Finding the missing middle: better insurance for small andmedium businesses

Micro, small and medium enterprises have significantly differing insurance needs. Treating them the same can undermine their potential, say Cenfri’s Jeremy Gray and David Saunders. By courtesy of the Micro Insurance Network

Jeremy Gray is Engagement Manager at Cenfri, the Centre for Financial Regulation and Inclusion.


David Saunders is Knoweldge Manager at Cenfri.
According to the World Bank’s International Financial Corporation, micro, small and medium enterprises (MSMEs) account for more than half of all employment worldwide. The jobs and wealth generated by MSMEs are recognised as important contributors to at least nine of the 17 Sustainable Development Goals (SDGs), but most directly to SDG8: decent work and economic growth.[1] Financial services, including insurance, are essential if MSMEs are to contribute to these goals. Insurance is increasingly recognised as a valuable tool for MSMEs in developing countries, which are vulnerable to risks and have a high incidence of business failure.[2] Finding the missing middle However, having insurance will not in itself automatically enhance the value of a business – MSMEs are not a homogenous group and their insurance needs differ significantly. They range, for example, from a sole-proprietor car mechanic to a tyre manufacturer with up to 249 employees.[3] Treating these businesses as if they have the same needs can undermine the potential value of insurance to contribute to their sustainability and growth. Most literature to date differentiates between micro-enterprises, and small and medium enterprises (SMEs). Micro-businesses, which make up the vast majority of MSMEs, have between one and nine employees and often operate out of necessity. The line between proprietor and business is likely to be blurred, with the result that micro-businesses often have insurance needs similar to individuals. Conversely, SMEs represent fewer than 10% of all MSMEs4 and generally operate out of choice. They are often defined by their size, based on the number of people they employ, but their makeup and needs also differ according to sector, age, geography and economic context. This makes them a highly diverse group requiring tailored insurance products to help them deal with risks. However, there are significant barriers to insurance providers meeting these needs in order to close this gap in insurance markets.

The missing middle

On the one hand, SMEs are often overlooked by banks and insurers that target large corporate businesses and on the other by alternative financial institutions or microinsurers, which tend to serve micro-businesses such as smallholder farmers. Interviews, combined with research on product offerings for SMEs on the websites of large global insurers, confirm that only five of the top 10 insurers worldwide offer insurance products designed for this business category. This gives rise to what is known in SME literature as the ‘missing middle’. This phenomenon is especially noticeable in developing countries, where SMEs account for only 18% of jobs and 16% of gross domestic product (GDP), compared to 57% of jobs and more than half of GDP in developed countries.[5] The reasons behind the neglect of SME insurance are complex. It’s not just a question of making micro-business insurance products bigger or making corporate products smaller. Micro-businesses are often better served than SMEs because they have similar needs to individuals, and the two groups taken together provide the scale needed to share costs. Aggregators,[6] smartphones and digital platforms are helping overcome the distribution and aggregation challenges associated with this group. However, this business model is difficult to replicate for SMEs, whose products need to be tailored for a variety of different business needs. Unlike micro-businesses, the size of the risk pool in comparison to the cost of serving these SMEs on a case-by-case basis is not viable. The result is that few insurers specialise in insurance for SMEs.

Overcoming the barriers

One approach to overcoming this barrier is to enter into a relationship with SMEs while they are still micro-businesses, in the expectation that they will grow. Pioneer Insurance in the Philippines, for example, follows a graduation strategy that adds more cover to the basic products as a business becomes bigger. [7] Growing with a business can pay off for insurers in the long run, as it increases retention, and when it comes to existing SMEs, there are several opportunities for insurers to make incremental gains:

