Even though SMMEs contribute significantly to the country’s economy, they are not adequately serviced by insurance companies, according to Wits lecturer Albert Mushai.
Mushai, who is the Head of Insurance and Risk Management at the university, told Vutivi News that small businesses often could not afford to take on risk, which made them less attractive to insurance companies. “Given the presence of risk, one is led to ask what organisations including SMMEs could do in order to cope in an environment characterised by risk? SMMEs are not immune from that reality,” he said.
“Large organisations can pass the risk they face to shareholders or through other balance sheet support mechanisms they have,” he said. “SMMEs are not privileged to be able to enjoy some of those benefits which make insurance critical for them.”
Mushai said that because many products in the business world were designed for big businesses, SMMEs were not catered for in the insurance industry. “Historically, insurance has been developed as a product to meet the needs of those who have. So, if you didn’t have anything, insurance was never a solution,” he said.
“For the industry to tap into the demand of SMMEs we must acknowledge that the insurance industry is profit-driven and insurance companies are not charitable organisations. “The transaction costs associated with extending coverage to small players tend to be regarded as too high compared to those associated with supplying insurance to large organisations,” he also said.
The state needed to lend its support to SMMEs, Mushai said.
“We acknowledge that SMMEs are the engine of growth for economies. The range of support must extend not only to issues of financing but to issues of enabling these entities to deal and cope with the risks SMMEs face,” he said. “A lot of them struggle to access credit, yet we have credit insurance that can assist them. “(Policy) needs to be crafted in such a way that it becomes attractive to credit insurers to extend products to SMMEs.
“Otherwise, left to their own devices, they will refuse to cater to that market because risks too high,” he warned. Mushai confirmed that the COVID-19 pandemic and resulting lockdown not only crippled businesses but also threatened to cripple the conventional way insurance companies operated.
Many of them were currently grappling with how to pay for losses associated with the lockdown. Mushai believed that better services could have been offered to small businesses hit by the pandemic. “Business interruption insurance is taken by an organisation when an interrupting event occurs, which causes business to lose revenue,” he explained.
This helped businesses recover a portion of their revenue through insurance.
“The reality of the matter is that insurance works on the basis of being able to diversify risk. If the risk is undiversifiable, the insurance doesn’t work,” Mushai said. “Covid is complicated in the sense that everyone was asked to shut down, whereas insurance operates on the assumption that if they take a pool of 1000 people with insurance, some will suffer loss and others will not.
“In this situation where everyone is lining up to claim, insurance has a big problem,” he said.
Ultimately SMMEs are competing with big businesses for payouts. However, some insurance companies like Old Mutual have launched campaigns to help get small and medium businesses to get back on their feet.