Why insurance is crucial for small businessesFor small businesses with thinner margins, insurance is not just an added cost but a crucial safeguard for their business continuity.

Despite employing 40% of India's workforce and accounting for 45% of the total Indian manufacturing output, less than 5% of SMEs in India are insured. Insurance plays a significant role in mitigating risks faced by this sector, which is referred to as the backbone of the Indian economy. And with the government targeting the sector's share in exports to grow from 49 per cent to 60 per cent, and five crore more jobs in this sector by 2025, the need for insurance adoption in this sector has become all the more significant.

"It is critical for small businesses and startups to own business insurance that can provide financial protection against any monetary loss and helps in smooth business continuity. While different organizations have different risk tolerances and differing abilities to pay, we agree that insurance is a must-have for all business types and sizes," says Sajja Praveen Chowdary, Head, Policybazaar for Business.

In events of natural or business catastrophe, the economic losses faced by MSMEs far exceeds the insurance loss, making them more vulnerable, while large corporations with their better risk practices and deeper cash reserves are able to cushion any setback.

"Unlike large corporations that often have the financial buffer to absorb unexpected losses, MSMEs operate with thinner margins and are more vulnerable to uncertainties. Insurance is not just an added cost, but a crucial safeguard for business continuity of MSMEs. Moreover, they have specific needs that differ from larger enterprises. The scale of their risks might be smaller, but the relative impact can be significantly more detrimental, necessitating customised coverage," says Sanjeev Mantri, ED, ICICI Lombard.

Reasons for low adoption

According to key people in the insurance industry, there are a number of reasons for SMEs to not adopt insurance, including lack of understanding of the kinds of risks one's business is susceptible to. "There is a lack of awareness about how some very affordable insurance solutions can safeguard different aspects of the business. There is also unrealistic optimism about the state of affairs, even if the risk is very real. Not prioritizing insurance as a solution over other aspects of business management, unless it's a compliance requirement," adds Chowdary.

Ajai Kumar Tripathi, Chief & Appointed Actuary, Aviva India says that as "Insurance is the subject matter of solicitation", voluntary adoption is still not ubiquitous. "Many SME owners are unaware of the various insurance types and coverage available to protect their company, assets, and employees. Also, limited financial resources make small businesses see insurance as an additional expense beyond their means. This perception deters them from seeking insurance."

Says Pranay Shah, Executive Vice-President and National Head, SME, Tata AIG Insurance, "While the primary reason for the same is lack of awareness of the products and benefits, affordability is also a reason in view of the tight margins. Sometimes, the need for insurance is not felt because of low awareness of incidents which have caused misery to others. At times, lack of understanding of coverage gives rise to mistrust."

According to Mantri, the distribution reach of insurance products has traditionally proved to be inadequate, making it difficult for MSMEs to access policies. "Moreover, the insurance products available often do not specifically cater to the unique risks and needs of MSMEs. This can deter them from investing in insurance."

Insurance products for SMEs in the market

There are a number of insurance products in the market for SMEs offered by insurers like Tata AIG, Aviva India, Bajaj Allianz and ICICI Lombard. The sum assured for liability products depend on the nature of work and type of business, while for workmen compensation insurance a company also needs to disclose the number of employees and their salary.

Comprehensive General Liability Insurance:This policy protects the business against any claims involving third party bodily injury or property damage resulting from its products or services. If the business is sued for any losses caused to the third party then the insurer will incur all the expenses of investigating officers and lawyers.

Directors and Officers Liability Insurance:Under this insurance policy, the insurer will compensate for any loss or damage arising out of actions taken by directors and officers during their employment. Bharat Laghu Udyam Suraksha policy: It is designed to cover shop's property and all its content. The policy applies for a sum insured above INR 5 crores to INR 50 crores. It was introduced by the Insurance Regulatory and Development Authority of India (IRDAI) in April 2021. The policy ensures that your insured property is covered against unforeseen losses/damages and unplanned expenses.

Business Interruption Insurance:If your company has to vacate its premises because of a disaster-related damage, this insurance protects loss of income. The policy also covers operating expenses, like electricity, that continue even after your business is interrupted. This is offered by the likes of Future Generali.

Worker's Compensation Insurance:Accidents at the workplace are inevitable, despite the preventive measures and safety precautions taken . The Workmen's Compensation policy enables the employer to pay the compensation to the employees or for their family in case of death or bodily injury (permanent partial disablement / permanent total disablement / temporary disablement) caused due to injury and accident at workplace (including certain occupational disease). It is mandatory for all to have this cover.

Cyber Insurance:It covers losses and business liability arising out of a cyber security breach. The policy offers complete insurance protection to your business against cyber or digital risks that can result in a financial loss to the insured and reputational loss to a third party because of a breach in the insured's systems.

Marine Insurance:It provides coverage against the losses or damages of cargo or goods during transportation between the points of origin to the final destination. Also covers all means of transportation example road, railway, air, sea, couriers and postal service. Besides the above insurance policies, there are policies like group health and group accident policies for SMEs.

Improving penetration

In a bid to improve the insurance penetration for the growth engine of the country, insurers are also gradually bringing about innovation in their solutions. "Recently, we have strengthened our commitment to helping businesses with all their insurance needs and launched "Policybazaar for Business". Our corporate insurance business is bolstered through cutting-edge technology, robust processes and a team of industry experts to cater to large corporates, SMEs and tech & non-tech startups," adds Chowdary.

On the other hand, Tata AIG has revised its flagship 'property package' to make it more comprehensive by including further sections in the package, with higher flexibility to the insured in terms of coverage and customized add-on covers for specific occupancies. "The new product also addresses the key concerns which cause mistrust amongst the micro enterprises including application of underinsurance and mis-match in the nature of business being covered," adds Shah.

Insurers are also working on making claim settlement easier, "We are addressing the primary pain points of a complex purchase experience and a cumbersome/delayed claim settlement with end to end transactions in a matter of seconds. This is ably supported with an ease of access and fairness of play in claim settlements. We've launched a first-of-its-kind service enabling faster claim settlements. Through the use of AI and big data analytics, ICICI Lombard offers settlement for admissible property and marine claims up to INR 5 lakh within 10 working days - ensuring swift and hassle-free claim payments," adds Mantri.

"We understand that new MSMEs - while not risk-averse - might not be fully risk-aware. Hence, our mission is to educate them on risk management, making them understand the potential risks they face and how insurance can help mitigate them. By doing so, we can contribute to a substantial increase in insurance adoption among MSMEs," adds Shah.

According to Shah, multi year policies can also help improve penetration. "If these are allowed, it would reduce non renewal of policies and also bring down the cost of distribution. Currently, getting information about turnover using GST requires customer consent even for the customer's property or marine Insurer. It would certainly help if such information is available to insurers for SMEs to be able to provide adequate coverage," he adds.

Visible changes after Covid-19

Industry believes that while the insurance penetration in the SME sector is abysmally low, there have been visible changes after Covid-19 pandemic."After Covid, even small businesses have started insuring their employees, and are looking for cost-effective solutions that do not require dedicated resources to manage," says Chowdary.

"With news of cyber-attacks world over and the unheard-of ways in which these attacks are happening, companies (esp those depending on technology) have become keener to protect themselves against such threats. Natural disasters in the recent past have also piqued the interest of business owners in the propery insurance products," he adds.