Neha Yardi
Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role in driving innovation, creating jobs, and fostering economic growth. Defined by parameters like turnover, investment, or workforce size, these enterprises operate on a smaller scale compared to large corporations but significantly impact their local economies. In India, MSMEs are categorised based on their annual turnover and investments in plant or machinery, with micro-enterprises operating at the smallest scale, followed by small and medium businesses.
To support their growth, the Indian government offers various benefits, including collateral-free loans under CGTMSE, tax incentives, and subsidies for technology upgrades. Initiatives like MUDRA Yojana and Skill India further provide financial assistance and workforce training.
While many MSMEs invest in basic insurance products, such as property or employee benefits, a study by IRDAI shows that only 17 per cent of Indian MSMEs have any insurance coverage. This underinsurance leaves the majority vulnerable to risks like natural disasters or financial shocks, underscoring the urgent need for increased awareness and affordable coverage options in this critical sector.
Underinsurance occurs when enterprises either avoid purchasing sufficient coverage due to cost constraints or fail to understand the specific risks they face. For Indian MSMEs, the issue is compounded by limited awareness about the importance of insurance, high premium costs, and complex policy structures. Many MSME owners prioritise immediate business needs, such as inventory or machinery, over safeguarding their long-term operational continuity against risks like fire, natural disasters, or cyber threats.
There is also minimal focus on Liability Insurance, such as Directors & Officers (D&O) or Professional Indemnity policies, which are crucial for managing third-party risks, regulatory claims, and business continuity. This gap highlights an area where MSMEs could strengthen their risk management frameworks. In today’s business landscape, rising litigation, increasingly complex regulations, and the costs associated with legal proceedings can pose significant threats to small businesses. With growing cross-border activities and stringent contractual obligations, MSMEs face potential liabilities from clients, suppliers, and third parties.
Addressing underinsurance in the MSME sector is critical for economic stability. Simplified insurance products, affordable premiums, and awareness campaigns tailored to the unique needs of these businesses could help bridge this gap, ensuring MSMEs remain resilient against unforeseen challenges.
For MSMEs aiming to expand or build trust with stakeholders, liability insurance is a vital shield against unforeseen risks. In the evolving business landscape, various liability insurance products have become essential for companies of all sizes, including MSMEs. Key policies include:
Directors and officers (D&O) liability insurance:
Contrary to common belief, D&O insurance isn’t exclusive to large or publicly listed companies. It safeguards key managerial personnel across diverse organisations such as private firms, NGOs, schools, trusts, and hospitals, against personal liability arising from their managerial decisions. This coverage is particularly crucial for entities with private equity involvement, as independent or nominee directors often require D&O protection before joining a company’s board.
Public offering of securities insurance (POSI):
This policy is vital for companies planning to go public, complementing existing D&O coverage. With a notable increase in SME IPOs, 179 listings in 2023, POSI provides critical protection during public offerings. It covers selling and controlling shareholders, facilitating private equity exits and promoter stake sales, and instils confidence in MSMEs to access public funds while mitigating regulatory and litigation risks associated with offer documents.
Cyber insurance:
As digital integration deepens, cyber threats have become more imminent than traditional risks like fire. SMEs are particularly vulnerable, facing cyberattacks four times more frequently than larger firms. Cyber insurance protects against financial losses from data breaches, ransomware, and business interruptions, making it a prudent investment even for smaller companies.
Crime insurance:
MSMEs, especially in manufacturing, are increasingly susceptible to social engineering frauds, employee dishonesty, stock misappropriation, and computer fraud. A comprehensive crime insurance policy shields businesses from direct financial losses resulting from such incidents.
Commercial general liability (CGL) insurance:
For manufacturing entities, CGL policies are essential. They offer protection against third-party claims for bodily injury or property damage due to product defects or accidents on company premises, ensuring coverage aligned with contractual obligations and operational risks.
Errors and omissions (E&O) insurance:
Service-oriented companies such as consultancies, tech firms, BPOs, KPOs, law firms should consider E&O insurance. It safeguards against client claims alleging financial losses due to professional negligence, contract breaches, intellectual property infringements, defamation, or confidentiality breaches.
Employer’s liability/workers’ compensation and employment practices liability insurance (EPLI):
MSMEs employing workers, particularly in sectors like manufacturing or construction, should secure coverage for workplace-related injuries under the Workmen’s Compensation Act or common law. EPLI policies further protect against employee claims of discrimination, harassment, wrongful termination, and other employment-related issues.
Manufacturing errors and omissions insurance:
Contract manufacturers may face claims from customers alleging financial losses due to manufacturing errors or non-compliance with specifications. While market availability is limited, a knowledgeable broker can help negotiate suitable coverage at competitive terms.
Specialised products:
Additional coverages, such as Warranties and Indemnities Insurance for MSMEs undergoing acquisitions or Recall Insurance to manage expenses related to product recalls, address specific risks and enhance overall risk management strategies.
Implementing these liability insurance solutions enables MSMEs to navigate complex operational challenges, comply with regulatory requirements, and safeguard their financial stability and integrity.
By prioritising a comprehensive risk management framework, MSMEs can protect themselves from unforeseen challenges, fulfil regulatory obligations, and build trust with stakeholders. Partnering with experienced insurance advisors ensures access to tailored solutions, competitive premiums, and expert support throughout the policy lifecycle. With the right insurance coverage, MSMEs can focus on innovation and expansion, secure in the knowledge that their risks are well-managed.
