Innovative insurance for SMEs


Innovation is important but the question is how does one do it. PHOTO | SHUTTERSTOCK

Micro, small and medium-sized enterprises (MSMEs) are critical to many economies worldwide. They contribute to job creation, economic growth, and social cohesion.

The Kenyan economy thrives on MSMEs. Given their labour-intensive nature, they contribute to filling the unemployment gap while favouring flexibility and innovation.

In Kenya, MSMEs constitute about 95 percent of all businesses and employ estimated 14.9 million people, constituting 80 percent of the entire labour force.

Notably, about 7.41 million MSMEs collectively contribute about 34 percent of Kenya’s gross domestic product (GDP). Sadly, more than 70 percent do not last beyond the third year.

These MSMEs are vulnerable to risks such as natural disasters, fire, theft, or legal disputes that could lead to financial losses or even the collapse of the enterprise.

However, despite the potential risks, many MSMEs lack access to insurance coverage, which could mitigate these risks.

Financial losses from an adverse event often exceed what MSMEs can cover with informal risk mitigation mechanisms or reserves.

Fortunately, the State is keen on encouraging MSME growth with targeted strategies, including efforts to formalise the sector and increase access to private sector growth, which stood at 11.7 percent in February 2023.

According to FinAccess Survey for the Insurance Industry (2019), the percentage of the population that rely on their own business as a source of livelihood has been declining from 18 percent in 2016 to 13 percent in 2019, pointing to harsh business environments and longstanding issues with business resilience.

The Covid-19 pandemic was an adamant time for MSMEs, as shown by the high rate of closures of more than 60 percent between 2019 and November 2022.

Given these figures, insurers have a significant role in meeting the risk management needs of MSMEs, not just for the survival of the businesses but also for Kenya and future generations.

MSMEs often lack sufficient risk management systems, exposing them to significant risks that could result in business failure.

Therefore, insurers have an opportunity to offer proactive risk management solutions to MSMEs by working with them to identify their risks and support the implementation of prevention and management mechanisms.

Formal insurance products are a crucial tool to increase the resilience of MSMEs. However, the uptake and use of insurance remain very low among MSMEs.

This, in turn, leads to a large and persistent gap in insurance provision for enterprises.

For a start, Insurers can leverage their greater understanding of risks than most small businesses to develop targeted MSME products that address specific risks businesses face.

They can bundle different types of mutually supportive insurance and non-insurance products such as credit or non-financial services, to provide more excellent value and convenience to MSMEs.

Insurers can also provide digital insurance, increasing accessibility to MSMEs.

Enterprises can access end-to-end insurance servicing using a mobile app, potentially boosting uptake and reducing the cost of insurance, making it more affordable for MSMEs.

Insurers can also partner with organisations that aggregate targeted MSMEs and have frequent touchpoints with them, such as financial institutions, agent networks, cooperatives, government, and digital platforms.

By partnering with these organisations, insurers can pool MSMEs with similar insurance needs, making it easier to offer tailored insurance solutions.

Additionally, insurers can offer targeted capacity building to MSMEs to drive growth.

Insurance literacy is another area where insurers can help MSMEs, as most need more knowledge to identify the risks they face and are unfamiliar with the role that insurance could play in managing these risks.

Insurers can design and support campaigns to raise awareness about insurance and improve the insurance literacy of MSMEs.

Insurers can offer proactive risk management solutions to MSMEs and provide them with more excellent value and convenience.

This will increase insurance uptake in the MSME market, reduce risks these enterprises face, and contribute to their growth and sustainability.

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