Insurance can help boost sustainability in informal sector

There is need to address factors hampering uptake of insurance by MSMEs in Kenya. FILE PHOTO | NMG 

By JOHN KAGUCHIA

The primary role of insurance is to protect individuals and businesses against risks. Insurance helps in mitigating the uncertainties of life. It is also a financial tool for mobilizing savings required for investment.

Generally, insurance gives the comfort that in the event of a disaster or accident, the insured will receive some form of financial compensation for the loss incurred.

The informal sector comprises a vital pillar of the economies of many developing countries including Kenya. It is a significant driver of livelihoods and jobs thus contributing to poverty eradication and financial inclusion.

According to the International Labour Organisation (ILO), two billion people or 61 percent of the world’s employed population, work in the informal sector. Of these, 93 percent are in emerging and developing countries. In Africa, 86 percent of employment is informal. These numbers underline the significance of the informal sector.

Majority of people working in the informal economy are employed by micro- and small and medium size enterprises (MSMEs).

The United Nations estimates that 90 percent of MSMEs operate in the informal economy. In Kenya, for example, the informal sector employs roughly 13 million people (compared to two million in the formal sector) and generates about 60 percent of national GDP.

Despite this immense economic value add, the informal sector remains largely uninsured. It tends to be by-passed by the formal insurance mechanisms largely because it is viewed as too risky. This means majority of MSMEs are exposed to multiple insurable risks including fire, theft, loss or damage to property, accidents, legal action, to name a few.

As highlighted above, insurance cushions businesses against the risk of failure if unforeseen, adverse events occur. By insuring the informal sector, insurers become business enablers of MSMEs. They help small businesses - most of which are in the informal sector - to thrive by improving their risk profile. Thus, they are able to attract financial credit and expand their value chains.

Insurance therefore serves to ‘mainstream’ or formalise the informal sector by according financial and social protection. It also boosts the sustainability of MSMEs by addressing the risk of disruption and failure.

But there is need to address factors hampering uptake of insurance by MSMEs in Kenya. This can be achieved by developing affordable products that meet the unique needs of the informal sector.

Informality however remains a constraint. Measuring the informal economy is not easy. Also, many MSMEs lack formal business structures. This makes it hard to assess the risks they face and come up with appropriate underwriting solutions.

There is scope, however, to grow the informal sector insurance market in Kenya. The rapid expansion of financial services underpinned by phenomenal growth of mobile banking is evidence that, with an optimal model, increased uptake of insurance by MSMEs is possible.

Creating access to affordable and relevant insurance products will encourage more small business operators to embrace insurance as a necessary tool in managing risks.

The writer is acting CEO, Kenya Orient Insurance Limited.