Distribution of micro-insurance through retail outlets: South African case study. August Prepared for FinMark Trust

Transcription

1 Distribution of micro-insurance through retail outlets: South African case study August 2006 Prepared for FinMark Trust

2 i 06/10/2006: VERSION 15.1 Author: Doubell Chamberlain Anja Smith Richard Walker Genesis Analytics (Pty) Ltd 2nd Floor, 4 High Street, Melrose Arch, Johannesburg South Africa, Post to: Suite 3, Private Bag X1, Melrose Arch, Johannesburg, South Africa, Tel: , Fax:

3 ii TABLE OF CONTENTS List of Figures iv List of Tables iv 1. INTRODUCTION Background Defining access Why retailers? Scope and limitations 3 2. GENERAL MODEL OF INSURANCE DISTRIBUTION 5 3. THE SOUTH AFRICAN REGULATORY CONTEXT 8 4. THE CURRENT MICRO-INSURANCE MARKET THE SOUTH AFRICAN RETAIL CONTEXT Overview Financial products on offer through retailers Credit and loans Transactions Savings Insurance RETAILER INSURANCE DISTRIBUTION MODELS 21

4 iii 6.1. Standalone product model: Shoprite/HTG Life funeral policies Bundled insurance model: Ellerine Holdings credit life insurance Accountholder/club member product model: Edgars and Jet selling of Hollard funeral insurance Allocation of distribution functions across partner institutions Affordability of insurance cover CONCLUSION Assessing the access potential of retailer distribution Proximity Affordability Product features Product terms Instructive points 42 Bibliography 44 Appendix B: Summary of insurance products sold through specific retailers 47 Appendix C: Insurance products covered by FinScope data 48

5 iv LIST OF FIGURES Figure 1: Insurance value chain 5 Figure 2: Usage of insurance and other financial products across LSMs 12 LIST OF TABLES Table 1: Financial products offered across retailer categories 17 Table 2: Basic features of Shoprite/HTG Life funeral policy 24 Table 3: Target markets of Ellerine Holdings stores. 27 Table 4: Awareness of credit insurance at three Ellerine Holdings furniture stores (LSM 1 to 5) 30 Table 5: Overview of Jet/Hollard insurance products; 37 Table 6: Allocation of distribution functions across retailer/insurer relationship 38 Table 7: Funeral insurance premiums charged for a standardised family portfolio (formal voluntary scheme) 39 Table 8. Summary of performance of models across access criteria 41 Table 9: Summary of insurance products sold through specific retailers 47

6 1. INTRODUCTION BACKGROUND This document presents the findings of a review of the potential for retailers to act as intermediaries of micro-insurance in South Africa. The research conducted 1 for this document served as input into a broader study on the opportunities and challenges facing various intermediary models operating (or potentially operating) in the lower-income market in South Africa (Genesis, 2006) as well as a chapter on retailer intermediation in Protecting the poor: A micro-insurance compendium (Churchill, 2006). 2. Micro-insurance can be defined as any form of insurance that is targeted at, used by and/or accessible to the poor 3. Such insurance is relevant to the poor as they face many risks, which threaten their lives and their possessions and results in costly interruptions to the difficult process of asset formation. Formal insurance presents one of the risk mitigation mechanisms which could support the management of these risks and smoothing of the household asset formation process. Although largely still limited to higher-income consumers, insurers globally are slowly finding ways of extending their services to lower-income households. One of the key constraints has been finding appropriate and efficient distribution mechanisms (Genesis Analytics, 2004). South Africa is no exception to this. Until recently, the South African insurance industry has (with the exception of funeral insurance see Section 4) not actively focused on serving the low-income market. The low penetration of formal insurance products in this market has been the result of, firstly, a limited understanding of the financial needs of individuals with low-incomes and, secondly, the absence of glaringly obvious profit opportunities. However, the Financial Sector Charter (FSC) 4, which delineates the financial sector s (including the insurance industry) obligations towards previously disadvantaged and low-income groups, has triggered a re-examination of poorer households financial needs. Other factors have also led to a renewed interest in the insurance market for lower-income households. The entry of non-traditional and non-insurer players has increased competition and may have hastened a race for the market, while higher-income markets are potentially becoming saturated, providing the search for new markets with greater impetus. 1 The research for this report was conducted in Nov/Dec At this time, the Pep/Hollard distribution model was not yet launched. The reader is referred to Genesis (2006) for more details on this distribution model. 2 The authors would like to thank Jim Roth from Microinsurancecentre.org for his comments and inputs on earlier drafts. 3 Microinsurance is not only limited to insurance for individuals, but also includes insurance products developed for and used to manage the risks of small enterprises. Microinsurance also extends beyond the provision of insurance by microfinance organisations and could include all categories of providers government, commercial entities and nonprofit organisations. 4 See Appendix A.

