims risks. Bundling insurance with a technology solution that helps MSMEs to mitigate or prevent risks also helps insurers to reduce their exposure to claim risks. Reducing exposure to claims risks will make it more feasible and profitable for insurers to serve MSMEs, from a business point of view. The bundled solution offered by the South African company Lumkani is a good example of this. Lumkani assists MSMEs in detecting fire outbreaks by providing early-warning heat detector sensors. It also offers a fire cover insurance, should there be a fire outbreak. Since Lumkani’s feature helps MSMEs to mitigate the risk of fire outbreaks, insurers find it more profitable to serve this segment, as MSMEs will be less likely to claim. 

• Access to data. A lack of data on MSMEs, particularly on the risks and needs that they face is one of the major challenges that prevent insurers from entering into the MSME market segment and from designing products that are well suited for MSMEs. Tech providers already have access to data of MSMEs that are subscribed to their solutions, which insurers can leverage to design and offer products to better serve MSMEs. For example, the Ghanaian mobile app OZÉ collects and leverages MSME data on sales, expenses, payables and receivables to predict credit risk. Accessing data from tech providers like OZÉ allows insurers to better understand the needs of MSMEs and their corresponding risk profile. This, in turn, enables insurers to offer solutions that are tailored for MSMEs.  

• Tapping into existing MSME networks. Some tech providers that serve MSMEs already have close relationships with a large network of MSMEs which insurers can tap into to market and distribute insurance. For example, the Egyptian payment provider Fawry serves about 340,000 MSMEs, and many MSMEs regard it as a trustworthy partner.  

But not only insurers stand to benefit from such partnerships – product bundling also enables tech providers to further develop their business. Offering a bundled product together with an insurer broadens tech providers’ current product portfolio and enables them to cater even better for the needs of MSMEs. This fosters trust between MSMEs and tech providers, as MSMEs feel considered and cared for in remaining resilient against shocks. More so, partnering with insurers not only improves the engagement with their own customer base, but it also attracts new customer segments who are interested in holistic service delivery and managing their own resilience. By offering insurance to their customer base, tech providers also enable their customer base to grow sustainably. This, in turn, secures the future demand of the product(s) offered by the respective tech provider. For example, integrating a business interruption coverage into the existing product offering promotes the resilience of the tech provider’s business, should its customers face shocks that affect their ability to pay, such as natural disasters or social unrest.  

Insurance providers need to rethink their current approach to insurance if they want to capture the MSME market and enable their potential for growth, employment, and profitability dividends. Through cooperating with tech providers, insurers can offer holistic resilience products. These partnerships also enable insurers to access new data sources on riskiness and other MSME behavioural databases. Tech providers that are already successfully serving the MSME segment now have the opportunity to further widen their product portfolio to cater for MSME needs. However, the incentives and opportunities for creating such partnerships are not only determined by the willingness of private sector stakeholders to cooperate but also, to a large extent, by the enabling environment. Hence, policymakers, regulators and development partners have a key role to play in supporting the formation of partnerships and making the business case for holistic resilience solutions viable.