Digital insurance

Micro and small enterprises (MSEs) are often more vulnerable to risks and shocks compared to larger enterprises. For instance, the personal risks that MSE owners face can impact their businesses and their employees too. Insurance can play a pivotal role in better absorbing financial shocks, building assets, and managing risks for MSEs. The risk landscape for small businesses is evolving; as they embrace digitalization, new cybersecurity and data risks emerge. Offline, growing risks from other factors—such as climate change—can also leave small businesses vulnerable, especially if they operate in sectors such as agriculture or tourism. However, as potential insurance customers, small businesses are challenging. They are reluctant, price-sensitive, and strapped for time to evaluate the decision of whether to get insurance. Further, as with their continued constraints to accessing finance, many MSEs often find themselves in the ‘missing middle’ of insurance coverage: overlooked by providers that target large corporations and poorly served by those that target informal micro-businesses.

The vast majority of MSEs around the globe are underinsured. When a crisis or accident strikes, this can negatively impact their resilience. For instance, across Africa, it is estimated that less than 2% of all MSEs have any form of insurance. In India, just 5% of the 63 million small businesses have insurance. 

The impacts of COVID-19 on small businesses have emphasized how essential insurance can be to their daily operations. Further, the continued growth of insurtech, coupled with the rapid digitalization of many small businesses in the last few years, has led to a growing appetite for digitally enabled insurance coverage. For example, one survey of small businesses found that almost half of respondents who were planning to switch insurance providers in the next five years would prefer to buy online or via digital channels. 

Digital insurance isn’t a new concept—some of the earliest examples of mobile-enabled insurance were launched 15 years ago in India. Since then, this space has continued to expand, with 135 mobile-enabled insurance offerings available across 28 countries at last count. What is more nascent is how the insurance sector is using innovation, data, and technology across the entire value chain to better serve the needs of that missing middle: small businesses. 

Insurance for small businesses: impact, barriers, and digital considerations

Evidence on the impact of digital insurance on small businesses is still limited, as the field continues to evolve. We include evidence that suggests that microinsurance, particularly products similar to traditional insurance, has positive effects on small businesses and their households. Further, this brief does not include practical insights for offering digital insurance to small businesses due to the nascency of this space. Instead, it addresses usage barriers and other small business considerations. As a living record of our learning, this insight brief will be updated as we uncover good practices through our partners and programs.

Microinsurance has historically been the first and only type of insurance that small businesses have had access to. Research on the impact of microinsurance has shown that it can improve the resilience of small firms and their households in a variety of ways. 

• First, it reduces the reliance on costly risk-coping strategies in the wake of shocks, such as selling productive assets or livestock or reducing household expenditures on food or schooling. While this applies to smallholder farmers and pastoralists, who may not necessarily be formally incorporated as a business, other small business owners might be forced to liquidate assets too in the event of a shock. For instance, research in Kenya observed a reduction in cost-coping strategies in both wealthy and poor households based on insurance, which made wealthier households less likely to sell assets following a shock and poorer households less likely to reduce food consumption. Similar findings were observed in households in Ghana.

• Second, insurance can lower small businesses’ levels of indebtedness. For example, research in Cambodia observed a significant decrease in the number of households who took out a loan after an adverse medical incident.

• Third, insurance enables small businesses to reallocate and invest funds previously earmarked for potential shocks to income-generating activities, as well as increase their creditworthiness and appetite for formal credit products. In China, insurance provision for farming households increased both crop production and borrowing.

• Finally, insurance can promote better risk management by sensitizing business owners to the price of insuring specific risks. This may allow business owners to take appropriate risks where required rather than adopting a risk-averse stance.

The uptake of insurance by small businesses continues to be hampered by a distinct set of barriers. The first and most important one is affordability. Small businesses often see insurance as too expensive, particularly considering their other business priorities. In the wake of the COVID-19 pandemic, small businesses have become increasingly price sensitive. One survey of UK small businesses observed that, when asked about selecting an insurance provider, “lowest price” as a parameter saw the greatest change in importance for respondents. Further, small business owners often cannot afford both individual and business coverage, leading them to prioritize personal insurance.