7 DEFINING ACCESS Access to financial services refers to the ability of an individual to obtain and, on a sustainable basis, use financial services that are affordable, usable and appropriate to their financial needs. Determinants of access. Based on the analytical framework developed by the FinMark Trust (Porteous, 2004), the notion of access has four key dimensions: Physical access: How far must a person travel to access the financial service concerned. Affordability: The service should be affordable relative to the income of the user and the value that it offers. Appropriate features: The features of the service should be appropriate to low-income customers and be able to meet their particular needs. Appropriate terms: There should be no terms that effectively exclude lowincome households from utilising the service (for example minimum levels of income, formal employment, etc.). Access is not usage. Individuals are considered to have access to a specific financial service if the above criteria are all met. It is important to note that access does not translate directly into usage. Individuals may have access, but choose not to use a specific service (e.g. using another financial service instead). Similarly, individuals may use a product out of necessity or compulsion (e.g. where employers insist on paying salaries into a bank account) even where all the access criteria are not met (e.g. due to high costs or inappropriate features). Such individuals would not be considered to have sustainable access WHY RETAILERS? As will be noted, traditional formal intermediation channels have achieved limited success in reaching the low-income market. Despite the current low levels of insurance sales conducted through retailers, there are a number of reasons why retailer distribution is becoming of interest and holds potential as an alternative channel for micro-insurance distribution: Geographical reach. Retailers have an extensive geographic footprint, which means that they are potentially able to service rural areas in which other agents, brokers and banks have limited reach (see Section 5). Cost of delivery. The extensive geographical footprint means that distribution can be done at lower cost utilising existing infrastructure and sharing the distribution cost with other products sold through the same channels. Branding and trust. Brand identity, trust and understanding associated with retailers may make low-income customers more receptive to being sold insurance through a retailer than through traditional channels. The findings of the 2005 Markinor-Sunday Times Brands Survey indicate much stronger

8 3 brand awareness of furniture stores, clothing stores and food retailers than of general insurance and life insurance companies 5. Existing relationship. As will be noted in Section 4, store card penetration suggests that retailers have been more successful than the formal insurers at penetrating the lower-income market and offer distribution potential to the formal insurers. Existing risk management systems. Credit retailers in particular have developed advanced credit scoring systems to facilitate cost-effective lending in the lower-income market. These systems and their experience in the credit market provide the credit retailers with a good understanding of risk in this market. Success in other jurisdictions. Finally, the UK experience shows that retailers can become significant players in the distribution of insurance. The three largest distributors of insurance in the United Kingdom (Tesco, Sainsbury s and ASDA) are all retailers. All three of these are fairly recent entrants to the intermediation market SCOPE AND LIMITATIONS The focus of this document is specifically to explore the potential of retailers to distribute appropriate micro-insurance products to lower-income individuals. More specifically, the focus is on chain store retailers 6 (e.g. not sole traders and other small retailers) and the following categories are considered: food and general goods retailers or supermarkets; clothing retailers; and furniture and appliance retailers. The analysis will focus on retailers that currently intermediate some form of insurance product and on products currently intermediated through retailers. This means that: although potentially interesting and worth further research, the current document will not consider networks such as petrol stations, airtime vendors and spaza shops as they are not currently intermediating insurance products; and health insurance will not be considered in this document as it is not currently offered through the retailer environment. The rest of this document is structured as follows: 5 General insurance was the category (of all of the product categories) with the lowest brand relationship scores. 74% of all respondent were unable to name any general insurance company, while 83% of respondents with a monthly household income of less than $472 (R3,000) did not know any general insurance company. In addition, four out of every ten respondents were unable to name a life insurance company. In this product category, 89% of respondents with a monthly household income of less than $472 (R3,000) were not able to name a life insurance company. It has to be qualified that while furniture stores have a much higher brand relationship scores than general insurance companies, the life insurance companies, on average, had slightly higher scores than furniture stores. 6 This focus was thought appropriate as chain stores have both broad geographic coverage and the ability to standardise and homogenise products characteristics which could potentially enable mass market reach.

