Parallel session 10 Insurance to support MSME development

Hosted by GIZ

By Pedro Pinheiro Micro, small and medium-sized enterprises (MSMEs) make up at least 90% of businesses and more than 50% of employment worldwide. While insurance is increasingly recognised as a valuable risk management tool for their development, insurers still face numerous challenges to offer products that are valuable, appropriate and affordable to that segment. This session hosted by GIZ discussed some of those challenges and two examples of how insurers are addressing them successfully. Challenges of insuring MSMEs Meeting the insurance needs of MSMEs requires a focused approach. Banks and traditional insurers often consider them too small in comparison to other businesses they serve. They are not able to provide MSMEs with customised products and services offered to larger entities. Microfinance institutions too are normally not able to address the diversity and complexity of MSMEs’ operations, leaving them with no appropriate insurance coverage. In fact, MSMEs are not a homogeneous group. They are commonly disaggregated based on their number of employees: roughly 1 to 9 for microbusinesses, 10 to 49 for small businesses and 50 to 250 for mediumsized enterprises. This wide range of classification fits a variety of operations, in many industry segments, with completely different value chains. An insurer seeking to navigate this complexity has to gather enough information about one segment and specialise to be able to develop a sustainable business model. From red to green: minivan taxis cross the insurance hurdle

In South Africa, for a long time, the minivan taxis serving most of the workforce in large cities such as Johannesburg were kept on the margins of the insurance industry. Mostly run as one-man businesses, they had their risk assessed as individuals who often have no formal qualification to run a business, no formal job or no credit history. For a traditional insurer, these businesses would be considered almost uninsurable. This was keeping them out of the credit market as well. For insurance aggregator SA Taxi, this presented an opportunity. In partnership with the minivan taxi industry association and an insurer, SA Taxi was able to dive deep into the business to develop a viable insurance product to cover the industry. Using GPS tracking devices, SA Taxi mapped all the different routes and measured their profitability, allowing for the risk to be assessed and monitored individually, which resulted in more affordable premiums.

69 — Left to right: Gregor Sahler, Advisor, GIZ , Germany; Maroba Maduma, Communications Executive, SA Taxi, South Africa; David C. Muchiri, Associate Director, Equity Insurance Agency, Kenya 70 — Jeremy Gray, Engagement Manager, Cenfri, South Africa

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To achieve more efficiency and reduce the cost of claims in a segment with very high frequency, the insurer started to verticalise the value chain, importing spare parts for its own use and for retail, and opening its own mechanical shops. With an appropriate and affordable insurance coverage for their main asset, minivan taxi owners have gained more access to credit and the customers they transport are now also covered. Reducing MSMEs’ credit risk After Kenya’s regulator imposed a cap on loan interests in the country, the credit score requirements for customers to get their loans approved became stricter. For MSMEs which already found it difficult to keep an acceptable credit history, this meant getting pushed out of the credit market at once. To maintain their businesses, credit institutions had to find new ways of reducing credit risk. For Equity Insurance Agency, insurance became a valuable tool not only for providing a guarantee for the loans, but also for providing coverage for the businesses and promoting better risk management by policyholders. The Agency relied heavily on the financial data already available on the 13 million bank customers within the financial group. It segmented them to offer insurance products that bundled the credit coverage with other coverages fitting the businesses’ needs. The Agency thus shifted the insurable interest from the bank to the actual policyholder and gained its own customer base. Lessons learnt

• MSMEs form a complex and diverse category of businesses that need to be addressed by insurers in segments. Understanding the business and drawing the line separating it from the individual running it is crucial for developing insurance products that are appropriate and affordable. • Partnering with industry associations can be an effective way of gathering the information that insurers need to better assess the risk.

• Insurance can play important alternative roles for MSMEs in addition to the obvious risk transfer and coverage roles. It can improve risk management by requiring or encouraging mitigation measures.

It can also spur investment in

MSMEs, not only by facilitating access to standard credit, but also by allowing credit institutions to offer loans that better fit the needs of specific MSME segments.