The largest insurance segment in South Africa – funeral cover for millions of mass market consumers in South Africa – is still marred by a breakdown of trust between key industry players as a result of the stressful COVID-19 pandemic – and this is affecting consumers in ways that they may not be aware of.
“People don’t often realise how enormous the funeral insurance industry in South Africa is. The regulated, legal, above-board side of the funeral insurance industry is worth between R15-20 billion annually, but it is estimated that up to 50% of the funeral industry operates illegally, which means without insurance or legal compliance. This puts consumers at great risk,” says Clinton Macdonald, CEO of KGA Life, specialists in funeral policy underwriting and regulatory compliance.
While the illegal side of the industry is of clear concern, Macdonald is also deeply concerned about a pandemic-induced breakdown of trust between key parties to the regulated and compliant side of the industry. Tensions are particularly strongly felt between licensed insurers and insurance intermediaries, such as registered funeral parlours, who by extension of their legal compliance are compelled to sell insurance policies from reputable insurers, and to use the services of registered insurance underwriters, both of which they may perceive to be putting pressure on their profit margins.
“This is because the parlours typically sell their services as monthly subscriptions to consumers and out of every R100 they charge the customer, R10 might have to go to the insurers or underwriters with whom the policies are registered in the background.”
The South African context needs to be understood
The average South African consumer has four funeral policies, which they take out through major retailers, financial services companies and/or funeral parlours, Macdonald explains. “Among different cultural groups, funerals mean different things, and in many cultures it may need to happen immediately or it may be treated as a weeklong red carpet celebration. This is why consumers take out different policies to cover different cost aspects of their loved ones’ funerals, from transport, accommodation, venue hire and catering, to hair and beauty and décor.”
Grieving families typically rely on the parlours make all the arrangements quickly and efficiently, and to deal directly with the various insurers and finance providers to cover the full spectrum of costs directly.
“The part that most people don’t realise is that insurers will often pay out a week or two after receiving the death certificate – and for most consumers this is too long of a wait. During COVID, when insurance companies became inundated with claims, the waiting time for funeral parlours and their clients to get paid out was up to six weeks. Culturally, however, funerals often have to happen within a day or few days, which forces parlours to ‘float’ their insurers until payout. This puts the parlours under severe cashflow pressure. And that’s why they need underwriters, who can work fast, to assist them immediately with their insurance cashflow.”
The underestimated role of underwriters in the SA funeral industry
And herein lies the rub, says Macdonald. “The average man on the street doesn’t know or care about the role of the underwriter, but when parlours don’t use underwriters to assist with their cashflow administration quickly, and choose to deal only with the insurers who take longer, delays can be passed on to the consumer, or parlours that have been trusted by the community for many years can fall into financial distress.”
In South Africa there are roughly 60 companies that provide funeral insurance underwriting, and who in turn are typically reinsured by international financial services providers. These companies are regulated under the ‘Twin Peaks Model’ by the South African Reserve Bank (SARB) Prudential Authority and the Financial Services Conduct Authority (FSCA), formerly known as the Financial Services Board. It is these regulators that ensure that funeral insurers and underwriters hold sufficient financial reserves to withstand unexpected shocks to the system, such as unusual events that cause higher than normal volumes of claims.
Hope for new trust relationships in the funeral insurance industry
“What we’ve seen emerging from the unfortunate stress that the COVID-19 pandemic has put the entire funeral industry under is that many parlours view insurance and underwriting services as grudge purchases. In the past the parlours could squeeze the insurers for lower prices, but now additional regulation has come into play to clamp down on parlours who were under-insured and under-financed during the COVID era, putting their customers at risk. In the past many parlours would shift around from insurer to insurer, underwriter to underwriter, to put pressure on them to cut their prices, unbeknownst to the consumer. This created a lot of tension in the industry. The FSCA has put a stop to it by making it illegal for parlours to move policies around without the customer’s written consent, and by doing spot checks to monitor the industry.”
One bad practice the FSCA is monitoring for is when intermediaries in the industry, such as funeral parlours and burial societies, only underwrite half of their client book in the hope that they can look above board while still saving a penny.
“The COVID era led to a lot of jostling and pointing of fingers, but I do have faith that many intermediaries have seen how critical it is for their own sustainability to have the backing of insurers and underwriters, and vice versa. Many people in the industry have woken up to how essential and beneficial it is to build good trust relationship between all parties, including the regulators. We are a symbiotic ecosystem and strong relationships between all the legally compliant entities in the funeral insurance business is absolutely critical for the wellbeing of the consumer. Consumers just want a service, and that requires trust relationships between the third parties in the background.”