9 4 As a basis for the subsequent analysis, Section 2 commences with a description of a general model of insurance distribution. Section 3 provides a brief overview of the regulatory context facing microinsurance. Section 4 provides an overview of the current micro-insurance market as captured in the FinScope 2005 survey. An overview of the general retail environment is provided in Section 5, including a brief review of the financial products offered by retailers. In Section 6, three categories of retailer distribution models are discussed using specific examples. Section 7 assesses the access impact of the models reviewed. Finally, in Section 8 some conclusions are drawn on the potential of retailers as distributors of micro-insurance.

10 2. GENERAL MODEL OF INSURANCE DISTRIBUTION 5 This section outlines a general model of insurance distribution as a basis for the rest of the discussion. Specifically, it considers the institutional and functional dimensions of insurance distribution and briefly notes the key characteristics which differentiate distribution models in their relevance and potential for micro-insurance distribution. Distribution encompasses a variety of functions. Distribution is not only limited to sales activities and encompasses a variety of administrative and intermediation activities necessary to deliver the product to the customer. These functions include marketing, sales, premium collection, policy and client management, policy administration and claims payment. Various institutional components and permutations. In addition, these distribution activities may be conducted by various entities and the roles of specific entities may vary from case to case. Figure 1 presents a picture of the generalised structure of the insurance value chain. Marketing, sales, policy administration, claims payment Distribution channel Risk carrier Administrator Intermediary Customer Technology Policy origination, premium collection, policy administration Figure 1: Insurance value chain Source: Genesis Analytics as adapted from Leach, FinMark Trust (2005) The relevance of the breakdown of activities and institutions presented above is that different institutions and functions may be subjected to different aspects of regulation, different cost structures or different incentives and may, therefore, present specific challenges with regards to distributing micro-insurance. Risk carrier: In the above diagram, the risk carrier is most often a registered insurer. This is the entity that in the final instance is liable for the risk. In some cases, the risk carrier may also be a protected cell company (PCC) (or cell captive as it is known in South Africa), which is a separate legal entity formed by joint venture between a registered insurer and other entity in the distribution channel.

11 6 Administrator: Policy administration may be done at the level of risk carrier or intermediary or may even be outsourced to a specialised entity. In South Africa, significant cost reductions have been achieved by the insurer outsourcing the administrative functions to a specialised administrator entity. Administrative costs are a substantial contributor to the overall insurance costs and innovation on this aspect is, therefore, of particular interest for micro-insurance. In some cases, the administrators have expanded their services to be involved with other aspects of distribution as well. Intermediary: The intermediary is responsible for the activities that rely on client contact (e.g. policy origination) and may take a variety of forms including a direct sales division, captive or independent agents, retailers, etc. Technology: The technology platform may include a variety of technologies ranging from sophisticated electronic solutions, use of cell phones to social technologies in the form of premium collection through self-help groups. The intermediation technologies used by retailers in this study are mostly over-the-counter or telephone interaction. Combination of institutional and functional options determines defining characteristics. Various permutations of institutional and functional make-up are possible and the particular combination of institutional and functional structure and the relationships between the various components determine a number of key characteristics. In the broader intermediary study (Genesis, 2006), the following characteristics were noted as defining the nature and impact of a particular intermediary model: Captive (of the insurer) or independent intermediaries. This refers to the contractual relationship between the insurer and intermediary which may restrict the intermediary to sell the products of only one insurer (captive e.g. the typical captive agent model) or may allow the intermediary to sell the products of any number of insurers (independent typical broker models). The key difference is that, in the captive model, the intermediary represents the interests of the insurer, whereas in the independent model, the intermediary represents the interests of the insured party. One-to-one or one-to-many relationship with insurers. Where the intermediary is contractually independent of the insurer, there may still be a one-to-one relationship with a particular insurer. This often occurs where it is of strategic interest to the intermediary to forge a closer relationship with an insurer (e.g. to develop tailored products) but the intermediary wants to retain its independence and ownership of the client base (see below). Product ownership. Traditionally, insurers developed the products and then sold these through distribution channels of their choice. Increasingly, however, products are developed at other levels of the distribution channel with underwriting then sourced from an insurer. Of interest to this study is that innovation is increasingly driven by entities that are closer to or have a better understanding of the client. Where retailers collect data on their

