ART structures can breathe new life into ailing funeral insurance industry

- Herman Schoeman, MD of Guardrisk

The funeral industry or "assistance" industry as it is referred to in the Long-term Insurance Act, is big business in South Africa. Some 6 million people are covered through formal and informal schemes; with premiums of R6.8bn going to burial societies and another R5.5bn going to stokvels each year.

To say that this industry is in a state of turmoil, is an understatement. A regulatory review of the formal and informal funeral insurance markets in South Africa was recently commissioned by FinMark Trust. The resulting report - produced by Genesis Analytics - confirmed that there are "substantial market failures" in the industry and that these are "at the cost of a large number of poor households".

Some of the problems facing the funeral insurance industry include poor administration; the lack of regulation within what the Genesis report calls the "soft middle" (funeral parlours and administrators); a lack of risk management; and, restrictive barriers to entry in respect of licencing requirements.

In many instances the administrative side of the funeral insurance business is in a mess. There is a lack of data, poor premium collection and unreliable claims verification, all of which lead to delays in payments. This is largely because much of the business is inherently informal - administered by burial societies and funeral parlours. Data collection and maintenance is often unreliable. Instead of funeral benefits being paid when they are most needed - within 48 hours of the death - it often takes up to two weeks for payment to be made.

Another problem is that very little, if any, risk management is currently practiced in the informal funeral insurance industry. Thus there is inadequate reserving and insufficient allowance for the negative impact of HIV/Aids on mortality.

Currently funeral insurance business is governed by the Long-term Insurance Act and is required to be written under a life licence. The Genesis report recommends that a dedicated funeral insurance licence be developed; "with lower compliance requirements that will allow smaller players, such as funeral parlours, to enter the formally regulated market". This could include the short-term insurance industry, which is also very well positioned to underwrite and properly administer similar volume related business

ART structures may be one of the ways to breathe new life into the funeral insurance industry. Specialist third party business administrators would help to resolve many of the administrative problems. The so-called "soft middle" could have an incentive to comply and take risk for themselves within a regulated environment. A combination of risk retention, proper systems and administration and reinsurance would make the case for prudent risk management. And the regulatory barrier to entry would be eliminated through use of the ART provider's licence.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: +27 11 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: +27 11 615-3309 / +27 83 225 7450