Insurers must rethink about the SMEs

Insurers must rethink about the SMEs

The economy is traditionally divided into three sectors: namely, the Agricultural sector, the Services 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 legally binding agreement between an insurer and an insured. The insured pays a premium while an insurer pays compensation or benefit upon the occurrence of a loss, or an insuring event or a benefit upon maturity of the policy.

Insurance covers named perils, and when 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 corporate entities, there are a lot of events which bring us negative outcomes 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, they bring death, permanent disability or temporary disability, and loss or damage to properties. They bring 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 an event happening. There is sometimes also vulnerability around the expected cost or occurrence of the risk. Insurance is also seen as contributions of many to meet the losses of a few.

People in a similar environment or business environment will be exposed to similar risks which are likely to bring them similar costs. One entity could not survive the risk happening – or in other words, the cost; hence, insurance provides the platform for these people to share the cost upon the occurrence of such an 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, and 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 attached to their businesses. This assertion is supported by Carroll et al (2014), who affirm that many organisations in an attempt to survive take time to understand their markets carefully – by evaluating their competition 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 organisations 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 from putting in place a sound risk management approach (International Labour Organisation [ILO], 2013).

Inadequate funding has been identified as one of the major limitations for 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 can increase the level of business risk exposure instead of reducing it, depending on the decision-maker’s understanding of the business.

Optimistic individuals are more likely to underestimate the negative consequence of risks affecting their businesses. On the other hand, the pessimistic SME owners are more likely to act in the opposite direction – and all of these influence the level of risk exposure 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) with 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 processes and environment? What efforts 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 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 well-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-make insurance products which can meet needs 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 just as the large well-established enterprises need it.

They also have to reconsider rewording most of their policy conditions, terms, exclusions and warranties in the space of SMEs. Above all, they have to organise insurance training activities for SMEs. People should begin to see Insurance as a form of protection.

The writer is a staff of the National Insurance Commission. He is also the Leading Managing Partner of Jusbel Risk Consult Limited. He is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG).

0549705031 || [email protected] ||  ||


Bamfo,B.A.;Kraa,J.J.MarketorientationandperformanceofsmallandmediumenterprisesinGhana:Themediatingroleof innovation. Cogent Bus. Manag. 2019, 6, 1605703.


Leave a Reply