Globally, 9 out of every 10 disasters have been found to be related to the changing patterns of the earth’s climate. Reports show that there have been a skyrocketing number of natural disasters moving from around 200 a year to over 400 a year. As such, not only private institutions are beset with making drastic decisions but individuals as well as Micro, Small and Medium Enterprises (MSMEs) also have important choices to make to cushion themselves from any unforeseen calamities.
For almost two decades now, Ghana’s news media have constantly had stories of fire ravaging markets with Kumasi being one of the most popular sites for such occurrences resulting in wailing of shop owners and making an observer’s gut cringe. Flooding in major cities of the country have also become predictable and to some extent expected as the unmistakable rise of the sun from the east.
However, under the intense lamentations during such tragic but common scenarios, the carpet on which many small business owners stand is mostly always draped in bewail. Doubtless they would relish the opportunity to recover their investments but they cling on hope as it is their only remedy. No matter how much they may bewail such happenings, redemption eludes them because insurance has not been an option for them.
Even with these constant incidents which create uncertainties in the businesses environment, one will expect many businesses to rely on insurance products to cushion themselves from these instances.
As there is an extreme paucity in data concerning businesses which purchase insurance products, an inference from the awareness and knowledge of the general Ghanaian public can help in understanding the level of penetration of insurance in the MSMEs sector of the country.
According to a pilot survey by the National Insurance Commission in 2019, “although people knew about insurance, just a few people had a good knowledge in insurance and that was very disappointing.”
What made this information unsatisfactory to the regulator in its survey was the fact that, even though 98% of the respondents in the survey responded in the affirmative when they were asked if they had heard about the concept of insurance, only 30% (urban dwellers) and 25% (rural dwellers) of the respondents had good knowledge about the concept of insurance. 22% (urban dwellers) and 5% (rural dwellers) had no knowledge on insurance. Whereas 29% (urban dwellers) and 17% (rural dwellers) had little knowledge.
The study also tested the respondents’ knowledge on insurance products. It found out that “majority of the respondents mentioned motor/car insurance, health insurance and life/funeral insurance. Non-clients of insurance firms had no knowledge on micro insurance and agriculture insurance. Not even one urban dweller had knowledge whatsoever about agricultural insurance.”
A very potent drawback that causes many small business owners from not purchasing insurance products is the negative perception about insurance policies.
The National Insurance Commission (NIC) in its survey realised that “mistrust of insurers, limited information on insurance facilities, complex underwriting processes and the high cost of premiums” were advanced by the people who were interviewed as the reasons for not signing up. It was also discovered that the thought of wasting money, provided no misfortune befalls them deterred people from purchasing insurance products. These problems according to the study were the same problems the industry faced back in 2014 and poignantly indicated that, “looking at the growth of insurance from 2014 to 2019, nothing has changed.”
A 2017 report by the Access to Insurance Initiative (A2ii) and the International Association of Insurance Supervisors (IAIS) dubbed, Supporting Responsible MSME Insurance indicated that, “in 2007, 60 percent of employment in developing countries was by own-account and contributing family workers.” According to the International Finance Corporation (IFC), between 70 and 80 % of MSMEs are informal and non-employer firms.
Ghana’s numbers are no different as more than 85 percent of businesses in the country are informal and are categorized under MSMEs which contributes 70 percent to its Gross Domestic Product (GDP).
Obviously, that can be deemed as the backbone of Ghana’s economy and without much attention to the resilience of these small businesses, the nation’s economic prospects may be dire.
Scholars such as Chait and Saghana have concluded that modern economies cannot survive without an organized insurance system. They, therefore argue that insurance is one of the most important industries in the economy.
This is because not only does insurance companies insulate individuals and other companies from risks that can cause their collapse, when insurance firms invest premiums paid by their customers into infrastructural ventures, which are mostly long term, jobs are created and the general health of an economy is improved.
