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South Africa’s funeral insurance industry is set for an upheaval as government pushes ahead with plans to create a funeral benefit scheme for all old age grant beneficiaries.
This benefit would be mandatory for the roughly 3.3m beneficiaries, and would probably amount to R10 000 upon death, the department of social development’s deputy director-general, Brenton van Vrede, told City Press.
At the same time, the department wants to repeal regulation 26(a), a mechanism which allows insurers to deduct up to 10% of a grant for funeral policy premiums before the grant even gets paid to the beneficiary.
Currently, 19 insurers use this mechanism. The largest three are Assupol, 1Life and Sanlam, according to data from the department.
The 19 insurers together deducted about R1.5bn from 800 000 grant beneficiaries every year, said Van Vrede.
This is apart from any funeral insurance which beneficiaries may be paying for after they receive the grants – business that can also get displaced by the planned new mandatory benefit.
The latest FinScope survey, released this week and produced by the FinMark Trust – an independent trust established in 2002 with the aim of making markets work for the poor – estimates that a total of 1.2m old age grant recipients have formal funeral insurance policies of some sort.
This indicates that at least 400 000 beneficiaries have funeral policies that do not use the 10% deduction mechanism.
The plan
Last week, the department of social development gazetted proposed amendments to the Social Assistance Act, including a proposal for the creation of a supplementary benefit fund.
In doing so, there are two problems the department hopes to address: the high cost of existing funeral insurance and the fact that too many people have no insurance to begin with.
Van Vrede said the monthly “premium” charged by the state fund would amount to R50 at most – but would hopefully be as low as R35 to provide a R10 000 death pay benefit.
Treasury still had to weigh in, and the plan would probably be presented to Cabinet in January, he added.
Nevertheless, Van Vrede said he was “quite confident” about these numbers.
Given the grant system’s extensive records, he added, the social development department could “predict with relative certainty” how many beneficiaries would die in a given year. That means it does not have to estimate risk and price it in the way private insurers do.
“The fund will not sell risk or make a profit. It will simply seek to cover the expected payouts,” said Van Vrede.
“Private insurers exaggerate risk anyway,” he added.
The department expects to pay out R1.5bn in benefits per year, indicating 150 000 deaths.
According to Van Vrede, most insurers in the grant beneficiary market simply charge the maximum 10%. This amounts to R150 a month for a similar benefit to what the department proposes, amounting to about R10 000.
“There is huge money in it for industry, but that is to the detriment of beneficiaries,” said Van Vrede.
“There is a strong need for funeral benefits in that market – and there is a need for government to intervene.
“I wouldn’t call it a market failure, but it is hugely expensive and not all that beneficial.”
People will still be free to buy additional cover once they get their grants, but these amendments will result in the insurance industry being judged according to the state’s pricing, done on a not-for-profit basis.
The bill is currently out for public comment and the industry’s major players are not prepared to say anything about it yet.
Sanlam, which makes use of the regulation 26(a) deductions through its subsidiary, Channel Life, declined to comment.
Laurence Hillman, CEO of Telesure Investment Holdings subsidiary 1 Life, said they “are engaging to understand their [government’s] thinking”.
“We do not know enough about the proposals yet. We certainly don’t charge too much; our rates are fair and we provide great value,” said Hillman.
Likewise, Lion of Africa CEO Paul Myeza told City Press he did not want to comment. Earlier this year, Lion of Africa challenged the department in court over its selling of funeral insurance to child grant beneficiaries.
Ongoing battle
The contentious deduction mechanism created by regulation 26(a) of the Social Assistance Act has already been significantly curtailed recently to stop abuses by private insurers.
Deductions were capped at 10% in 2013, or a monthly R150 coming off an old age grant.
Late last year, the department banned these deductions on the child care grant – a move that resulted in it being dragged to court by Lion of Africa.
Lion of Africa had launched an aggressive campaign to sell overpriced funeral policies to children, said Van Vrede. “We saw people sell policies to children who have almost no risk of death,” he told City Press.
“You could, hypothetically, sell funeral insurance to kids at R1 a month if the risk was really taken into account,” he added.
Instead, the policies were priced at exactly the 10% maximum of R35 a month.
“That is just pure profit,” said Van Vrede.
The case went to the Constitutional Court, but was dropped, leaving the legal questions undecided just as they could become relevant again – because of the plan to stop deductions off old age grants as well.
The Reserve Bank also disapproves of regulation 26(a) because it gives a risk-free and preferential collection mechanism to one sector of the financial services industry.
Sanlam, too, has challenged the social development department in court about its decision last year to scrap many deductions on social grants that were not properly consented to by recipients.
Funeral policies everywhere
Funeral insurance is by far the most common form of insurance in South Africa. The FinScope survey estimates that 19m adults have funeral policies, while only 8.6m have any other kind of insurance.
In its latest survey results, FinMark flagged the commonplace practice of taking out more than one of these policies.
“About 5m South African adults have more than one funeral policy and would probably be better off buying life cover,” FinMark said.
When it comes to old age grant beneficiaries, the survey found that:
. 30% of old age grant recipients have formal funeral cover products in their name;
. 28% belong to a burial society, often in addition to their funeral policies;
. 18% of old age grant recipients are only covered by a policy in someone else’s name; and
. 36% of old age grant recipients do not have any type of funeral cover at all.