A second barrier is a lack of knowledge and experience with risk management strategies and insurance products. Small businesses may struggle to select an insurance plan or decide which risks they should seek coverage for. In part, this might be influenced by their perception of and low levels of trust in insurance. Similarly, small businesses may be unknowingly underinsured; one survey found that while 74% of respondents expressed confidence about their business insurance requirements, just half of the respondents had professional indemnity insurance, and only 16% had cyber insurance. Small businesses that have insurance may lack clarity and confidence about their coverage—in one survey, just 41% of small business respondents were confident in their understanding of their current insurance coverage.

The third barrier is a lack of insurance products that are customized to small business needs. Providers face obstacles that hinder their effectiveness in serving small businesses. Small businesses come in many shapes and sizes, and insurers have little experience catering to the diverse needs of these firms. Additional information and data about small businesses may be limited or unreliable, especially due to the high level of informality of small businesses in many countries, further limiting insurers’ ability to accurately understand and underwrite these businesses.

A fourth barrier is about managing distribution and operations. Traditional insurance providers may not be equipped to distribute high volumes of low-premium policies at low cost. The cost of acquiring and serving small businesses without scale can be high, though mobile technology has led to improved distribution for some microinsurance products. Finally, regulatory barriers can impede insurers from entering the small business market. Several low- and middle-income countries neither have the appropriate legislation nor regulatory capacity to support microinsurance services.

The differing needs of micro, small, and medium enterprises

While insurers may often group them together, micro, small, and medium enterprises have very different characteristics and insurance needs. For instance, microenterprises often have limited affordability for premiums and depend wholly on the owner and their family, leading owners to not distinguish between business and household finances. GIZ found that for these businesses, insurance needs are mostly confined to life and health insurance for the owner and their family, as well as single-policy multi-risk coverage for various business assets. Small and medium enterprises are more likely to have a larger number of employees, significant business assets, and more sophisticated bookkeeping and financial planning. Insurance needs for these businesses may include group insurance, vehicle or premise insurance, liability insurance, or business interruption insurance. Insurance providers who can better target these segments by disaggregating their business needs are more likely to offer valuable digital insurance products.  

Insurtech offers innovative potential across the entire insurance value chain by leveraging innovative digital technologies and data-first approaches, and one landscape identified almost 500 insurtech initiatives across 85 countries in emerging markets. Digital technologies can expand the reach of insurance for small businesses by enabling insurtechs to offer faster, more affordable, and more tailored products. The IFC suggests that technology is disrupting the insurance industry by:

• Making the claims process faster and simpler
• Using alternative data and artificial intelligence for underwriting and claims
• Providing a faster and more reliable way of paying claims through digital payments
• Creating robo-advisory to offer insurance advice, enabling companies to sell suitable products at a lower cost to more clients

Insuretech initiatives often focus on solving existing challenges within the inclusive insurance sector, such as the lack of information on consumers, the lack of access to consumers, different and new consumer needs, consumers with limited experience with formal financial services, and constrained business models. 

The opportunity for small business insurance is compelling. Data and digital technologies can enable them to meet the diverse insurance needs of small businesses (which are often as complex as those of larger firms), while offering the user-friendly, low-cost, and personalized experience that small businesses demand. Partnerships play an important role here, too, especially with those who have existing relationships with small businesses, such as digital platforms and value chain aggregators.  

Trust and transparency matter

Historically, small businesses have been reluctant insurance customers, so trust in providers is an important factor in improving uptake. This trust was broken in the wake of COVID-19, when many small businesses learned that interruption insurance applied only to interruptions caused by the loss or destruction of physical assets, thereby excluding business interruption caused by a pandemic. More than ever, for small businesses, there’s a need for increased transparency and simplicity in coverage options and contract terms.

By offering simplified user journeys and easy-to-understand contracts, digital insurance providers have the potential to increase a sense of trust with small businesses. In Ghana, the SAGABI partnership found that onboarding messages that informed and educated customers about their policy should be sent to customers repeatedly, for as long as they hold their policy, via their preferred communication channel. For SAGABI, these multiple customer touchpoints were key to increasing customer understanding and trust in their mobile insurance product.    

The continued rise of insurtech, coupled with the increasing digitalization of small businesses around the globe, offers a promising opportunity for digital insurance offerings to play a significant role in mitigating the risks faced by small firms, helping them to grow and increase their resilience. As we learn more about practices and techniques for offering digital insurance to small businesses, we will continue to share these insights.