However, historical trend shows that the majority of MSMEs see insurance as an unnecessary expense and desist from buying it. Nearly 85% of the MSMEs in India are uninsured, according to data released by the Insurance Regulatory and Development Authority of India (IRDAI) in 2020.
“Even the MSMEs which subscribe to insurance products don’t do it on their own. They do it only when it is mandated by a buyer or a bank, or to meet some regulatory compliance,” says Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME).
For context, MSMEs contribute 40% to the country’s total exports and account for 45% of manufacturing in the country.
Small businesses generally fail to understand that insurance products should not only be seen as tools to reduce business risks as they can be leveraged to cut costs of services such as financial services, adds Bhardwaj.Surendar Singh, Associate Professor, International Business Area, FORE School of Management, echoes the same views. “Insurance cover is particularly important for MSME exporters to mitigate potential risks, such as loss of cargo, defaults by buyers, economic sanctions, floods and wars, among others. MSMEs need to understand the importance of insurance coverage in international trade transactions as they are highly dependent on third parties for their supply chain management. Thus, any kind of interruption or commercial risk related to third parties can significantly impact their business. In fact, it can turn their profit-making into a loss-making transaction,” says Singh.The total addressable market for SME insurance in India is estimated to be between Rs 1.5 lakh crore and Rs 1.8 lakh crore, according to a report by the International Finance Corporation (IFC) and IRDAI.Insurance and the MSME sector
The insurance sector in India has a mix of both public and private sector companies. These companies offer all kinds of products to exporters such as insurance for export payment default (ECGC), theft or damage of goods in factories or transit.
Sajja Praveen Chowdary, Head at Policybazaar for Business, sheds light on the different types of insurance schemes that are important for MSME exporters. Exporters require marine cargo insurance, product liability insurance, general liability insurance, business interruption insurance, export credit insurance and trade credit insurance, among others, says Chowdary.
However, most MSMEs are unaware of modern insurance products such as product liability, director liability and surety products, says Bhardwaj. “One area where a product is yet to be developed or approved is the surety product to replace bank guarantees. MSMEs have been awaiting the product since its announcement by the finance minister during the 2021-22 budget speech.”
Low insurance penetration
Singh of FORE School shares his concerns around the low penetration of insurance in the MSME sector despite these businesses being the backbone of domestic manufacturing. The current penetration rate in the insurance sector is less than 15% for MSMEs who have accessed credit.
He also agrees with Bhardwaj that lack of awareness among MSMEs is the key reason behind low insurance penetration in this sector. But adds that insurance companies also need to understand the business model of MSMEs and customise insurance products accordingly.
“Most MSMEs lack understanding of the technicality of insurance terms. The challenge arises when these companies file for a claim and learn about things not covered under the policy. This essentially means that there is a communication gap that needs to be addressed. Additionally, when any MSME gets classified in the caution list of RBI, it finds it difficult to procure insurance at competitive prices. The cost of insurance goes up significantly, which discourages MSMEs from procuring insurance,” says Singh.
Despite insurance being the most underpenetrated in the MSME sector, technology has been a massive enabler, with the role of online brokers and aggregators becoming more important, say experts.
“There has been more global news coverage of threats and unforeseen events with respect to the MSME sector. This has made business owners more aware of this risk mitigation strategy. The government has also been an enabler through government-backed insurance schemes,” adds Chowdary of Policybazaar.