12 7 clients (e.g. through accounts), this places them in a particularly good position to develop products suitable for their client base. Client ownership. This is usually determined by which entity has the primary relationship with the client. Where insurance is sold to accountholders or members of retailers affinity clubs, the retailer (in practice) owns the client even if the contractual insurance relationship may be with an insurer. In such cases, the retailer has the power to move the client group to a new insurer if it so wishes. Multi-function vs. primary insurance function. This refers to whether the intermediary combines the selling of insurance with other financial and nonfinancial products or whether it purely sells insurance. This is relevant for the retailer model as the multi-function nature of the retailer environment allows for cost reductions through shared infrastructure. Profit or non-profit. In the broader review of the intermediary market, the profit nature of the intermediary is also considered. For this document, it is of less interest as the intermediaries in all cases are profit driven. Although the model of the above characteristics will not be fully developed for this study, the position of the various models in relation to the relevant characteristics will be noted.

13 3. THE SOUTH AFRICAN REGULATORY CONTEXT 8 Micro-insurance has not developed as a separately defined or regulated market in South Africa (i.e. it is not provided by a category of separately defined and regulated financial service providers or intermediaries). Low-income products such as funeral insurance are provided through mainstream insurers and, therefore, regulated as part of the overall insurance regulatory system. In addition, the goal of extending access to insurance to lower-income households has been adopted as an explicit objective (as manifested in the Financial Sector Charter 7 ) of the formal and mainstream insurance industry. Pressure is, therefore, being placed on mainstream formal insurers to find ways of extending their services to lowerincome markets. The Charter process has, to date, mostly focused on product development and has yet to address the challenges of distribution. Regulation drives market segmentation and product offering. Although microinsurance is not separately identified in regulation, the current regulatory regime allows for differentiated regulation defined according to product, which allows less restrictive regulation for micro-insurance policies. To date, limited use has been made of this flexibility in order to create a market for micro-insurance. There are three main product-based divisions in regulation 8 : Life insurance: The Long-term Insurance Act (Act 52 of 1998) governs insurers providing specifically defined types of long-term cover and also refers to the role of the intermediary. These include: assistance policies 9 (the legal term used for funeral insurance), disability policies, fund policies, health policies, life policies and sinking fund policies. The fact that funeral insurance (assistance business) is identified as a separate product category allows the regulator to determine different regulatory requirements for this category of insurance. In this way, funeral insurance is, for example, exempted from commission caps on intermediary selling applied to other areas of insurance. Until recently, insurers providing only funeral insurance were also subjected to lower capital requirements than other insurance categories. The increase in regulatory capital requirements of funeral insurers without a concurrent increase in benefit levels is one of the issues raised by the review of regulation of the funeral insurance market conducted by Genesis (2004). This review argues in favour of reducing the regulatory requirements for this product category in line with the lower risk levels inherent to funeral insurance 10. The recommendations were at the time of writing being considered by the government. 7 See Appendix A for a brief explanation of the Charter. 8 For a more detailed review of the regulatory environment governing the South African insurance sector, the reader is referred to Genesis (2004) and Genesis (2006). 9 Defined as life policies for which the benefits paid may not exceed $ (R10 000). (It is important to note that all Rand to Dollar conversions were made at the interbank average rate of $/R for December 2005). 10 See Genesis (2004), for a more detailed discussion on the risk nature of funeral insurance.

