Paresh Nath Karmakar

Micro, Small and Medium Enterprises (MSMEs) are key components of every economy. The MSME sector generates lakhs of employment and significantly contributes to the GDP of the country.

As per MSME Ministry data, there are about 6.3 crore MSMEs in India, which provide employment to approximately 11.10 crore and contribute to about 27% to the country’s GDP, which is again 45% of the manufacturing output and over 40% of both direct and indirect exports.

Criteria for classification of MSMEs enterprises:

i) A Micro enterprise where the investment in Plant and Machinery does not exceed Rs. 1crore and turnover does not exceed Rs.5 crore.

ii) A Small enterprise where the investment in Plant and Machinery does not exceed Rs.10 crore and turnover does not exceed Rs.50 crore.

iii) A Medium enterprise, where the investment in Plant and Machinery does not exceed Rs.50 crore and turnover does not exceed Rs. 250 crores.

The location of these enterprises includes rural and semi urban cities. The location makes the business susceptible to various risks like Fire, Flood, Storm, Earthquake, Burglary etc. It is to be ensured that these business models are risk free and under insurance coverage and help sustain business.

Insurance coverage in this sector is way behind and enterprises require insurance coverage as a safety net for their business to withstand business risk and remain resilient to unannounced dangers that often hamper running enterprises which are operating often on lesser financial strength. A report by the National Institute for Micro, Small and Medium Enterprise (NI-MSME) reveals that less than 10% of these enterprises have adequate insurance coverage, leaving them vulnerable to various risks.

Insurers have the onus on them to create more acceptable and affordable insurance-based products that can cover different risks. But various reports say insurance coverage is less in this sector as many enterprises are not aware of various insurance covers that are available. Besides, they have a lack of trust in insurance. This skepticism may be due to lack of direct experience of insurance and information of insurance-based products and distribution channels.

The Insurance Regulatory and Development Authority (IRDAI) has been taking measures to bring maximum MSME’s under insurance coverage. They have issued guidelines to introduce Standardized Products for Micro and Small Business to provide coverage for Fire and Allied Perils. The Insurers have been providing these products even with various Add-ons to this Sector with effect from April 2021. The Insurers have been providing the following products to these enterprises.

i) Bharat Sookshma Udyam Suraksha (for enterprises where the total value at risk at one location is up to Rs. 5 Crore)

ii) Bharat Laghu Udyam Suraksha (for enterprises where the total value at risk at one location is more than Rs.5 Crores and up to Rs.50 Crores).

To attract this segment, only the standard insurance product is not sufficient. The understanding of the value chain of different MSMEs and innovative thinking is necessary to develop customized products.

In this article an effort is being made to take care of the pain points faced by the enterprises.

1. The main feature of this insurance is that there is a fixed sum insured. Indemnification will be limited to the maximum amount to be indicated in each section during the entire period of insurance. The condition of Average will not be applied—a great relief for the customers.

2. At present, the Standard Business Interruption (BI) Policies issued to cover industrial units are cumbersome and not so popular though it is very scientific, taking care of all contingencies and time tested. Unfortunately, in one study, it is found that less than 1% of the Fire policy is covered under BI insurance. In this context an effort is made to design an innovative, easily understandable BI insurance to take care of MSME It will be easily understood by the customers and marketing forces. The methodology adopted here is that the value of different components like Net Profit and All Standing charges of last Financial Year will be taken as standard and agreed. The basis of BI insurance will be based on this Agreed Value. Assessment of loss will be based on the Per day loss of Gross Profit and to be applied for the interruption Period. In the existing BI policy, the Interruption Period commences from the date of loss and ends when production is back to the normal planned anticipated level. But in the proposed BI insurance, Interruption period commences from the date of loss and ends after resumption of commercial production.

