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Insurance-averse MSME sector hit harder by Covid; experts call for higher coverage

Barely 5 percent of small businesses take insurance cover because most of them opt for it only when a lender demands it. This makes MSMEs more vulnerable to uncertainties.
Insurance-averse MSME sector hit harder by Covid; experts call for higher coverage

Small businesses have taken a bigger hit from the pandemic and will take longer to recover because of low penetration of insurance cover among MSMEs, experts and industry bodies said.

Lockdowns because of COVID-19 have devastated the MSME sector, India’s second-largest job creator that employs an estimated 11 crore people, but barely 5 percent of the units are insured. There are an estimated 6.3 crore MSMEs as per the National Sample Survey 73rd Round (2015-2016).

Vinod Kumar, president of the India SME Forum said in metropolitan cities, about 27- 30 percent MSMEs get insurance cover, but in other areas, it is barely 1 percent. “In the US, about 90 percent of the MSMEs get their plant and products insured which helps them offset their risk in case of any exigency,” he said.

Kumar said Indian MSMEs do not have sound financial knowledge and do not opt for insurance, making them vulnerable to uncertainties, which often forces them to shut down.

Insurance companies in India have also not given adequate attention to MSMEs like they did for life and car insurance, experts said.

Ranjeet Mehta, a MSME and policy expert said, "Insurance in general is not very popular in India and hence in the MSME sector where it drops further."

According to Mehta,

The key reason for low insurance penetration among MSMEs, Mehta said, was the lack of financial literacy and the fact that most of them operate in the unorganised sector.

"Only those MSMEs get insurance who take money from banks and NBFCs as they mandate it as a prerequisite before lending but given that so many MSMEs borrow from the informal sector, they do not even get even the most basic insurance cover,” he said.

Ashok Saigal, Co-Chairman at Confederation of Indian Industry’s National MSME Council and MD of Frontier Technologies, agreed. "MSMEs borrowing from banks get a basic insurance cover like the fire insurance because the lenders mandate before lending it out, however beyond that the MSMEs do not make it priority which exposes them to contingencies," he said.

Mehta and Kumar said insurance companies must bring financial products for the MSMEs, and the compliance procedure must be eased to encourage them to opt for it.

Saigal said that although insurance is critical for MSMEs, it should be incentivised in the sector only after a few months as currently these enterprises are under severe financial crunch.

Ramamurthy, member, All India Council of Association of MSMEs (AICA) which represents 170 MSME associations across the country said, "Insurance coverage among MSMEs is alarmingly low and perhaps only those MSMEs get insured which borrow from banks as the lenders demand it. Associations and government must work increase the awareness as they it is highly needed to safeguard the sector."

According to India Brand Equity Foundation (IBEF), India has 57 insurance companies, including 24 in the life insurance business. India’s insurance market is expected to be worth $280 billion in 2020, as per IBEF.

As per Statista, the general insurance or non-life insurance penetration in India at the end of FY2019 stood at 0.9 percent, up from around 0.6 percent in FY2009.

Speaking to Moneycontrol, Mehul Palan, Business Head, Emerging Corporates, Alliance Insurance said, “It is true that the approach to MSMEs insurance in India was largely unorganized due to its immense spread and adequate attention was not bestowed due to their small ticket size or the premium size"

Palan further noted that Alliance Insurance through its SMEInsure portal is dedicatedly focusing on MSMEs through a Phygital approach to promote the need and importance of insurance for the sector.

"Our focus is on the reach and distribution, '' said Palan.

Alliance Insurance earlier this year had rolled out a dedicated portal for the MSME sector called SMEInsure on which the MSMEs can choose products as per their requirements from various well-known insurance service providers.

Some of the popular insurance providers listed on the portal include HDFC Ergo, Bajaj Allianz, Iffco Tokio, Tata Aig, Liberty General Insurance, Raheja QBE, Reliance General Insurance, and SBI General. 

So far Alliance has insured about 3000 MSMEs and is hopeful of reaching out to another 50,000 by the end of 2022 through its SMEInsure portal.

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