Insurance coverage in the MSME segment is way behind and standalone MSME’s and SME’s require insurance coverage as a safety net for their business to withstand business risk and remain resilient to unannounced dangers that often hamper running business or enterprises in the MSME sector who often operate on lesser financial strength.
The MSME sector generates lakhs of employment and significantly contributes to the GDP of the country and over the years have proved that small and medium scale business are worthy for investments and demands insurance coverage in order to create a safer environment for business operations.
Insurance companies and different policy makers have the onus on them to create more acceptable and affordable insurance-based products that can cover various micros, medium and small-scale businesses thoroughly.
Being insured will ensure MSME businesses are in safe zone and ways of doing business will impact productivity and make risk free.
Insurance coverage for the MSME sector as they are one of the pillars of the Indian economy is a must for stability and protection, but various reports say insurance coverage is less in this sector as many MSME businesses are not aware of various insurance products that are available and importance why ensuring the business is essential.
Insurance companies are also lagging behind to some extent in creating insurance products for MSME business which are mostly owned by individuals and micro entrepreneurs. MSME businesses have overcome a lot of pressure to survive in the post pandemic era and made it to success. Current scenario and growth of MSME business and their contribution to the GDP of our country makes it more important for MSME business owners, entrepreneurs and policy makers and insurance companies to formulate wide range of insurance coverage that is affordable and bring in confidence to investors in MSME sector.
Investors look to invest in those areas which are safe and having insurance coverage will boost the confidence of the investors making medium and small-scale businesses more viable in the industry apart from government efforts.
Read more: https://smeventure.com/business-incubator-world-trade-center-sptbi-mumbai-technology-start-ups/
Importance of Insurance Coverage for MSME’s of all size
MSME businesses are categorized under different variations in terms of vast range of activities, sizes and nature of business. Small and medium scale industry and business provide a massive economic support to our country’s growth and considering the ways of doing business are different then main scale business.
As per the MSME ministry data, there are about 6.3 crore MSMEs in India, which provide employment to approximately 11.10 crore Indians and contribute to about 27% to the country’s GDP. This makes it all the more important for insurance companies to create products based on needs as per the business size of MSMEs.
MSME’s are remotely located in rural and semi urban cities. The location also makes the business of small , medium and micro industries susceptible to various kinds of theft, fire and business loss due to extreme weather conditions or remaining connected. There are risk factors that can aggravate and directly hit the economy. To make sure MSME‘s and SME’s business models are risk free, insurance coverage will be inclusive policy and help sustain business.
MSME insurance penetration should be part of overall policymaker objectives including insurance companies as report from the World Bank says, formal SMEs contribute up to 60% of total employment and up to 40% of national income (GDP) in emerging economies.
If we look at the MSME business, they are often driven by one person and prone to be more vulnerable to the personal risks of their owners and their family members. These compounds with the personal risk of their employees and simultaneously their families along with various business risks the MSME enterprise faces.
Finally, MSMEs often have a lack of trust in insurance as a low perceived value of insurance as a risk mitigation instrument. This skepticism is due to lack of direct experience of insurance and information of insurance-based products and distribution channels.
Insurance Coverage for MSME sustainability & Recover After shocks.
MSME‘s is mostly run by individuals’ or micro entrepreneurs who solely carry out all business-related activities from operations to marketing involving huge risk as they pour their saving or income to sustain and grow the business. It might happen even after long investments they get into loss, or some mishaps occur foreseen or unforeseen.
MSMEs first deplete their savings in response to a risk and are not able to recover fast for another unforeseen shock. To make MSME’s more resilient and respond fast to the variety of needs of the MSMEs related to their business operations and for the assets and persons involved, MSME insurance remains indispensable.
Types of risk in MSME business
Risks faced by small businesses can be classified four major categories:
- Hazard risks are shocks like fire or sickness. Insurance is well placed to cover this category of risks.
- Financial risks include risks that businesses manage around their cash flow, prices of goods or inflation. Insurance has some role to play here, particularly in credit-linked insurance, which can help a business to manage cash flow and pay off loans if a disaster strikes like the pandemic.
- Operational risks and strategic risks are external threats like competition or market forces, as well as internal risks around poor strategy and planning.
The question remains is the insurance sector well equipped to cover all types of risk in MSME business risk. Creating high valued insurance products that can cater to cover the majority of risk is required. High quality products will be valued against low quality that can undermine confidence in insurance coverage as a risk mitigation tool for sustainability.
Lack of trust in insurance in MSME business is often found as they avoid and a prominent hurdle in delivering on the social value of insurance. The government has emphasized the need to make the MSME sector more robust. To mitigate the risks and provide ways and means such as fire, theft, or worker safety as most of these MSMEs often are business ventures where the promoter has invested their lifetime savings or loans to start a business venture.
One of the major reasons is to cover MSME’s massively under insurance and make them resilient. As per studies 85% of MSME business are uninsured and if India has to reach the vision of 5$ Trillion economy, without insuring the MSME and SME business this will be critical to reach the goal as MSME’s being major contributors to the economy .
Insurance companies Realizing potential in the MSME Market
The insurance regulatory and development authority (IRDA) is taking up measures to bring maximum MSME’s under insurance coverage. Many private organizations also tied up with IRDA to cover MSME’s under insurance and help the entire ecosystem to survive and thrive.
IRDA has taken up initiatives to reach out to maximum numbers of MSME for insurance cover and make business risk free as insurance penetration in the SME market is less than 15%. And this same SME and MSME sector contributes around 40% to India’s GDP that makes the entire sector giving national importance to insurance of MSME business.
Max Life Insurance Company Ltd recently announced a strategic partnership with the Indian Industries Association (IIA) to provide life insurance plans to the Micro, Small, and Medium Enterprises (MSME) sector’s workforce in Uttar Pradesh (UP).
Under the recently announced IRDAI’s State Insurance Plan, Max Life aims to enhance accessibility and drive affordable insurance penetration across UP.
This will help secure 11 lakhs of MSME workforce and their families and help empower the ecosystem that focuses on growth and subsequently become resilient.
Creating Insurance Awareness among MSME business entrepreneurs
The fundamental and most important challenge before the insurance companies lies in creating awareness amongst MSME businesses and pushing products accordingly. As there lies a lot of communication gap and many of the owners still don’t realize the potential benefits of ensuring their business and bringing in stability making it risk free. Registered MSME have access to formal finance, and they can manage insurance cover but the majority of them still don’t have access to formal finance, so they don’t want to spend extra on taking up insurance and insuring their business.
In the Union Budget 2023, the honorable Finance minister, the updated Credit Guarantee Scheme for MSMEs would go into operation on April 1, 2023, with an injection of Rs 9000 crore into the corpus. This will permit an additional Rs 2 lakh crore in collateral-free credit guarantees, lowering the cost of credit by 1%.”
Fueling more credit in the market will give confidence to MSME business as they will have additional funds to spare for insurance and bring in required stability. Depending on industry size and financial requirements which are vastly diverse in nature, MSME’s have different insurance requirements. Sales teams from various insurance companies should work to continuously customer experience by communicating regularly and noting down their requirements within their financial budget.
To reap benefit what the MSME segment has to offer to insurance companies, insurers are coming up with various crafted policies and reap the benefits.