By: Siobhan Cassidy, MoneyMarketing contributor
A review of regulation governing the distribution of funeral policies in South Africa, announced in early November, promises to bring much-needed clarity to the industry and relief for millions of consumers who value these products for both financial and cultural reasons. In a joint statement issued on 6 November, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) announced a review that aims to go beyond improving the sector’s regulatory framework to supporting small and emerging businesses and empowering consumers through a financial literacy programme.
The review is a response to concerns raised by the funeral parlour industry “around potential issues in the current regulatory framework that may be hampering the ability of the market to achieve meaningful long-term growth and effectively serve its historically under-served customer base”. The joint statement also pointed to concerns about “the existence of an unlicensed funeral insurance market and prevailing poor practices in relation to the distribution of funeral insurance, even within the licensed market”.
The ASISA release adds layers of importance and complexity, and some intrigue, to this review of a sector, where the lack of regularity and transparency seem to be at odds with its relevance and value to consumers.
Cultural importance
News of the review will be welcomed by consumers because of the practical and cultural importance of funeral insurance. It’s often a ‘must-have’ in a country where a large proportion of drivers are uninsured and only a small minority of people are prepared financially for retirement. Funeral cover is the most held insurance product in South Africa, according to the FSCA Financial Sector Outlook Study 2022, and “inflates the number of South Africans who are insured”. The study said that 42% of adults claim to have an insurance product, but when funeral cover is excluded, the share of South Africans with an insurance product drops to 19%.
According to ASISA figures, at the end of June 2024, of the 35.2 million risk policies held by life insurers for policyholders paying monthly premiums, 15 million were funeral policies against 13 million life, disability, severe illness and income protection policies, and 7 million credit life policies. Noting that funeral insurance “holds a unique and prominent place in South Africa, driven by a mix of cultural, economic and social factors”, Mfanafuthi Mlungwana, Head of Mass Market Distribution at Discovery, pointed to a 2020 study by UK insurer SunLife that ranked South Africa as the fourth most expensive country in the world to die in. South Africans spend approximately 13% of their average salary on funerals.
When people don’t have a policy or savings, they will often take out a loan rather than skimp on a funeral. The burden of having to repay the loan is set off against enormous cultural pressure to give the deceased a dignified ‘send-off’. According to Xolani Buthelezi, Managing Director of Scarlet Capital, the cultural importance of a dignified funeral cannot be overstated: “Funerals are viewed not only as a personal or family matter but as a community event where one’s respect for the deceased is on display.” The costs often extend beyond the basic funeral, and may include livestock for traditional ceremonies, food for guests and transportation, adds Buthelezi, who traces his own interest in insurance to when, as a young man, he borrowed money to pay funeral expenses for an uncle who had been a father figure to him.
The popularity of funeral insurance in South Africa is also a function of accessibility. Unlike life insurance, funeral policies are simple and don’t require medical examinations or proof of income. This can also lead to ill-informed consumers treating funeral cover as a savings product or life cover. Theo Bohlale Head: Actuarial Group Benefits, Sanlam Retail Mass, says he has seen cases where clients hold “multiple funeral policies to cover needs better suited to life policies”. He adds that he encourages clients to discuss their needs with advisers.
Family connection
Funeral policies can include anyone with a family connection, subject to the insurer’s limits, says Anna Rosenberg, Senior Policy Adviser at ASISA. “Funeral policies are designed to cater for one’s immediate family, as well as extended families where one person is likely to be expected to pay for the funerals of several family members.”
Buthelezi says the ease of obtaining funeral policies and the straightforward claims process can lead to misuse, including cases of ‘murder for money’. “Because it’s so easy to insure multiple family members and the payouts are quick, some see this as a means to a financial windfall,” he says.
Nceba Sihlali, Manager Adjudication: Life Insurance Division at National Financial Ombud Scheme, confirms consumers can buy as many policies from different financial service providers as they like. The overall limit is R100 000 per individual per funeral policy, although policies may have their own limits. “It often happens that one family member is covered in more than one policy with the same insurer. For instance, a person may be covered by both his brother and his son under different policies. Such policies may have a limitation on the total cover payable in respect of any one life assured.”
He says duplication is sometimes only discovered at claims stage when, for example, names don’t correspond. “The practice by insurers in those cases is to pay out in full to the first claimant proving a claim, and refund the other claimants whatever premiums may have been paid in respect of the other policy. This often causes dissatisfaction among policyholders.” Saying insurers had adjusted policies and practices to avoid such issues, Sihlali noted the ombud rarely received complaints about over-insurance now. Still, he says, “it would be good to have regulatory certainty”.
Bohlale, of Sanlam Retail Mass, says working with an adviser helps to ensure there are no surprises at the payout stage. He adds that an adviser would “typically do a needs analysis that considers the client’s financial needs, life stage, suitable products, existing product holding and affordability, which helps to identify any risk of over-insurance”. Buying multiple policies was also the consequence of a historical mistrust of insurance companies due to past experiences where claims were frequently denied, and recourse options were limited. “While ombudsman bodies and consumer protection laws have evolved, the lingering perception of unreliability means people often ‘double up’ on policies across different providers to hedge against the possibility of a claim being declined.”
Many South Africans view funeral insurance as a form of family savings. It’s accessible, readily available and relatively inexpensive. For lower-income households, funeral insurance may serve as the only financial instrument providing a semblance of financial security, even if it is an inefficient one. Bohlale notes financial literacy is a major issue. “People may purchase multiple small policies, some even unknowingly, through retail accounts, banks, or other channels. Without clear guidance, individuals assume that more policies equal more security, leading to duplication and excess expenditure on premiums.”
Promising to cover regulation, consumer education, as well as supporting small businesses in this complex, crucial and culturally important sector, the FSCA and PA review has its work cut out for it. Workshops will be set up for stakeholders input in the first half of 2025.
