Big shift among non-life insurers to cover SMEs

Saturation in other businesses triggers the move.

Small and medium enterprises (SMEs) have become the preferred segment for general insurers after saturation in covering other corporate businesses, despite the former’s small ticket-size and unorganised nature of business. Over 60 per cent of the business underwritten in the corporate side is coming from the SME segment.

Insurers see huge potential and says the segment is highly untapped. Chances of big claims are low. Risks are mainly retained by insurers, as the sum assured falls in the range of Rs 1-5 crore. They do see challenge coming from high cost of distribution.

To promote the product, insurers now sell customised bundled policies. The product covers different kinds of risks like fire, workmen exposure, flood, earthquake, general liability, marine, fidelity, personal accident, public liability and health, all together in a package.

Though there is no standard definition of SME, any sum assured of less than Rs 1 crore is understood as small enterprises, while up to Rs 50 crore is considered medium enterprises. The risks underwritten in this segment is retained by the insurers.

“It is an underserved segment. The income from SMEs has gone up by more than 50 per cent. We expect profitability from this segment with increase in volume,” said Tata AIG General Insurance Managing Director and CEO Gaurav Garg. Insurers offer higher discounts with the increase in coverage in the bundle. Garg expects the growth from SMEs to be around 30-35 per cent.

“We expect this segment to grow by 20 per cent. These are mostly bundles and customised as per the demand of the SME. Though the claim ratio is low, management expense is quite high in this segment, as insurers have to invest in both people and infrastructure,” said ICICI Lombard’s chief financial officer, Rakesh Jain.

To tap the segment, insurers have designed products for bancassurance partners.

The claim ratio in this segment is around 50 per cent. The premium varies from 0.01 per cent to 0.03 per cent of the sum assured. Any sum assured between Rs 1 crore to Rs 50 crore falls into the SME segment.

“Earlier, insurers shied away from this segment as the cost of administration was too high. But, with little business left in corporates, and high discounts offered due to competition, it has become unviable for insurers to write corporate (insurance),” said K Ramachandran, executive director, Boda Insurance Brokers.

“We see immense potential in the segment, as the overall industry is doing well. Generally, if there is a bank funding, they insist on collateral to be insured. We expect the penetration to go up. The biggest challenge is to reach them in a cost-effective method,” said HDFC ERGO’s head of retail, Karan Chopra.

Generally, insurers sell products through regional rural banks, co-operative banks and agencies. Since the chances of defaults are higher, discounts are lower in this segment.