In V20 economies, micro-, small- and medium-sized enterprises (MSMEs), contribute between 20 and 80 percent of GDP, constitute more than 70 percent of all businesses and power the countries’ export revenues. They are important drivers of socio-economic growth, arguably a key prerequisite for resilience and government revenue.
At the same time, MSMEs, including but not limited to agro-business, are often particularly vulnerable to extreme weather events and suffer from high electricity cost to the detriment of their productivity and growth. Low carbon technology options with deflationary costs for technologies such as rooftop solar and other, more energy efficient equipment and infrastructure, may help in addressing the latter. It is, however, difficult for MSMEs to secure upfront funds or financing options such as loan or leasing mechanisms. As a result, they are typically left with high operational costs, preventing them from investing in improving productive and operational efficiencies to increase the profitability of their business.
Even MSMEs’ ability to maintain the status-quo is threatened by the increasing frequency or intensity of natural hazards. This is because businesses often have low adaptive capacity due to 1) limited human and financial resources, 2) lack of accessible and useable information, including on climate risks, transition risks, energy efficiency and risk reduction measures, and 3) the cost of resilience and low carbon measures, including insurance. Worsening climate related natural hazards will further drag down economic productivity and resilience if the MSME sector does not have adequate insurance protection and investment capacity. These could help to absorb financial shocks from natural hazards and de-risk the implementation of cost-saving renewable energy and energy efficiency infrastructure.
Leveraging progress in closing the protection gap through climate-smart insurance for MSMEs
However, adequate insurance offerings to protect MSMEs and de-risk investments are often unavailable and so far, very few projects focus on climate-smart insurance specifically for MSMEs, and even less so on enhancing their risk management capacities in the process. Vulnerable developing countries experience an at least 90 percent protection gap for climate risks and non-life insurance penetration in V20 economies, typically indicative of the degree to which the private sector is covered, often lies below or between one to two percent. Yet, better insurance access and uptake among MSMEs can not only help to protect economic growth, but also reduce contingent liabilities on governments’ balance sheets, thereby widening the fiscal space for development.
The exact definition of what constitutes MSMEs varies across the V20, but micro-enterprises usually have one to five or up to ten employees, small businesses ten to 50, and medium-sized enterprises up to 300 employees. As such, the livelihoods of large population segments depend on them: In V20 economies, MSMEs make up 30 to 90 percent of employment.
This puts MSMEs in a unique role, in which they aggregate large sections of the population and thereby represent a policyholder group through which many people – owners, employees or small, family-owned businesses – can directly or indirectly benefit from insurance. MSMEs also offer important employment opportunities for lower-skilled workers and women. They therefore support particularly vulnerable population segments and also provide an avenue for developing their human capital. Designing and developing insurance products in collaboration with MSMEs, while simultaneously building their risk management capacities, can hence represent a powerful opportunity to train and educate entrepreneurs in financial literacy, climate risk literacy and business planning skills.
Currently, several barriers still impede the development and uptake of climate risk insurance among MSMEs. These include lack of regulation, consumer protection and tailored product offerings, taxes and effective distribution channels. Equally, climate risks and their prospective financial impacts are often unknown or not well understood by MSMEs. And those MSMEs that are aware of these impacts, frequently lack the capital, including through credit access, and business planning skills to invest in risk reduction and formulate disaster response strategies. These competencies are, however, relevant for making insurance cost-effective and for enabling MSMEs to better understand why they would need insurance and for what.
Strengthening the capacities of MSMEs may also enable their employees to gain an understanding of insurance. MSMEs’ financial management, creditworthiness and productivity may also be improved. As such, MSMEs can be seen as important aggregators, offering an entry point for leveraging progress towards achieving the InsuResilience Global Partnership’s 500 million protection target, contributing to human development and realizing its gender declaration.
Led by the V20 Group, the Sustainable Insurance Facility (SIF) promotes integrated efforts which address these issues. Doing so can also foster progress on other agendas, such as MSME finance, financial inclusion and sustainable supply chain management.
To learn more about the SIF, its design and its five action areas, click here