Insurers must rethink about the SMEs!
The Ghanaian economy is traditionally divided into three sectors; namely, the agricultural sector, the service sector, and the industrial sector. With a growth rate of 24.3 percent of GDP in 2016, the manufacturing sector still stands in its typical second place among the five industrial subsectors of Ghana. About 9% of Ghana’s GDP consists of the manufacturing sector, which has created over 250,000 jobs for the citizenry. The number of registered enterprises is said to be around 25,000, although more than 80% of them are SMEs.
The Ghana Statistical Service (GSS) considers firms with less than 10 employees as Small Scale Enterprises and their counterparts with more than 10 employees as Medium and Large-Sized Enterprises. Kayanula and Quartey (2000).
Insurance is a contract and a legally binding agreement between an insurer and an insured. The insured pays a premium while an insurer pays compensation or benefit upon the happening of a loss or an insuring event or a benefit upon maturity of the policy. Insurance covers named perils or where it is an all-risk policy, it covers everything except the named exclusions. This means that insurance compensation is for specified loss, damage, illness, or death. Insurance is a risk transfer mechanism. As individuals or cooperate entities, there are a lot of events that bring us a negative outcome upon their occurrence. Some of these events include fire, flood, storm, impact, earthquake, theft, burglary, accident, critical illness, death, infidel act of an employee, etc. When these events occur, it brings us death, permanent disability or temporal disability, loss or damage to properties. It brings us financial difficulty. In simple terms, the risk is cost. Insurance helps to transfer this cost.
We also know that; risk is the uncertainty of the happening of an event. There is also vulnerability around sometimes the expected cost or the occurrence of the risk. Insurance is also seen as the contributions of the many to meet the losses of the few. People in a similar environment or business environment would be exposed to similar risks which are likely to bring them similar costs. One entity could not survive the happening of the risk or in other words, the cost hence, insurance provides the platform for these people to share the cost upon the occurrence of the event to one.
A thorough understanding of businesses undertaken by the owners of SMEs enables them to have a clear picture of risks affecting their businesses to act proactively to mitigate or avoid the impending risks. On the other hand, a poor understanding of businesses could prevent the owners from making rational decisions to mitigate the inherent risks attaching to their businesses. This assertion is supported by Carroll et al (2014) which affirm that many organizations in an attempt to survive to take time to understand their markets carefully by evaluating their competitions, and applying best practices to create advantages over competitors.
These efforts allow them to identify emerging risks and develop appropriate strategic responses on time. While it has been acknowledged that big organizations are financially strong enough to attract experts to deal effectively with risks in their businesses, the financial standing of SMEs due to their small size prevents them to put in place a sound risk management approach (International Labour Organisation [ILO], 2013).
Inadequate funding has been identified as one of the major limitations of small and medium enterprises (SMEs) in any part of the world by many studies. However, risk mitigation is taking prominence in every area of business beyond issues of financing long-term and short-term investments constraints. Feridun (2006) cited in Kagwathi, Kamau, Njau, and Kamau (2014) reveals that traditional risk mitigation of SMEs focuses on physical causes like fires, accidents, and death. The approach used to reduce risk may either increase the level of business risk exposure instead of reducing it depending on the understanding of the business by the decision-maker.
Optimistic individuals are more likely to underestimate the negative consequence of risks affecting their businesses. On the other hand, the pessimistic SMEs’ owners are more likely to act in the opposite direction, and all of these influence the level of risk exposures and mitigation approaches used in running their businesses.
According to Abor and Quartey (2010), in Ghana, the SME sector is the main structure of businesses accounting for close to 92% of enterprises in the economy. Besides, in 2018, it was projected that SMEs added to Ghana’s Gross Domestic Product (GDP) by an estimated 70% contribution, which translated to about 90% of operational businesses. The sector is also said to provide close to 85% of jobs in Ghana.
What can insurers do for SMEs to give them the necessary protection for their business operations? Insurance companies have insurance products which include Asset-All-Risk, Fire material damage policy, Business Interruption, Fidelity Guaranty, Money Insurance, Accident Insurances, Plant and Machinery, Burglary, Motor, Goods-in-transit, Product and Public Liability policies, Professional Indemnity Insurance, Keyman insurance, other life, and micro insurances, etc. all these insurance policies provide solutions to business owners.
The main question is, how do the terms and conditions of these policies meet the conditions and needs of the Small and Medium Enterprises. Are these small enterprises able to satisfy all the standard policy wordings, conditions, terms, and warranties to seek protection? Do insurance companies have the appetite to do business with these enterprises after a pre-loss survey of their business, its process, and environment. What effort have insurance companies made to better the business environment and processes of the small-scale enterprises to make most of them insurable? How does the mineral water producer on a small-scale production take advantage of these insurance policies listed above? Do they have the capacity to meet all the standard terms and conditions in the policy? Most of these policies are designed with the medium and large-welled established companies in mind. How can the insurance industry provide protection and peace of mind for startup small and medium enterprises?
Insurance companies must begin to design or tailor-made insurance products which can meet the need of the mobile money vendor, the small retail seller, small vehicle repairer, the small security company, the small mineral water producer, the small vehicle retail company, the small consulting firm, the small construction firm, and many others who need this protection as the large well-established enterprises also need. They also have to reconsider rewording most of their policy conditions, terms, exclusions, warranties in the space of SMEs. Above all, they have to organize insurance training activities for SMEs. People should begin to see Insurance as a form of protection.
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Reference
https://www.econstor.eu/bitstream/10419/197532/1/1663005338.pdf
Bamfo,B.A.;Kraa,J.J.MarketorientationandperformanceofsmallandmediumenterprisesinGhana:Themediatingroleof innovation. Cogent Bus. Manag. 2019, 6, 1605703.
https://www.mdpi.com/journal/sustainability
http://www.businessenvironment.org/dyn/be/docs/60/fdwp15.pdf