But, impediments such as the inability to afford insurance due to low incomes of the majority of the prospective consumers; non possession of valuable insurance goods due to general poverty; the intangibility of insurance which makes its value and the role difficult to appreciate, given the education level of the masses and the dearth of products available for small businesses form the defense of many businesses.
Regardless of the fact that, Micro, Small and Medium Enterprises make up the vast majority of enterprises, and make a significant contribution to employment and economic growth, insurance products suited to their specific demands often do not exist.
In addition, entrepreneurs themselves are often not familiar with insurance as a risk mitigation approach for their families, lives, business assets and transitions, and their employees.
To deal with this gap, a ferocious marketing strategy and the demystification of insurance products must be considered if the huge number of uninsured MSMEs are to be roped into the insurance net.
This approach is important because, according to the NIC, although a fair number of people have an idea about insurance, the channeling of the information is a dire problem.
MSMEs are comparatively vulnerable compared to larger enterprises. It can be observed that many small businesses have a short lifespan, likely an effect of their high risk appetite and the lack of skills and entrepreneurial capacity because they have no other choice to earn a living than self-employment. A 5-year-survival rate of 40% is typical for MSMEs in developing countries.
In addition, small businesses face a higher exposure to threats and disasters. They operate with smaller margins and with fewer funds available to deal with emergencies. It is also very common for them to overlook, minimize or disregard certain critical risks, by settling in disaster-prone areas, or failing to comply with safety standards.
Also, the report by the A2ii and IAIS indicate that even though some MSMEs demand for insurance products they often tend to seek cover for uninsurable risks, or misunderstand how coverage works.
Briefly elucidating some of the risks that can be insured and those that cannot be covered, the report pointed out that, “Hazard risks are shocks like fire or sickness. Insurance is well placed to cover this category of risks.
“Financial risks include risks that businesses manage around their cash flow, prices of goods or inflation. Insurance has some role to play here, particularly in credit-linked insurance, which can help a business to manage cash flow and pay off loans if a disaster strikes. However, the majority of financial risks cannot generally be mitigated by insurance.
“Operational risks and strategic risks are external threats like competition or market forces, as well as internal risks around poor strategy and planning. MSMEs are very exposed to these, but insurance cannot cover them. Liability insurance may apply for a very small group of more sophisticated enterprises.”
Other insurable risks include but not the least: first party property damage, employee dishonesty, third party bodily injury or property damage, statutory cover for employees against work related injuries. Goods and money in transit or within a firm’s premises can also be insured.
A very cardinal aspect of the insurance industry is the enforcement of laid down regulations by the supervisory body.
However, despite the important development potential for the insurance market, regulatory and supervisory frameworks may not sufficiently enable insurance that suits the needs of MSMEs and their owners and employees. For both social and economic reasons, it is in the interest of policymakers and supervisors to scale up the provision of appropriate and responsible insurance products amongst MSMEs.
Under Ghana’s 2006 Insurance Act, it is compulsory for private commercial buildings to have insurance. Plans must cover the legal liabilities of owners or occupiers with respect to bodily injury or death to users or third parties, and damage of property belonging to users or members of the public.
However, compliance with this legislation has traditionally been weak, prompting the NIC to launch a task force investigation in March 2017. The enforcement led to official cautions for 70 firms and the arrest of two company heads in the Greater Accra region.
It was expected that the government of Ghana would also submit its buildings to the same scrutiny and requirements since the past three years.
In August 2016 Simon Nerro Davor, then-deputy commissioner of the NIC, told the media in the country that a new law had been proposed to make it mandatory that government buildings have insurance.
While the bill is yet to be passed, in September 2017 the incoming commissioner of the NIC, Justice Yaw Ofori, similarly voiced his support for the measure, which would provide a bulwark for the government in times of disaster and a boon for the industry.
“Given that the government is the largest spender, agreeing to insure all government assets could increase insurance penetration significantly.”