Why SME Underwriting Demands a Dedicated Approach
India's MSME sector contributes over 30% of GDP and employs more than 11 crore people, yet insurance penetration among SMEs remains below 5%. For underwriters, this presents a paradox: massive opportunity paired with limited data. Unlike large corporates that submit detailed risk information, SME proposals are often sparse — incomplete financials, no professional risk management, and minimal loss history.
A structured checklist compensates for these gaps by ensuring underwriters evaluate every material risk factor systematically, even when the proposal form leaves fields blank.
Financial Health and Business Viability
Begin with the proposer's financial stability. Request at least two years of audited financial statements or ITR filings. Check the debt-to-equity ratio — SMEs with leverage above 3:1 may indicate financial stress, increasing moral hazard. Verify GST registration status and filing regularity as a proxy for operational continuity.
For proprietorship and partnership firms, assess the promoter's personal credit history through CIBIL scores where available. Look for pending litigation on the MCA or eCourts portal. A financially stressed SME is statistically more likely to file inflated or fraudulent claims.
Physical Risk Assessment
For property and fire policies, evaluate the physical premises even if a formal survey is not cost-justified. Key items include: construction type (RCC, steel frame, kutcha), age of the building, electrical installation condition (last inspection date per Indian Electricity Rules), fire protection systems (extinguishers, hydrants, sprinklers per TAC norms), and proximity to fire brigade stations.
For manufacturing SMEs, check the type of machinery, maintenance schedules, and storage practices for raw materials — particularly if flammable or hazardous chemicals are involved. MSME clusters in Surat, Ludhiana, and Coimbatore have distinct risk profiles that underwriters should calibrate against.
Occupancy and Industry Risk Classification
Verify the occupancy classification declared in the proposal against the actual business activity. Misclassification is common among SMEs — a unit declared as a garment stitching workshop may actually be dyeing textiles, which carries a significantly higher fire hazard rating.
Cross-reference the NIC code with IRDAI's hazard grade classifications. High-risk occupancies such as chemical manufacturing, woodworking, and plastics processing require additional scrutiny. If the SME operates in a mixed-use industrial estate, assess the neighbouring occupancies as well — fire spread from adjacent units is a leading cause of SME fire claims in India.
Claims History and Loss Prevention
Request the proposer's claims history for the past five years, including details from previous insurers. Use the Insurance Information Bureau (IIB) data where accessible to verify the declared history. Look for patterns: recurring fire losses may indicate poor housekeeping, while frequent theft claims could signal inadequate security.
Assess whether the proposer has implemented any loss prevention measures following prior claims. An SME that suffered a fire loss and subsequently installed a sprinkler system demonstrates risk consciousness. One that had the same type of loss twice without any mitigation should be flagged for underwriting referral.
Regulatory and Compliance Checks
Confirm that the SME holds all required licences and permits — factory licence under the Factories Act, 1948, pollution control board consent (CTE and CTO), fire NOC from the local authority, and trade licence. Absence of these documents indicates potential non-compliance with safety regulations, which can become grounds for claim repudiation.
For policies covering third-party liability, verify compliance with the Public Liability Insurance Act, 1991 for units handling hazardous substances. Check whether the SME's products are subject to BIS mandatory certification, as non-certified products increase product liability exposure.
The Completed Checklist: Decision and Documentation
Once all checks are complete, document the findings in a structured underwriting note. This should include a risk score (if your framework supports it), any deviations from standard acceptance criteria, and the rationale for the final decision — accept, decline, or accept with subjectivities.
For accepted risks, clearly record any warranties or conditions imposed (such as maintenance of fire extinguishers or compliance deadlines). This documentation is critical for IRDAI audit compliance and for supporting the insurer's position in the event of a disputed claim. A well-maintained underwriting file is the first line of defence in any claims dispute.