Emerging Insight: Rethinking insurance for MSMEs
10 December 2020
A new paper by the Microinsurance Network presents key insights on how to provide better risk management solutions to micro, small and medium enterprises (MSME).
One main idea of the paper is to look at MSMEs within the value chain to understand their risk needs. For instance, rather than segmenting MSMEs by size (typically using number of employees), it may be more relevant to look at MSMEs by business sector as there is likely to be more homogeneity within a value chain. Further, value chains present opportunities for aggregation, such as associations, cooperatives or suppliers of the MSMEs.
Another key aspect from a value chain perspective is to look at the risk management needs of MSMEs from a holistic perspective and offer risk mitigation services that go beyond risk-transfer mechanisms such as insurance. For instance, as presented in an earlier paper by Cenfri, focusing on a specific value chain helped to identify the risks and solutions of MSMEs operating within the Ghanaian road transport and logistics sector. When looking at the risks faced by MSMEs in this sector, it was found that risks related to the vehicle’s driver were the primary challenge.
Some risks related to drivers are preventable. Accidents or delays may occur because of basic human error, tiredness or alcohol consumption. It is possible to mitigate the impact of these risks through solutions such as the ones below that some MSMEs have already implemented:
Insurance providers could offer some of these services to prevent risks while bundling them with more traditional risk transfer products. This would allow insurers to address the MSME’s primary risk need, add tangibility to their insurance offering, and mitigate against their own risk of claims.
One main idea of the paper is to look at MSMEs within the value chain to understand their risk needs. For instance, rather than segmenting MSMEs by size (typically using number of employees), it may be more relevant to look at MSMEs by business sector as there is likely to be more homogeneity within a value chain. Further, value chains present opportunities for aggregation, such as associations, cooperatives or suppliers of the MSMEs.
Another key aspect from a value chain perspective is to look at the risk management needs of MSMEs from a holistic perspective and offer risk mitigation services that go beyond risk-transfer mechanisms such as insurance. For instance, as presented in an earlier paper by Cenfri, focusing on a specific value chain helped to identify the risks and solutions of MSMEs operating within the Ghanaian road transport and logistics sector. When looking at the risks faced by MSMEs in this sector, it was found that risks related to the vehicle’s driver were the primary challenge.
Some risks related to drivers are preventable. Accidents or delays may occur because of basic human error, tiredness or alcohol consumption. It is possible to mitigate the impact of these risks through solutions such as the ones below that some MSMEs have already implemented:
- Inserting tracking devices to track speed, distance travelled, stops etc. of every truck and driver.
- Educating their drivers on road safety by sending them on short courses on safety driving.
- ‘Testing’ the reliability of new drivers by only sending them on short distance deliveries during their initial period at the company.
- Having trucks inspected on-site by the engineers that they employ, who are tasked with checking the condition of the trucks before drivers begin any new assignment.
Insurance providers could offer some of these services to prevent risks while bundling them with more traditional risk transfer products. This would allow insurers to address the MSME’s primary risk need, add tangibility to their insurance offering, and mitigate against their own risk of claims.