Risk sharing beyond insurance: Strategies and options for SMEs

Small and medium enterprises (SMEs) operating in the tourism sector in South Africa are facing multiple hazards ranging from utility outages and social unrest to weather extremes and the lingering effects of the Covid-19 pandemic. These hazards disrupt SME’s business operations on a daily basis and threaten their survival in the medium term. To be better prepared to mitigate such risks, SMEs need to come up with innovative, cost-effective, and scalable risk treatment strategies.

There are four strategies that allow SMEs to ‘treat’ risks through preventive measures in advance of disruption:

1. Avoidance: Whenever a risk is too extreme, the best action to take is to eliminate the risk by withdrawing business activities and avoiding risk exposure. Consider a guesthouse located in a flood-prone area: removing critical assets from the guesthouse’s premises (e.g. outdoor seating arrangements) during flood season could eliminate the risk. If this is not sufficient to avoid exposure, a more drastic measure would be to relocate the entire guesthouse.
2. Reduction: Risks that are unacceptably or undesirably high need to be treated until the risk level comes down to a lower level of magnitude that is acceptable and affordable. Consider a restaurant – kitchen fires are a common risk. Through investing into risk reduction measures such as installing smoke detectors, buying class B fire extinguishers and training kitchen personnel on fire safety, the risk of kitchen fires can be effectively reduced.
3. Retainment: Acceptable risks can be retained. However, it is critical that business owners are aware of all possible consequences of the risk and able to shoulder all losses associated with the risk, should it occur. Think about a tour operator – extreme weather events such as floods may require last minute cancellations of tours. However, so long as the extreme weather events happen only occasionally and the associated loss in revenue is manageable, retainment is an appropriate risk treatment strategy.
4. Sharing: Finally, and most importantly, there is another strategy to treat risks that are unacceptably or undesirably high: risk sharing brings the risk level to a lower magnitude by reducing exposure and associated consequences through sharing the risk with business partners or third parties. The default risk sharing option for any business is insurance. Whilst insurance is arguably one of the most effective financial innovations, it may come at a heavy cost or – as is often the case for SMEs in South Africa – be geared towards larger enterprises and required eligibility criteria that SMEs cannot comply with.

But there is more to risk sharing than insurance. Risk sharing can also take the form of innovative partnerships between SMEs and their business peers. The ILO’s Sustainable and Resilient Enterprise (SURE) training programme prepares SMEs in South Africa’s tourism sector to forge risk sharing partnerships that are cost-effective and scalable. There are three types of risk sharing partnerships that can be implemented stand-alone or as a combination:

1. Shared services: Two businesses or more hire a third party or agree to share resources to access risk treatment solutions. Imagine a group of neighbouring businesses that decide to jointly invest into solar panels to mitigate electricity outages.
2. Early warning systems: A group of businesses collect, exchange, and monitor information about impending hazards. Consider a group of transport operators that establish a WhatsApp group to monitor road incidents to mitigate road assaults and crime.
3. Joint advocacy: A group of businesses unite and engage together in advocacy to achieve common business resilience interests. Think about a group of informal tourism businesses that establish an association to gain recognition and lobby government officials more effectively.

Risk-sharing partnerships are not rocket-science. But anecdotal evidence from the SURE programme suggests that few SMEs have so far incorporated risk sharing partnerships into their menu of risk treatment options. In South Africa, the ILO has launched a risk-sharing competition with the support of the GIZ to encourage SMEs to forge risk sharing partnerships that are cost-effective and scalable. Find out more about the winners and their innovative risk sharing solutions here.

The author of this blog post is Julian Schweitzer.