To survive, SMEs must embrace insurance

Vandalised Quickmart supermarket in Mlolongo, Machakos County, July 12, 2023. [Samson Wire, Standard]

It is difficult to sustainably run a business in a volatile environment. This is especially the case for majority of small and medium enterprises (SMEs).

Their operations are majorly owned by sole proprietors and may not have adequate reserves to withstand material disruption from economic shocks and other eventualities such unavailability of the business owner due to death or illness.

By taking up relevant insurance covers, SMEs can improve resilience and continuity of their business operations as well as contribute to sustainable economic development.

SMEs are a key contributor to the economy not just in Kenya but globally. The World Bank estimates that 90 per cent of businesses globally are SMEs. In Africa, they account for 80-90 per cent of businesses according to the International Finance Corporation. In Kenya, the sector accounts for 24 per cent of GDP and 93 per cent of the economy's entire labour force, according to the Ministry of Trade and Industry in 2020.

It thus makes economic and social sense to boost growth of SMEs, especially when the country is facing acute unemployment.

This is however not the case since many SMEs shut down within the first few years after inception. The situation is exacerbated by economic shocks that may undermine the macro-economic environment.

For instance, according to Kenya's National Bureau of Statistics Medium and Small Enterprise Covid-19 Survey of 2020, about 20 per cent of SMEs closed permanently due to the Covid-19 outbreak.

Most of these entities had not taken protection against business interruption. They also did not have any other form of risk management to withstand or recover from such event. Having an insurance cover would have made these entities more resilient by transferring unpredictable risk to the insurers. The safety net created by insurance allows owners to focus on core business with assurance of continuity no matter the changes.

Other benefits include increased confidence by key stakeholders such as clients, financiers, regulators and business partners.

Insurance policies such as business interruption coverage, for example, provide vital support during times of crisis. In the face of disruptions such as fire, theft, or supply chain issues, insurance can compensate for lost or reduced income, sustain operations and ensure timely recovery.

While insurance is important, some start-ups may not afford it. Insurance is still perceived as a luxury though majority know it as a necessity. This is due to high cost of insurance covers. As a result, the country has recorded low insurance penetration at 2.4 per cent, a rate low compared to economic growth. To reduce the protection gap from uninsured economic operations, Kenya started offering micro-insurance in early 2000s and approved the micro-insurance regulations in 2020. More than before, insurance is now affordable and accessible through distribution channels such as mobile phones.

Owners of SMEs can now take insurance protection on their own lives and businesses. This is against loss of live and reduced or loss of income from eventualities such as ailment, political violence, disruption of supply chain and emerging risks such as cyber-attacks.

Kenya Reinsurance Corporation is keen on contributing to Kenya's economic resilience by offering sustainable solutions to direct underwriters. Besides mainstream solutions, we have introduced micro-insurance in our products. This is through collaboration with leading local insurance firms to offer protection on short-term basis.

The corporation is also finalising uptake of micro-life risks. This is being done through partnership with local life assurance companies, making the product accessible and affordable to SMEs.

-The writer is Group MD at Kenya Reinsurance Corporation Limited