14 9 General (non-life) insurance: The Short-term Insurance Act (Act 53 of 1998) governs both insurers and intermediaries providing specifically defined types of general or non-life insurance (including property insurance). Short-term policies include, amongst others, engineering policies, liability policies, motor policies and accident and health policies. Although it is possible to offer asset or property-related micro-insurance under this category, this market is still non-existent. Flowing from the Financial Sector Charter, the short-term insurers, through the South African Short-term Insurers Association (SAIA), have developed a low-income product providing cover for informal housing and contents. This has only recently been finalised and has been launched in certain test areas. Health insurance: Both the Long-term and Short-term insurance Acts explicitly prohibit the provision of health or accident policies where the benefits are other than a stated sum of money or are directly linked as payment for the provision of medical services. These types of insurance policies are demarcated to fall within the ambit of the Medical Schemes Act (Act 131 of 1998) on the basis that they constitute the operation of a medical scheme. All medical schemes operating under this Act are obliged to offer beneficiaries a minimum prescribed package of benefits (called Prescribed Minimum Benefits or PMBs). In reaction to government pressure, initiatives have been launched to develop medical insurance products suitable for lower-income households. To date, these products have not been developed and the health micro-insurance market is still non-existent. No entity may carry out more than one of the above categories (life, general or health) without establishing separate insurance companies (or medical schemes) for each category. Consumer protection the focus of intermediary regulation. In addition to the above regulation, insurance intermediaries are governed by the Financial Advisory and Intermediary Services (FAIS) Act, which has impacted dramatically on the manner in which insurance is distributed (particularly at the lower-end of the market) 11. As its name suggests, the Financial Advisory and Intermediary Service Act (FAIS), was introduced to regulate market conduct in relation to advisory and intermediary services. In essence, it seeks to ensure that every person authorised to render financial services to a client is fully qualified to discharge this responsibility, so as to improve the flow and quality of information in the market and to ensure consumers enjoy full disclosure and protection from unqualified intermediaries. Where advice or intermediary services in respect of any financial product (including funeral or other micro-insurance policies) are provided through a broker, agent, funeral parlour, retailer, administrator or other class of intermediary, that provider is obliged to first obtain a licence to act as a Financial Services Provider (FSP) 12. This includes any transaction where money is received from a policyholder or client on 11 Most of the provisions of the FAIS Act came into operation on 15 November 2002; those relating to licensing of financial services providers (FSPs) came into operation on 30 September Section 1. A financial services provider is any person (natural or juristic) who as a regular feature of its business furnishes advice, renders an intermediary service, or does both.

15 10 behalf of a financial institution, even where that money is merely held or passed on to the institution. FAIS limits those who can act as an FSP to those who can comply with certain fitand-proper regulations, which includes certain education standards. In addition, an employee or contractually bound agent of an FSP who renders a financial service to a client for or on behalf of an FSP must be registered as a representative of the FSP, unless that person renders only clerical, administrative, or other service in a subordinate capacity, which service does not require judgement and does not lead a client to any specific transaction 13. The introduction of FAIS has raised the barriers to entry in the intermediary market, and increased compliance costs for those who are still able to enter the market. These effects have, particularly, been experienced in the lower-income market as premium values are low and compliance costs thus relatively high. Also, those serving the low-income market tend to find it difficult to meet the fit-and-proper requirements, especially the educational requirements. In recognition of this, the regulator has allowed for a particular category of intermediary (referred to as Category A) to enter the funeral insurance intermediaries market for a grace period of 3 years with lower regulatory requirements on condition that they acquire the necessary educational credits within the grace period. However, even with the reduced requirements, it still presents compliance problems for the intermediaries currently operating in that market and may result in a withdrawal of intermediaries serving this market once the grace period expires. Implication of regulatory regime for retail distribution. With the increased regulatory cost of intermediation, over-the-counter or telephone distribution of insurance policies (as is often done in the retailer context) has received much interest. Specifically, retailers utilise what is referred to as tick-of-the-box selling (i.e. simplified products which are sold without advice) reducing the regulatory requirements of the retailer under FAIS. While this interpretation of the FAIS Act seems to be accepted by the regulator, it is unclear whether it will meet the intentions of the Act (consumer protection). Clearly there is a trade-off between reducing the cost of intermediation with sufficient disclosure and consumer protection. Tiered regulation may facilitate the development of the micro-insurance market. Given the difficulty of providing lower-cost products in a highly regulated environment (mostly designed around high-value products), South Africa has started to move towards establishing regulation for second-tier financial institutions (e.g. second-tier banks) that will allow limited financial operations subjected to a 13 Section 1. Advice in this context means any recommendation or guidance in respect of buying a financial product (including an assistance policy). It does not, however, include factual advice given merely in relation to the description of a financial product, or in answer to routine administrative queries, or in the form of objective information about a particular financial product, or by the display or distribution of promotional material. An intermediary service means an act other than advice, performed by a person for and on behalf of any client, with a view to, buying, selling, administering, managing or otherwise dealing in an assistance policy purchased by the client from a product supplier, or collecting or accounting for premiums payable by the client, or receiving, submitting or processing the claims of a client (Section 1).

