It is difficult to sustainably run a business in a volatile environment. This is especially the case for most small and medium enterprises (SMEs).
These business operations are majorly owned by sole proprietors and may not have adequate reserves to withstand material disruption from economic shocks and other eventualities such as unavailability of the business owner from death or illness. By taking up relevant insurance covers, SMEs in Kenya can improve the resilience and continuity of their business operations as well as contribute to the country’s sustainable economic development.
SMEs are a key contributor to the economy not just in Kenya but globally. The World Bank estimates that 90 percent of businesses globally are small and medium enterprises (SMEs). In Africa, they account for 80-90 percent of businesses according to the International Finance Corporation.
In Kenya, the sector accounts for 24% of the GDP and 93% of the economy’s entire labor force, according to the Ministry of Investments, Trade and Industry in 2020. It thus makes economic and social sense to sustainably boost the growth of SMEs, especially right now when the country is facing acute unemployment, with over 2.9 million Kenyans being jobless according to the Kenya National Bureau of Statistics of 2022.
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 in which such entities operate in. For instance, according to Kenya’s National Bureau of Statistics Medium and Small Enterprise Covid-19 Survey of 2020, about 20% of SMEs closed permanently due to economic hardship after the Covid-19 outbreak. Most of these entities had not taken protection against business interruption from this unforeseen event. They also did not have any other form of risk management to withstand or recover from such an 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 business owners to focus on core business with assurance of continuity no matter the changes in the business environment.
Other benefits of insurance include increased confidence in 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.
Micro-insurance as a cost solution
While insurance is important, some start-ups may not afford it. Insurance is still perceived as a luxury though the majority know it as a necessity. This is due to the high cost of insurance coverage. As a result, the country has recorded low insurance penetration at 2.4 percent, a rate that is low compared to economic growth. To reduce the protection gap from uninsured economic operations, Kenya started offering microinsurance in the early 2000s and approved the microinsurance regulations in 2020. More than before, insurance is now affordable and accessible to the masses via various distribution channels such as through mobile phones. Owners of SMEs can now take insurance protection for their own lives and their businesses. This is against loss of life and reduced or loss of income from such eventualities as ailments, political violence, disruption of the supply chain, and emerging risks such as cyber-attacks and reputational risks.
Kenya Reinsurance Corporation is keen on significantly contributing to Kenya’s economic resilience by offering sustainable solutions to direct underwriters. Besides mainstream solutions, the Corporation has introduced micro-insurance in its product offerings. This is through collaboration with one of the leading local insurance firms to offer protection on a short-term basis. The Corporation is also at the advanced stages of finalizing the uptake of micro-life risks as part of its strategy. This is also being done through partnerships with local life assurance companies, making the product accessible and affordable to local SMEs. In addition, the Corporation has enhanced its capacity for specialized risks such as cyber risk and reputational risk to tap local business, which has otherwise been ceded out of the country. These products further enhance the resilience of SMEs and the wider economy.
As the risk profile of SMEs changes, insurance solution providers and relevant stakeholders should collaborate to innovate effective solutions that are affordable and accessible to ordinary businesses. There is also a need to promote financial literacy, flexibility in pricing risks, and the creation of the right business conditions to increase the uptake of insurance in Kenya.
By Dr. Hillary Maina Wachinga, the Group Managing Director, Kenya Reinsurance Corporation Limited