Keeping Bharat Laghu / Sookshma Udyam Suraksha Insurance on the focal point, other contingencies like Business Interruption due to Fire and allied perils, Burglary and Housebreaking, Money Insurance, Machinery Breakdown of electrical/mechanical appliance, Electronic Equipment and Appliances. Goods in Transit, Plate Glass/Neon Sign/Glow Sign, Baggage, Fidelity Guarantee, Personal Accident to employees, Cyber Liability, Legal Liability to employees and Third Parties is included in one Package Policy. Package policy has several advantages. It provides a comprehensive approach to risk management by consolidating multiple perils into a single policy, simplifying administration, and often reducing costs through bundled coverage.

An outline for different section is given below:

Section I

Subject matter of Insurance:

Building and Plant and Machinery, Stocks, Raw material, semi-finished, stock in process and finished stock.

Perils covered:

Fire, Explosion/Implosion, Lighting, Landslide, Bush fire, forest fire, Impact damage of any kind, Missile testing operations, Riot, Strikes, Malicious Damage, acts of terrorism, Bursting or overflowing of water tanks, apparatus and pipes, Leakage from automatic sprinkler installations, Earthquake, Storm, cyclone, Flood, Inundation, Tsunami.

Theft within 7 days of the occurrence of, and proximately caused by, any of the above Insured.

Few add on in-built covers: Additions, alterations or extensions, Temporary removal of stocks, cover for specific contents, Start-up expenses, Professional fees, Removal of debris, costs compelled by Municipal Regulations.

Section II

Business Interruption Insurance:

a) Identify the Standing Charges (Fixed cost) which are incurred by the Insured even if there is no production following upon the loss caused by insured perils. e.g., Bank instalment, Rent, Salary of Manager and supervisory staff, conveyance, Depreciation of building, machinery, insurance premium etc. These charges will be termed as Agreed Standing Charges.

b) Net Profit from the last audited financial accounts to be considered as Agreed Net Profit.

c) Agreed Gross Profit = Agreed Standing Charges Plus Agreed Net Profit (In case of Net loss, Agreed Gross Profit= Agreed Standing Charges minus Net Loss)

d) Per day Agreed Gross Profit= Agreed Gross profit divided by 365.

e) Indemnity Period= Indemnity Period is the duration during which commercial production will commence from the date of incident; to be limited to 12 months.

f) Sum Insured = Per day Agreed Gross Profit multiplied by Indemnity Period of 12 months.

g) Period of interruption of business= Date of commercial production minus date of Loss.

 Indemnification= Period of interruption of business multiplied by Per day Agreed Gross Profit.

Condition of Average is not applicable.

Illustration:

Underwriting Stage:

Relevant data for the financial year 01.4.2022 to 31.3.2023:

i) Net Profit: Rs.25,00,000/-

ii) Standing Charges identified and agreed: Rs.1,00,00,000/-

Policy issued from 1.10.2023 to 30.9.2024

  • Agreed Standing Charges: Rs.1,00,00,000/-
  • Net Profit: Rs.25,00,000/-
  • Agreed Gross Profit: Rs.1,00,00,000/-+Rs.25,00,000/- =Rs.1,25,00,000/-
  • Per day Agreed Gross Profit: Rs.1,25,00,000 /365= 34,247/-
  • Indemnity Period: 12 months
  • Sum Insured: Rs34,247 X 12 = Rs.1,25,00,000/-
  • Premium to be charged on this Sum Insured.

Assessment of loss:

  • Date of loss: 1.1.2024
  • Date of resumption of commercial Production: 31.3.2024

Assessment of Claim:

  • Period of interruption: 90 days
  • Per day Agreed Gross Profit: 34,247/-
  • Indemnification= 90days X 34,247= Rs.30,82,230/-
  • This method of “Indemnification as agreed” will be easily understood by the customers and the members of distribution channel. It also offers faster payouts than the existing BI insurance.

Section III

Burglary and House Breaking

Subject matter of Insurance:

Plant and Machinery, Stocks, Raw material, semi-finished, stock in process and finished stock.