  • Utilise new data: Improvements in connectivity and new data sources such as call detail records, buying behaviour and social media data are enabling insurers to make use of previously invisible economic activity. This data can be used to identify viable SME target markets, design products to better meet their needs, more accurately price for risk, and control the costs that are typically associated with entering new markets. 8 For example, Discovery Insure in South Africa recently launched a product using data and analytics to diagnose SMEs’ business needs to offer multi-peril cover and unique additional covers. [9]
  • Leverage new digital ecosystems: Technological developments have also given rise to new digital platforms that make it possible to aggregate SMEs at scale, allowing insurers to tailor insurance products for larger groups at a lower cost. In 2016, for example, French insurer AXA and China’s largest e-commerce platform Alibaba partnered to offer AXA’s commercial insurance products to SMEs through Alibaba’s e-commerce platform.[10]
  • Improve risk management: For bigger businesses, the emphasis is often on tailored risk reduction, which in turn brings down premiums or minimises losses, thereby increasing the attractiveness of insurance to corporate clients. For example, Ghana’s largest chain of retail department stores, the Melcom Group, experienced large claims following a building collapse in 2012 and a warehouse fire in 2015.[11,12] Their insurer, Activa, brought in risk assessment professionals to help ensure compliance and identify procedures to mitigate similar disasters in the future. The Melcom Group has had no major claims since Activa introduced these risk mitigation procedures, and a similar approach could be considered for SMEs.

We need new business models

Implementing such strategies could lead to incremental gains, but more action may be needed to convince many insurers that SMEs are a viable target market. A new business model that leverages new sources of data, digital ecosystems or improved risk management may be required. There is often little incentive for insurers to launch new business models in challenging and untested markets. Donors and governments can help by: communicating success stories; building capacity among providers; sharing proven business models from round the world; working with industry to develop MSME insurance product solutions and templates; and providing technical assistance in specific areas such as pricing formulas. It is clear that the missing middle of business insurance has not yet been eliminated. In the drive to achieve the SDGs, it is vital that we do not continue to overlook small and medium businesses. Only by treating them differently from other MSMEs can we start to understand their unique needs and find new ways to close this gap.


[1] International Trade Centre, MSMEs and the 2030 Agenda for Sustainable Development, 2017. Available at: http://, accessed on 3 November 2017. [2] Merry, A., Insurance for small businesses, (Geneva: International Labour Organization (ILO), 2016). Available at http://, accessed on 6 September 2018. [3] Gonzales, E., Hommes, M., Mirmulstein, ML. MSME Country Indicators 2014: Towards a Better Understanding of Micro, Small and Medium Enterprises, (International Finance Corporation (IFC), 2014). Available at, accessed on 6 September 2018. [4] Bester, H., Gray, J., Hougaard, C., Saunders, D., van der Linden, A. Decoding the Customer: First impressions from a more granular approach to client typology, (Centre for Financial Regulation and Inclusion (Cenfri), 2015). Available at, accessed on 14 May 2018. [5] Milken Institute, Stimulating Investment in Emerging-Market SMEs, (2009). Available at https://assets1c.milkeninstitute. org/assets/Publication/InnovationLab/PDF/smelab.pdf, accessed on 11 May 2018. [6] Client aggregators are entities, for example, retailers, service providers, membership-based organisations or civil society organisations that bring together people or entities for non-insurance purposes and that are then used by insurers, with or without the intervention of agents or brokers, to distribute insurance. (Gray, J., Bester, H., Hougaard, C. & Thom, M. Evolving Microinsurance Business Models and their Regulatory Implications, (2014). Available at a2ii_cross-country_synthesis_doc_1_final_clean_2.pdf, accessed on 23 July 2018). [7] See Pioneer Insurances website at ph/products, accessed on 3 November 2017. [8] Riggs, T. Worldmark Global Business and Economy Issues. Business, 2015, Volume 1, 139-144 and Hunter, R., Nordin, K. & Thom, M. forthcoming. Client data in inclusive insurance. (Accessed 23 July 2018). [9] See Discovery website, Discovery launches business insurance (May 2018): (accessed on 6 September 2018). [10] Cendrowski, S6. Alibaba and Insurer AXA Join to Calm Global Customers Worried About Fakes, (Fortune, 29 July 2016). ] Available at, accessed on 3 November 2017. [11] BBC, Melcom shop collapse in Ghana: Negligence blamed. (BBC, 8 November 2012). Available at news/world-africa-20250494, accessed on 11 May 2018. [12] Modern Ghana, Melcom warehouse gutted by fire, (Modern Ghana, 3 January 2015). Available at