MSMEs form the backbone of many economies globally and give rise to economic growth, employment and innovation. The ongoing COVID-19 crisis has highlighted the extreme vulnerability of MSMEs to exogenous shocks and risks.

However, the uptake and use of insurance remains extremely low for this group. In sub- Saharan Africa, it is estimated that less than 2% of all MSMEs have any form of insurance. Few MSMEs have any form of insurance cover to help shield them. Even those that have insurance are only covered for the personal impacts on their health expenses, while their enterprises remain highly exposed to risks.  

Whilst COVID-19 has especially exposed the vulnerable MSMEs to a high level of risk, the pandemic is just one infrequent and specific risk. Across the world there is a lack of adequate MSME insurance. This is particularly pronounced in emerging markets, where MSMEs are often overlooked by banks and insurers – that usually target large corporate businesses. Even alternative financial institutions, such as Microfinance (nstitutions (MFIs) and Savings and Credit Cooperative Societies (SACCOs), or microinsurers – which tend to serve micro-businesses, also do not meet all the needs of the MSME market. This gives rise to what is known in the MSME literature as the ‘missing middle’.  

There is a need for markets insurance market actors, including providers, regulators and development partners need to rethink MSME insurance because current approaches are clearly, with a few exceptions, not working. A number of key challenges exist, that make serving the MSME target market particularly challenging for insurers. This note discusses the following challenges and possible solutions:  

• Inadequate risk management strategies  
• Rapidly changing risk management needs  
• Lack of awareness of insurance  
• Insurers’ lack of knowledge about MSMEs as potential target market  
• High heterogeneity of MSMEs 
• MSMEs are difficult to reach for insurers  
• Regulatory barriers  

In light of these obstacles, three areas of opportunities have emerged for insurance providers:  

1. Deepen the understanding of MSMEs and their needs. A lack of data and understanding is a major challenge in designing fit-for-purpose insurance solutions for MSMEs. The high level of heterogeneity of MSMEs requires thoughtful segmentation and disaggregation of the group to identify subsets with similar risks for a customer-centric approach.  
2. Offer risk management and risk transfer solutions. The focus of nearly all MSME insurance that does exist is on the development of insurance policies, in other words, the transfer of specific risks from enterprise to insurer. However, the mitigation and management of specific risks that either reduce the likelihood of occurrence or the scale of the risk when it does occur offers a potential win-win. New technologies, such as IOT sensors and apps, make these types of offerings increasingly feasible to incorporate as part of a ‘holistic’ resilience solution.  
3. Strategic partnerships with aligned incentives are key. As MSMEs are too small to individually constitute a sustainable business case for insurance providers, aggregation of subsets of MSMEs with similar risks and needs remains important. What also remains critical is that the incentives of the partners are well aligned with each other and the end client to ensure the sustainability and value of the insurance solution.  

This note is produced by the Microinsurance Network’s (MiN) Best Practice Group (BPG) on Insurance for MSMEs. It draws on the joint expertise and experience of group members to articulate the challenges for MSME insurance and identifies key considerations and opportunities to rethink the approach to MSME insurance.