The Covid19 pandemic has greatly affected the Ugandan Economy. The emergence of the pandemic implied income loss for companies, and consequently, job loss for employees. For the companies, the status quo ushered in a range of new cost-effective work cultures. For some employees, it was time to go into self-employment. In great numbers, they jumped into the vast, albeit murky waters of Ugandan Micro, Small or Medium Enterprising (MSME’s). They joined millions of MSME’s that are, by nature of their financial capacities, predisposed to fail almost as soon as they start.
According to a Ministry of Trade report, 2 out of 3 Start-Ups fail within in their first year of operation. A report by Uganda Investment Authority indicates that MSMEs constitute 95% of business, and as such, employ over 3.5 million people and contribute 40% to Uganda’s GDP. At the height of such risk to the Ugandan economy, research conducted in partnership with Financial Sector Deepening Uganda (FSDU,) Old Mutual Rest of Africa, UAP Old Mutual and Cenfri; fronts insurance as a powerful and effective tool in fostering (financial) resilience in MSME’s.
Speaking in reference to the report, Jolly Kabahuma, the Country Agency Services Manager at UAP Old Mutual emphasizes that MSMEs ought to embrace financial insurance to ensure longevity, growth and risk management.
“MSMEs are diverse and of vital importance to our economy. They, however, face high exposure to risk and are unable to cope. For example, with Farming, which is a key business segment among MSMEs; 67% of farming MSMEs experienced harvest/crop failure, and/or loss of livestock. These are alarming numbers for such a crucial sector in our economy. The alarming risks that MSMEs face ought to, therefore, be emphatically managed by Insurance,” Kabahuma explained.
Kabahuma added that UAP Old Mutual research indicates that only 2% of MSMEs in Uganda have insurance, which is extremely low.
“43% of the respondents knew how insurance works, while 24% stated that they don’t know the benefits. These are some of many challenges that both MSMEs and insurers face when it comes to insurance uptake. Others include high-risk exposure, rapidly changing risk management needs, lack of insurance awareness, and the lack of MSME knowledge by insurers,” emphasizes Kabahuma. She explains that for insurers to overcome these challenges, they ought to cultivate an in depth understanding of the MSME sector. She added that it was in the same plight, that UAP Old Mutual partnered with FSDU and Cenfri to conduct a study on MSME Resilience in Uganda, research on ‘How The Financial Sector Can Better Serve MSME’s’.
“There has been a gap in financial insights for MSMEs, however It is only when we have great understanding of the sector that we can best serve it and create tailor made solutions that meet the sector’s specific needs. We need to work with enterprises to assess their risk and support the implementation of prevention and management mechanisms, rather than only focusing on the transfer of risk through traditional insurance policies, this can be mutually beneficial and add greater tangibility to MSME insurance offerings,” explains Kabahuma.
HOW AND WHY INSURANCE FOR MSMEs?
According to Kabahuma, the first most pertinent step for MSMEs to ensure financial resilience is choosing the right insurance partner.
“Choosing a partner with a track record of success, resilience and over-arching insurance solutions like UAP Old Mutual is paramount if an MSME’s journey to financial resilience is to be successful. UAP Old Mutual is a subsidiary of Old Mutual Limited, based in South Africa, which has been in operation for over 176 years and is in 33 countries. We’re an integrated financial services provider with solutions such as asset management, life, medical and general insurance. We are customer centric which is why conducting research like we have done for the MSME sector is crucial to us as we develop products specific to our customer needs.” explained Kabahuma.
A study by the International Growth Center in 2021, showed that most businesses have reopened after the lockdown in Uganda. However, there has been substantial income loss with businesses now earning 30% lower revenues and workers earning 30% less income than before the lockdown. MSMEs have also faced challenges due to global supply chain shocks with reduced imports and exports, shipping delays and reduced access to international markets.
According to Kabahuma, it is important to note that in general, MSMEs face a range of risks, many of which can’t easily be insured. However, there are alternative tools and strategies that can be used to better manage and mitigate these risks. One of the key solutions that were identified is to enhance risk management and the associated data to inform risk modeling. This reduces the risk exposure which in turn creates a positive impact on the claims in terms of magnitude and frequency. This also enables some premium cost reductions, given that the risk is lower (with risk management) and the risk is better known (because of more data, which means there is less need to add a premium to deal with the uncertainty).