SMEs and Microinsurance: Benefits and Risks

“Do you know the difference between education and experience? Education is when you read the fine print; experience is what you get when you don't” (American singer and social activist, Pete Seeger)

Microinsurance refers to an area of cover made accessible to low-income individuals and businesses at relatively low cost. Within the South African context, they originally dealt heavily with funeral insurance. Since 1 July 2018, in terms of the Insurance Act of 2017, microinsurers were allowed to offer additional product offerings.

The Insurance Act introduced a new microinsurance license category. Now microinsurers may be profit-making, not-for-profit or co-operatives. This has brought stability to the sector and even opened up the market, and extended the list of options.

Legislation included a time cap on contract terms of 12 months for life insurance and a “No Waiting Periods” law for policies covering accidental death or disability, as well as credit risk policies.

The importance of the microinsurance sector for local SMEs

A South African Microinsurance Case-Study, which was conducted by the University of the Western Cape (UWC) for the International Labour Organisation, surveyed SME operators to assess the risks that they face and then explored the possibility of insuring those risks.

It concluded that “there is an important, albeit limited, role for microinsurance (especially life insurance)” among SMEs. The case study assessed the risks SMEs face in totality, from operational to employee benefits.

The avoidable financial risks negligent SMEs face

Given the many companies advertising funeral cover, employees of SMEs should first find out if such cover is offered as an employee benefit to avoid making unnecessary contributions to their own policies given the payout caps in the event of a claim.

Accordingly, SMEs which contribute to their employees’ life insurance and/or funeral policies as benefits, run the risk of wasting money should they not fully understand the regulations relating to these policies. This should be fully discussed with employees as the impact of the R100 000 cap on life and/or funeral cover affects SMEs which offer these employee benefits directly to staff. For example, if an employee is covered by multiple funeral policies and a claim is filed, the insurers will scrimmage and divide the R100 000 cap liability among themselves. Regardless of the policies’ individual values, not a single rand will be paid beyond that amount.

These are usually taken out as group covers. Communicating with employees is vital as there is no need for multiple funeral policies if the R100 000 aggregate sum is reached.

Advantages of using microinsurance over traditional insurance

• They provide cover at lower premiums.
  
  
• No exclusion is allowed due to pre-existing health conditions for funeral and credit life insurance policies.
  
  
• Excesses only concern the non-life insurance policies.
  
  
• Authorisation and payment of claims are not allowed to take more than two business days.
  
  
• SMEs that have microinsurance cover for employees have them as group schemes with less admin and red tape as compared to traditional insurance.

Disadvantages of using microinsurance

• Many microinsurance schemes are said to have relatively poor viability and sustainability, so products require more scrutiny in order to be considered safe.
  
  
• SMEs need to be aware of the cap of R100 000 maximum payout in the life and funeral insurance category and the R300 000 cap in the non-life category.
  
  
• Products are usually not comprehensive in the non-life category.

Seek professional assistance to find the best microinsurance options available in order to avoid being trapped by the fine print.