Building enterprise resilience through MSME insurance

Covid-19 heralded unprecedented disruption that permanently redefined our post-2019 concepts of business normalcy. PHOTO | SHUTTERSTOCK

Covid-19 heralded unprecedented disruption that permanently redefined our post-2019 concepts of business normalcy. Among the worst affected were micro, small, and medium enterprises (MSMEs) that struggled to adapt to the new normal, requiring a robust disaster preparedness strategy.

According to a 2021 survey by the UNDP and the Micro and Small Enterprises Authority (MSEA), MSMEs were hit particularly hard by the disease due to their small size, limited liquidity, restricted access to capital, and informal nature. 

Almost half of the MSMEs had to shut down during the pandemic, with 46 percent of them closing for a year or more.

The financial impact was evident, with a staggering increase in restructured MSME loans and Non-Performing Loans (NPLs).

With one of risk management’s key tenets being insurance, the link between MSMEs, resilience, risk management, and now insurance becomes irrefutable. 

Entrepreneurs often argue that insurance is merely an unnecessary cost and that their attention and capital should go to core offerings.

However, insurance serves as a safeguard for MSMEs against financial losses arising from business, owner, or employee risks. 

By doing so, it prevents the need to resort to expensive coping mechanisms like depleting savings, taking out more loans, or limiting business reinvestment.

This underscores the importance of resilience and highlights the contrast between effective insurance coverage and costly coping strategies.

According to the Microinsurance Network, less than two percent of all MSMEs in sub-Saharan Africa have any form of insurance.

This damning statistic is corroborated by MSEA in its 2022 survey, which indicated that only six percent of MSMEs had insurance, with the proportion of insured MSMEs dropping even further in the manufacturing sector to 1.2 percent.

What makes this even more apparent is that while MSMEs account for more than 90 percent of private sector enterprises and 93 percent of Kenya’s total labour force in the economy, according to the Kenya Micro and Small Enterprises Policy for Promoting Micro and Small Enterprises (MSEs) for Wealth and Employment Creation, only less than 10 percent of MSMEs in Kenya are insured.

To reverse this situation where close to 95 percent of our MSMEs are uninsured, MSMEs, risk advisers, financial institutions, sector regulators, and even the national government must work to create homegrown solutions that speak to MSME challenges.

Firstly, the government should ease MSME formalisation as informal businesses cannot access insurance services without tax incentives introduced to offset the potential cost barriers expressed by MSMEs.

Secondly, sector regulators, especially those in insurance, banking, and trade should spearhead training to inculcate a proactive risk management approach in MSMEs.

Thirdly, as more MSMEs seek additional liquidity from formal lenders, lenders should compel MSMEs to take up adequate insurance coverage to access funding, and even consider a business’ insurance undertaking in their overall risk assessment.

The writer is an associate GM, Business Intelligence & Analytics at Minet Kenya.