Insurance Solutions to Small and Medium Enterprises

Herfty Muzyamba

One of the distinct developments under the ‘New Dawn’s government is creating the Ministry for Small and Medium Enterprises (SMEs). The ministry seeks to drive the growth of the SME sector in Zambia. This move suggests that the government is cognisant of the critical role SMEs play. Its role through policy formulation is thus fundamental to the country’s economic growth, hence the need to promote growth and the ability to sustain profitable operations in the long term of the businesses in the SME sector.

Undoubtedly, SMEs are the bedrock of the emerging private sector in developing countries. Despite this significance, SMEs are not immune to undesirable exposures. These include accidental damage to property, loss of life, injury, theft, robbery, flooding, bad weather, fire, and other unforeseen events. Further, while the government has set the tone from the top, the question is what role the insurance sector will play to complement the government’s efforts. The need to develop additional new products is essential. Availability of the appropriate insurance policy cover is significant for the survival and success of the SME sector.

An SME is a privately owned business operated with few employees and a relatively moderate sales volume. However, this definition varies from country to country, depending on the level of development and the economy’s strength. For example, Hallberg (2000) posits that the upper limit for medium scale enterprises is between 100 and 250. Further, the lower limit for SMEs lies between five and ten workers, and the upper limit is between 50 and 100 workers.

SMEs are exposed to all business risk categories: property risk, liability risk, income risk, and personal risk, including political riots. According to random market research that I carried out, the majority of the SMEs do not have insurance cover to manage their risks. SMEs face challenges in utilising insurance as a risk mitigation mechanism due to several factors ranging from delay in claim settlement, incomplete compensation to SME claimants, high cost of premiums and lack of proper information dissemination and sensitisation by insurers.

Against this backdrop, there are critical questions that will guide our discourse:

  • Do owners of SMEs require education on the need to have appropriate insurance cover for their businesses to help them recover from losses associated with their operations?
  • Besides the motor insurance policy, is there a need to enact legislation that will make some of the insurance risks under the SME sector like fire and liability, compulsory or mandatory, achievable?

Research by the Insurers Association of Zambia (IAZ) indicated that numerous challenges negatively impact the growth potential of SMEs, including finance, labour, equipment, technology, inputs, and access to markets for products and services. Another big challenge affecting SMEs, particularly in Zambia, is the loss of business due to unforeseen eventualities (IAZ, 2017). Thus, this gap creates a massive opportunity for the insurance industry to provide appropriate solutions. The challenges faced by SMEs should be comprehensively addressed. Through stakeholder support, such as government, specifically, the new ministry of SMEs, the Pensions and Insurance Authority (PIA) and industry associations should advance this plan.

Evidence suggests that some of the challenges SMEs face include utilising insurance as a risk mitigation mechanism due to several factors. For example, delay in claim settlement, incomplete compensation to SME claimants, high cost of premiums and lack of proper information dissemination and education awareness by the industry.

Some of the recommendations that the insurance industry can consider to ensure that SMEs are adequately insured include;

  • The need to increasingly educate proprietors of SMEs on the need to have appropriate insurance cover for their business will help them recover from business losses associated with their operations. This could be done by encouraging & motivating business rapports where SMEs can easily access risk management information and insurance policy coverage products to avert any unforeseen business operational calamities.
  • Additionally, the industry needs to develop an improved, efficient and monitored decentralised claim settlement system to minimise the high level of bureaucracy and delays in claims processing. This will go a long way in encouraging more SMEs to take on insurance as a risk management tool. Technology and, specifically, automation will be the game changer to this challenge.
  • Making fire and liability insurance compulsory or mandatory will have positive externalities on businesses and the entire economy. This could certainly lead to increased comprehensive protection for both SMEs and large businesses, which will eventually result in increased premium income of the insurance industry, tax revenue to the government, increased employment levels and an increase in the capitalisation level of the Zambian insurance industry.
  • Given the profiles of SMEs, their risks vary, and the ability to afford the cost of insurance might be a challenge. Therefore, it is necessary to design customised policies that suit the needs of SMEs independently, considering that there are different potentials in different sectors of their operations. Regarding premium payments, a flexible payment plan could be designed for the unique needs of SMEs over a period.
  • Non-Life (general) insurance companies should consider partnering with other financial institutions such as  Micro Financial Institutions (MFIs) or Commercial Banks to educate and provide SMEs insurance cover products and payment channelled through the financial institutions that are least likely to default.
  • Insurers should avoid using highly technical policy wordings that SMEs have problems understanding as it affects compliance to policy terms and conditions, thereby impacting claim settlement.

In other markets or countries, they have developed specific mechanisms that respond to geographical or weather conditions as well as the economic drivers, for example:

  • The Philippines is usually faced with weather and geographical calamities such as Earthquakes, floods, and almost 20 typhoons every year. Pioneer Insurance, amongst other insurance companies, has tailor-made insurance products that meet the SMEs when these calamities are experienced. They have proven to work for them as millions of people lose their lives and businesses, but insurance comes to their aid.
  • Political instability or political violence in other countries like South Africa is notable, and any start-up company found in this space may shut down due to looting. This looting has been evident in the recent past in South Africa.  One way for the company to come back to life is by having a political violence insurance policy that would also extend to cover looting.
  • Another case that gains significance is Allianz Global and Specialty, a multinational company with a specific department that focuses on SMEs and meets their demands appropriately. From their website, under the solutions section, you will be welcomed by a phrase, “Tailored business insurance solutions for your risks and opportunities”.

The need to grow the SME insurance sector in Zambia is dependent on providing customer-centric solutions that can be customised to meet the specific needs of the SMEs whilst remaining affordable and easy to access.

Herfty Muzyamba
Underwriting Manager
Klapton Reinsurance Limited