Loss or damage to property by theft involving entry into or exit from the insured premises by forcible and violent means or following assault or violence or threat thereof to the insured or any employee of the insured or member of the insured’s family.

Section IV

Money Insurance

Money – in- Transit and/or in safe and/or in steel cupboards, Cash box and in such other places under lock and key (covering all business transactions) loss due to any accident or misfortune subject to limits of liability specified in the schedule.

Section V

Machinery Breakdown of selective machines.

Loss or damage due to unforeseen and sudden accidental physical damage caused by and / or solely due to the mechanical and / or electrical breakdown.

Section VI

Electronic Equipment and Appliances including Laptop (selective basis)

Loss or damage to Electronic Equipment caused by unforeseen and sudden accident from any cause other than those specifically excluded.

Loss or damage to External Data Media and/or costs of restoring information and data stored therein.

All risk cover (with standard exclusions) for Laptop.

Section VII

Goods in Transit

All risk cover of Raw Materials, Semi finished goods, Finished goods with standard exclusions for all inward and outward transits.

Section VIII

 Plate Glass/Neon Sign/Glow Sign

Against fire, accidental damage, malicious act and/or theft.

Section IX

Baggage

Loss or damage to accompanied baggage by accident or misfortune.

Section X

Fidelity Guarantee

Loss due to any act of fraud or dishonesty by salaried employees at the Insured’s premises.

Section XI

Personal Accident

It covers the employees towards bodily injury solely and directly caused by accidental, violent, external and visible means resulting in death or disablement within 12 (twelve) calendar months of the occurrence of such injury.

Section XII

Cyber Liability

It provides protection against a wide range of first and third party liabilities occurring out of cyber exposures associated with e-business, internet, networks and information assets.

Coverage.             

First Party Liability:

  • E-Theft Loss as a consequence of having transferred funds due to the fraudulent input of data into a computer system,
  • E-communication Loss occurring due to a customer having transferred funds on the faith of any fraudulent communication for which loss, Insured is held legally liable.
  • E-Threat Loss including the cost of a professional negotiator.
  •  E-Vandalism Loss even when caused by an employee
  •  E-Business interruption including Extra Expenses

Third Party Liability:

  •  Disclosure Liability including customer claims due to system security failures resulting in unauthorized access to or dissemination of private information on the Internet.
  • Reputational Liability including claims alleging disparagement of products or services, libel, slander, defamation and invasion of privacy
  • Conduit Liability including claims arising from system security failures that result in harm to third-party systems
  • Defence Costs cover costs incurred in defending any claim brought by a government agency, licensing or regulatory organization.

Section XIII

Legal Liability to Employees

It covers the Insured’s legal liability to employees arising out of and in the course of employment under Workmen’s Compensation Act 1923 and subsequent Employees Compensation Act, 2009.

Section XIV

Legal Liability to Third Party

It covers liability of the Insured to Public for bodily injury to any Third Party or loss of or damage to Third Party’s property whilst caused at the Insured’s premises. Policy may be issued on AOA and AOY basis.

In addition to those Parametric covers for Earthquake, Flood Strom, Inundations etc. can be designed.

Customer has the wide option to choose the section as per his requirement.

The major advantage under this policy is the absence of Average Clause and simplified Business Interruption cover. But before issuing coverage, a thorough assessment of physical risk, operational risk, financial risk and digital risks of the enterprise is to be carried out.  The marketing forces should be sensitized, and appropriate capacity building is to be done. This would facilitate Entrepreneurs, Bankers, Intermediaries, Surveyors and the Insurers too.

References: From various sources.

By: Paresh Nath Karmakar

Retired DGM(IS): United India Insurance Co. Ltd.

Ex-Faculty Member: National Insurance Academy, Pune and College of Insurance, Insurance Institute of India, Kolkata

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This entry is part 18 of 23 in the series February 2025- Insurance Times

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