Insurance is a vital tool for small businesses to not just manage risks but also protect their financial stability, comply with legal requirements, and maintain credibility. While insurance serves as a safety net that allows small businesses to navigate uncertainties and focus on their core operations with confidence, its penetration in the MSME sector has been a perennial issue. The insurance adoption rate among micro and small enterprises (MSEs) is reportedly below 15 percent for those who have accessed credit. For MSEs that have not obtained credit, the insurance adoption rate would be less than 10 per cent.
The reasons for low insurance penetration among small businesses are multiple. The biggest of them is a lack of awareness, especially for those in rural or less developed areas with limited knowledge about the benefits and importance of insurance 1 aamir khan 2 a infrastructure 3 abc india 4 abm knowledgeware 5 accedere 6 accel ace software exports.
“The major challenge for MSMEs is the awareness issue and on top of it is the challenge to access it. MSMEs don’t know about the products available to protect their business and what could be the tentative cost. Even if they know that insurance is good for their business and they are willing to pay for it, the challenge is around how they get the relevant information about the product,” said Abhishek Bondia, Co-founder of B2B-focused insurtech platform, SecureNow, in the webinar Bridging the gap of Economic value of loss & value of loss for MSME in India.
The webinar was part of a ‘#WithYouForYouMSME’ three-webinar series presented by Reliance General Insurance and powered by Financial Express Digital.
According to Amit Goel, Director & Principal Officer, Raghnall Insurance Broking & Risk Management Pvt Ltd, access to insurance is an issue among MSMEs because of a lack of awareness as commercial products, which MSMEs need, are complex or not very-easily-to-sell products. “I believe the distribution strength, which is based on the agency point of view, is not competent enough to probably take the right products to the right MSMEs. This not only leads to misselling but also a lack of trust among MSMEs that whether they are offered the right products”.
He noted that there are only 500-600 brokers in India and around a few hundred agents who understand the MSME insurance segment while there are over 63 million MSMEs in the country. “So, the lack of accessibility is huge and it will remain unless we are able to create that kind of background in terms of education and awareness about insurance,” he added.
Affordability, however, remains another key challenge as limited financial resources often force small businesses to prioritize other immediate expenses over insurance premiums. Moreover, the insurance industry is perhaps perceived as complex and bureaucratic, particularly for individuals with limited exposure to insurance products and services. “Small business owners also find it difficult to navigate the intricate processes involved in purchasing insurance, understanding policy terms and conditions, and filing claims.
Apart from that there is also a mindset issue among MSMEs that they are not vulnerable to unforeseen events in business”, said Rahul Kumar, Director, Finsense Insurance Brokers Pvt Ltd during the webinar.
“This is the reason why many entrepreneurs don’t buy insurance. Also, because of some bad claim experience in the past in their personal life, they don’t take insurance for their commercial establishment too,” said Mr. Kumar.
Importantly, according to experts, technology plays a significant role in facilitating insurance penetration among small businesses in several ways viz., online platforms, digital applications, data analytics, digital risk assessment, and bridging the overall gap in insurance penetration among MSMEs. Moreover, by leveraging technology, insurers may overcome barriers to insurance adoption among small businesses, such as accessibility, affordability, and complexity as technology-driven solutions can enhance convenience, customization, and engagement to make insurance more accessible and appealing to small businesses.
“While in a corporate set-up, a ticket size of an insurance deal is high and insurers can uniquely work on the deal, find the right premium and close the deal, in MSMEs, one needs products to sell on scale for instance, 10,000 or 50,000 or 1 lakh policies or more which has to be digitally done”, according to Amit Agarwal, Promoter and Director, Coastal Insurance Brokers Pvt Ltd.
Speaking at the second webinar Leveraging Insuretech Solutions: Empowering Agents to Drive Insurance Penetration under ‘#WithYouForYouMSME’ webinar series, Agarwal said, “Manually selling policies will bear a very high cost of acquisition and that the product itself will not be viable for the insurer. Digitally, you can capture analytics, understand the needs and sell policies online. The way you pay, look at those proposals, reach customers, etc., can be done digitally. Also, to reach rural areas, one has to go digital.”
In fact, “some of the insurance companies who have gone digital have started issuing policies and settling claims through a mobile application. Also, chatbots are being used. We have got a lot of these web portals wherein the comparison of quotes, etc., is happening digitally,” said Ashish Jhamb, Director and Chief Operating Officer, Infina Insurance Broking Pvt Ltd during the second webinar.
Technology-driven data analytics tools also enable insurance companies to analyze vast amounts of data and gain insights into small businesses’ risks and insurance needs. This data-driven approach allows insurers to create customized coverage options tailored to the specific needs of small businesses, ensuring more relevant and comprehensive insurance solutions.
According to Kanika Popat, CEO and Principal Officer, Shift Risk Insurance Brokers Ltd, since MSMEs are time constrained because of limited team size and access to finance, customized insurance solutions can help them.
“There could be bundled products wherein various aspects of the business can be covered which would make risk better for the insurer and it would reduce the bandwidth consumed by the entrepreneur. Bundled products could have a price advantage which can be passed onto them and further help in increasing the penetration,” said Ms. Popat.
Another critical aspect of insurance adoption among MSMEs is the penetration of finance in the sector. According to experts, both insurance and finance penetration goes hand-in-hand.
“On a holistic level in insurance, there are a variety of instances in the probability of default which could be covered through credit insurance or fire insurance or the currency risk which could be covered through hedging. Higher the insurance penetration, the probability of underwriting comfort from a credit perspective on the bank side will also be higher,” said Dhavan Shah, Country Head, SME Banking, YES Bank.
“Similarly, the depth of finance penetration in MSMEs would automatically lead to the inclusion of insurance as well because in most cases the basic insurance on the property, equipment and fire will get covered as part of the financing requirements,” said Mr. Dhavan Shah, Country Head, SME Banking, YES Bank in the third webinar Harnessing SME finance for growth and expanding insurance opportunities.
Mr. Amitabh Gupta, Chief Underwriting Officer, Reliance General Insurance echoed Mr. Shah on the importance of finance and insurance together. Mr. Gupta said that most of the MSMEs are in the unorganized sector and hence a lot of data that insurance companies need for insurance purposes is not properly captured by MSMEs in their books.
“If finance comes in, all these things will get formalized. So proper data would be available for insurance companies to provide services. This is one of the reasons why certain SMEs in the unorganized sector have not been able to avail of insurance benefits,” said Mr. Gupta.
Apparently, MSME insurance has a considerable distance to cover in India. Events like floods and the pandemic, which were not perceived as significant risks before, now have the capability to devastate micro and small businesses established through the hard-earned savings of entrepreneurs. These businesses lack any safety net, leaving them vulnerable to significant losses. Insurance is typically considered a push product and consequently, extensive efforts are necessary to drive insurance adoption for business protection and continuity.