16 11 appropriately reduced regulatory burden (in line with the risks posed). The insurance legislation already implicitly allows this within the current regulatory framework by allowing regulatory requirements to be determined based on the product offering 14. In practice, insurers that only provide funeral insurance (an example of a limited risk micro-insurance product) are, however, subjected to the same basic regulatory requirements as those offering a wide spectrum of life insurance products. The Genesis Analytics research on the regulation of the funeral insurance market (Genesis Analytics, 2005) argues in favour of utilising the scope provided by the legislation to reduce the regulatory requirements (and hence, burden) on providers of micro-insurance (in this case funeral insurance) to be in line with the risks they manage 15. The provision of funeral insurance as a category is, currently, exempted from the restrictions on commissions placed on the intermediation of other insurance products. This may contribute to the relative success of funeral insurance over other insurance categories and should be taken into account when considering distribution channels. 14 The Life insurance Act defines a number of products that may be offered by a Long-term Insurer. The Act allows the regulator to set different regulatory requirements for insurers offering different products (e.g. offering only funeral insurance). 15 This will not necessarily result in a second tier of insurers, which operates in a different market to that of first-tier insurers as first-tier insurers also benefit from lower regulatory requirements if they offered the product in question.

17 4. THE CURRENT MICRO-INSURANCE MARKET 12 The micro-insurance market in South Africa is limited in products offered and penetration achieved. Figure 2 shows the usage of insurance and other financial products across LSMs 16 as recorded by the FinScope 2005 survey % Currently banked Some form of life insurance Store card/account Burial society membership All funeral cover Formal funeral insurance Some form of general insurance 10 0 LSM 1 LSM 2 LSM 3 LSM 4 LSM 5 LSM 6 LSM 7 LSM 8 LSM 9 LSM 10 Figure 2: Usage of insurance and other financial products 18 across LSMs Source: FinScope 2005 Based on the information captured in the FinScope survey, a number of observations can be made on the current micro-insurance market: 16 The Living Standard Measure (LSM) is a tool used to segment the wider South African market according to individuals' living standards. It uses location (urban vs. rural), ownership of household assets and access to services to group individuals into one of ten potential LSMs through calculation of a composite indicator (Eighty20, 2005). LSM 1 is the lowest LSM, containing the poorest individuals in terms of the composite indicator, while LSM 10 is the highest category and contains the wealthiest individuals if ranked according the composite indicator. 17 FinScope is a national household survey, underwritten and coordinated by the FinMark Trust. It is focused on measuring financial services needs and usage across the South African population. The FinMark Trust was created in March 2002 with funding received from the United Kingdom Department for International Development (DFID). Its mission is making financial markets work for the poor. 18 See Appendix C for a list of products included.

18 13 Only funeral insurance achieves notable usage. Approximately 27% of individuals in LSM 1-5 indicated that they have some form of funeral insurance (including formal insurance through a big institution, insurance through funeral parlours, insurance through employer or burial society membership 19 ). The relative distribution across LSMs of all funeral insurance categories is indicated by the line all funeral cover in Figure 2. An important and still unanswered question on the success of funeral insurance is whether the success achieved by this product is due to the characteristics on the supply-side (e.g. uncapped commissions) or simply because of the particular cultural demands around funerals in South Africa. In contrast to all other insurance products, funeral insurance seems to be bought, rather than sold. This question, however, falls beyond the scope of the current document. Of the funeral insurance usage, a large proportion is through informal burial societies. Of the 27% that have any form of funeral insurance, about 60% are members of a burial society and about 50% are only members of a burial society (i.e. they did not use any of the other funeral insurance products). Although a proportion of these may refer to formal funeral insurance products sold through informal societies, this is still quite limited and not expected to be a large component of the informal product usage. The bulk is still expected to be informal insurance products managed without any relationship with a formal insurer. In addition to showing the strength of the informal societies, this is also a demand signal for the need for products to manage risks faced by lower-income households. Of the formal insurance usage, the bulk is through funeral parlours. Exploring funeral insurance usage further, the bulk (30%) of usage in LSM1-5, outside of burial societies, is provided through funeral parlours. From previous research (Genesis, 2004), this could be where the funeral parlour acts as the agent of the formal insurer but in many cases, this also presents illegal insurance schemes run by funeral parlours without any relationship with a formal insurer. The data available is insufficient for the disaggregation of these two components or to provide estimates of the extent of illegal insurance. Qualitative research suggests that the self-insured component may be substantial. Other than funeral insurance, the use of formal life or general insurance products are restricted to the higher-income market. Figure 2 shows very limited usage of formal life or general insurance below LSM 6. Of all individuals in LSM1-5, only about 4% and 1% have, respectively, some form of formal life insurance or general insurance. Bank accounts exceed insurance penetration at lower-income levels. The absence of bank accounts is often provided as a reason for why lower-income households cannot access insurance (due to the cost and difficulty of collecting cash premiums). While it may be true that the absence of bank accounts complicate the 19 For simplicity, we refer to burial societies in the same context as insurance products. Previous research, however, suggests that, although burial societies provide funeral cover, they do not provide insurance as defined in South African legislation as the benefits are not guaranteed. See Genesis (2004) for a more detailed discussion.

