Business continuity insurance; a missing link in global protection

June 24, 2020


As we’ve all seen, the impact of COVID-19 has been significantly multidimensional. Health systems have demonstrated their fragility and a whole range of socio-economic vulnerabilities have been exploited throughout both the developed and developing world. Every day, even months after the outbreak began in earnest, people are losing jobs and income, with no way of knowing when normality will return. The International Labour Organization (ILO) estimates that over 195 million jobs could be lost, which will have destructive consequences on household resilience and the number of people living below the poverty line.

At the coalface of this disaster are Micro, Small and Medium Enterprises (MSMEs) who have been disproportionately affected, as their financial reserves simply don’t stretch as far as big business and multinational corporations.

The critical role of MSME’s cannot be underestimated. They represent 90 percent of businesses worldwide and account for more than 50 percent of global employment. In emerging economies they contribute up to 40 percent of GDP, and this is expected to  grow over the coming years. And yet despite their overall contribution to the global economy, MSMEs are often fragile. They find it difficult to access financial services and are much less likely to be given loans than large organizations. Approximately 65 million formal MSMEs are credit constrained and the total unmet demand for credit in developing economies is estimated to be around US$5.2 trillion. This puts them at increased risk of economic shocks, as illustrated during the ongoing pandemic, with more than 436 million enterprises in the hardest-hit sectors worldwide at risk of at least serious disruption.

There is evidently a huge demand across developed and developing countries to move aggressively and help stave off the crisis by slashing interest rates, injecting liquidity, and providing emergency funding for MSMEs and households. But beyond the initial need of support through cash transfer, subsidies and liquidity; what infrastructure can we put in place to ensure that they are more resilient to the increasing frequency and severity of disasters and pandemics in the future?

Business interruption insurance

Insurance can play a pivotal role in tackling the risks faced by MSMEs, by helping them absorb shocks, build assets, smoothen consumption and manage risks associated with irregular and unpredictable income, helping sustain productivity during and after a crisis. Most of the microinsurance available to small businesses revolve around life, accident and health risks, meaning that MSMEs are massively underserved in the insurance market and often have to fall back on families and friends in the event of disasters.

At UNDP, as part of our work in the soon-to-be-launched Insurance and Risk Finance Facility, we are examining this moment of crisis carefully to see what can be done differently, at scale and business interruption insurance has been largely identified is a critically underserved area. Our SME business interruption initiative attempts to reset the odds stacked against this critical economic sector.

In terms of daily protection, as little as $10-15 per day over a six-month period post-disaster can make a significant difference to small businesses in developing countries. There are over 65 million MSMEs globally without credit, so providing business interruption insurance to ensure no-one is left behind is estimated to cost around $1.63bn per year, a relatively small price tag given the potential long-term costs associated with development and aid, and massive impact on communities and families due to failing businesses.

UNDP’s proposition focuses on providing business interruption insurance for pandemics and disasters to more than 170 million MSMEs in 10 developing countries where there is a critical need; Bangladesh, Cambodia, Ghana, India, Indonesia, Kenya, Morocco, Nigeria, the Philippines and Sri Lanka. The target enterprises will be of the smallest kind, with between one and 10 employees, and we estimate such an initiative would reach up to 300 million employees. The provision would be inclusive or micro in nature, with a total cost of US$4.37 billion for premiums per annum, based on an average of US$25 per policyholder. But if we set that against as yet largely uncounted impact of the closure of entire economies in developing countries, and the subsequent impact on SMEs and the families on which they rely, the cost is small. (As a comparison, the public debt of just one of these ten countries, which is US$83.9 billion, if forgiven could cover 20 years of this initiative in all ten countries.)

Key elements of the initiative would be:

•      Cover for loss of income (including loss of gross profits, wage costs and cost of expenses) and property damage after a disaster has occurred.

•      Bundled offer for pandemic risk and climate risks (flood, drought, cyclone/typhoon etc.).

•      Parametric trigger for climate and pandemic risks, with payouts triggered automatically using satellite technology and smart contracts.

•      Educational workshops on financial planning and book-keeping, especially for women SME-owners.

•      Linked to official health and disaster information and advice.

UNDP Insurance and Risk Finance Facility

The Insurance and Risk Finance Facility of UNDP is advocating for the development of MSME business interruption insurance across the developing world to help build community resilience for millions of small business owners and their workers. It is examining this initiative in depth, bringing a group of experts from across finance, insurance, employment, institutions and more, to examine its details, pick open its caveats and challenge its assumptions.

The initiative we have developed is ambitious in scale and scope, but the challenge now and the future is even greater. This is a call to action.