Insurance for Small Businesses: Overcoming Challenges and Ensuring Adequate Coverage

✍️ Opinions

Ashwini

Apr 24, 2023 — 3 min read

Chetan Paliwal, Vice President of Insurance Products, Pazcare | Insurance for Small Businesses

This article has been contributed by Chetan Paliwal, Vice President of Insurance Products, Pazcare.

Creating sufficient insurance solutions and implementing them with the necessary penetration poses significant challenges for insurance companies and their distribution channel partners, such as agents and brokers, when insuring small businesses.

The key challenge lies in the diverse risks that small businesses face, combined with their limited awareness of them, which often makes them ineligible for insurance coverage. Despite efforts by insurers and distribution partners to increase awareness, low premiums and limited remuneration for brokers and agents can make it financially unviable for them. This results in a classic scenario where demand exists but supply-side constraints create a mismatch, leaving small businesses largely uninsured or inadequately insured.

Below are the major risks that need to be insured in order to protect small businesses and ensure the continuity of their operations.

Fire Incident
Burglary and Theft Incidents
Death or Disability of Employee
Death or Disability of the Owner

Fire Incident

A Fire incident on a small business has a multi-fold impact as they can lose most of their capital, which is in the form of stocks, machinery, fittings, and other immovable assets.

To protect this, fire and allied perils insurance coverage provides coverage for loss due to fire, flood, other natural disasters, terrorism, and other similar perils.
The cost of covering all the above risks for a shop owner or retailer is approximately 0.1% of the value of the assets on an annual basis.
The regulator is also pushing for reforms to make insurance more accessible. Thus, they have also asked insurance companies to launch standardized coverages like Bharat Sookshma Udyam Suraksha, which covers businesses with total assets of up to ₹5 crore, and Bharat Laghu Udyam Suraksha, which covers businesses with total assets valued between ₹5 and ₹50 crore.

Burglary and Theft Incidents

Burglary and theft incidents are also very rampant in small businesses, and that can have a financial impact if the raw material stock or finished goods stock is lost.

To protect against this burglary and theft, insurance coverage provides coverage for losses due to these risks.
The cost of covering all the above risks for a shop owner or retailer is approximately 0.2% of the value of the assets on an annual basis.

Death or Disability of Employee

Death or disability of the employee due to an accident while working on the premises.

Worker’s Compensation Insurance: This policy is for employers when they provide compensation to their employees in case of accidents that happen while they are on the job. It covers employees in the case of diseases, bodily injury, disability, or death caused due to accidents in the course of employment and helps them get the care they need. By doing this, it enables employers to meet the requirements of the Workmen's Compensation Act and protection from lawsuits.
The cost of covering all the above risks for a shop owner or retailer is approx. 0.05% of the value of the overall payroll of employees on an annual basis.
Group Health Insurance: This is a health insurance plan that covers the employees of an organization under one policy, where the premium is borne by the employer. The coverage can be taken for their dependents, such as spouses, children, and parents.
The cost of covering all the above risks is approx. 1%–2% of the value of the overall limit required on an annual basis.

Death or Disability of the Owner

The owner or proprietor typically takes business loans on their personal liability. In the event of the death or disability of the owner or proprietor due to any injury or ailment, the personal liability would have to be paid by the dependents.

Term life insurance for the promoter or owner would help in the above scenarios where the value of the term insurance can be kept as outstanding loan value so that in case of any eventuality, their dependents can square off the loan with that insurance claim so that business continuity can be ascertained to the extent possible.
The cost of covering all the above risks for an owner or proprietor is approx. 0.1%–0.0.2% of the value of the overall limit required on an annual basis.

Thus, with the above-mentioned various insurance solutions, small businesses can also be adequately covered and prevent losing their capital, thereby ensuring business continuity.