19 14 distribution question, Figure 2 shows that bank account usage exceeds usage of formal insurance products. This suggests that the premium collection and claims payment elements of distribution may not be the primary barriers. In addition, takeup of formal bank products suggests a familiarity with formal institutions and possibly some level of financial literacy. The use of store cards 20 suggests some potential for retailer distribution to extend the reach of formal insurance products. Although equally limited in LSM 1-3, store card usage in LSM 4-5 exceeds formal insurance usage (if funeral insurance is excluded - of which the bulk is in any event distributed through funeral parlours) and suggests some potential for the distribution of other financial products through retailers. Approximately 13% (2.4m people) of individuals in LSM 1-5 have a store card or account. Almost 97% (2.4m) of the store card holders do not have general insurance, while 79% (1.9m) do not have life insurance and 70% (1.75m) do not have formal funeral insurance. In addition, between 20% and 30% of store card holders in LSM 3-5 do not have a bank account. This presents a substantial and untapped market within reach of the retailers. This is a conservative signal as it is expected that insurance could be sold to a larger proportion of the retailers client base than may currently use or qualify for store cards or accounts. Lack of awareness of credit insurance amongst those who have it brings the value of this product into question. Less than 0.5% of individuals in LSM 1-5 indicated that they use credit insurance, while 25% indicated that they have bought large appliances or furniture and paid for these goods in instalments. Most (if not all) of these credit purchases would have included credit insurance as consumers are forced to take credit insurance (especially where they do not have life or household content insurance) for credit purchases of appliances and furniture. As a result, we must conclude that people in LSM 1-5 are not aware that credit insurance is added to their credit agreement. The fact that consumers are not aware that they have such cover also brings into question the value of this cover to the consumer and explains the low claims rates generally experienced on this category of insurance. Current usage of cell phone insurance draws into question retailers view of this as a low-income product. At least two retailers reviewed in this document offer cell phone insurance as this is viewed as a product needed by lower-income households. The current usage reported in FinScope shows that less than 0.5% of individuals in LSM 1-5 currently have cell phone insurance. Unlike credit insurance, cell phone insurance for pre-paid cell phone users is not bundled with the cell phone purchase and lack of awareness would, therefore, not explain the low usage reported. Although this may suggest an untapped market for the retailers, it may also reflect low demand for this product. Even in the lower-income market, the bulk of formal life (excluding funeral) and general insurance is still sold through brokers and agents. While this question is limited to the few individuals in LSM 1-5 who have purchased formal life or general insurance products, it is still interesting to note that 86% and 71%, respectively, 20 Store cards/accounts are mainly used to facilitate credit purchases, although (in some instances) they are also used in the establishment of customer loyalty.

20 15 reported to have purchased this through a broker or an agent. The distribution of formal funeral insurance was not explored by a similar question, but the analysis above suggests that the bulk of formal funeral insurance is sold through funeral parlours and that the component expected to be sold through broker or agents will be quite limited. This suggests that brokers and agents have not been successful intermediaries in the low-income environment and that alternative channels such as funeral parlours may be more successful. While the situation of funeral parlours is quite different to that of general retailers (primarily that funeral parlours, through offering insurance, obtains captives clients for the funeral services that they provide), it confirms the need for formal insurers to consider distribution channels such as retailers. Low-income preferences on distribution channels raise questions on demand and shows lack of awareness of retailers as distribution channels for insurance products. One of the questions included in the FinScope survey asks respondents which channel they would want to use to purchase life or general insurance from (irrespective of whether they currently have insurance or not). The first interesting result to note is that only 5% of respondents suggested retailers as a preferred channel, suggesting that the awareness of retailers as a distribution channel for insurance is still limited. More interestingly, however, is the fact that 55% and 66% of respondents, respectively, responded that they would not consider purchasing life or general insurance at all. The lack of demand expressed may confirm the view of insurance as grudge purchase and should be carefully considered by institutions planning to enter this market.

21 5. THE SOUTH AFRICAN RETAIL CONTEXT OVERVIEW The South African chain store retailer environment is concentrated in a few large store brands. Three retail categories were selected because of their specific interest to the study - they already offer some type of financial service. However, it is important to note that the categories below cannot be considered an exhaustive list of all store types in South Africa 21 : Clothing retailers (including brands such as Edgars, Jet, Woolworths, Truworths, Foschini, Pep, Mr Price and Ackermans). The clothing subsector consists of a few players with relatively large distribution networks. Although some store brands explicitly target lower-income individuals (e.g. Pep, Jet and Ackermans), most stores are focused on middle- and higherincome customers. The clothing retailer, Edgars, discussed in Section 6.3, officially targets middle- and higher-income markets, but has achieved some penetration in the lower-income market as well. Together the clothing retailers have almost 3,000 stores of which a large proportion has some lower-income exposure. Food and general goods retailers or supermarkets (including major retailers such as Pick n Pay, Spar, Shoprite, Checkers). As with the clothing retailers, the food and general goods retail sector is concentrated in a few large players that own a large number of brands used to target specific customer groups. The target market for these retailers extends across the whole income spectrum, with brands such as Shoprite specifically focusing on the middle- and lower-income markets. Together the food and general goods retailers have in excess of 2,000 store locations of which a large proportion has lower-income exposure. Furniture and appliance retailers (including brands such as Joshua Door, Bradlows, Furniture City and Ellerines). The furniture and appliance sector is dominated by two groups (JDGroup and Ellerines Holdings) operating through a large number of store brands. Different store brands are used to differentiate the offering to particular target markets. The national furniture retail market can be divided into two specific segments the market aimed at LSM 3-7 (particularly brands such as Ellerines and Town Talk Furnishers in the Ellerines Group and Barnetts, Price n Pride and Joshua Door in the JD Group and other furniture stores such as OK Furniture) and the market aimed at customers in the LSM 8 to 10 categories (e.g. Furniture City in the Ellerines Group and Hi-fi Corporation in the JDGroup) (Competition Commission, 2005: 9). The lower-income category is of particular interest to this study and will be the focus of specific examples discussed in Section 21 In addition to the listed categories, at least one other category can be identified. Petrol stations and associated convenience stores (mini-markets, of which some are open 24 hours per day) do not currently offer financial services, but have an extensive geographic footprint and are already used to, for example, selling prepaid cell phone airtime. They were not included in this document as they do not currently sell financial products.

22 17 6. In total, furniture retailers have just over 1,500 store locations of which a large proportion has exposure to the lower-income market. Together the above retailers have an extensive distribution network in excess of 6,500 locations across South Africa that also extends into rural areas. Nearly every small town in South Africa will have at least one chain store retailer. A number of the retailers already offer some type of financial service to customers FINANCIAL PRODUCTS ON OFFER THROUGH RETAILERS Before proceeding with a discussion of insurance distribution through retail outlets, we provide a brief overview of the different types of financial products that are currently offered through retailers. Although this document will focus on the insurance products, these are often woven into an offer of a bundle of financial services and the other products may, therefore, be relevant in order to understand the overall context. As a distribution strategy, it will also be useful to consider the potential to combine multiple products through the retailer mechanism in order to increase volume and reduce transaction cost. The focus will remain on products that are available or suitable to lower-income households. The financial products offered can be split into four broad groups: credit, transactions, savings and insurance. Clothing retailers Consumer Account facilities Credit Transactions Savings Insurance Other Personal None None Funeral loans insurance Credit cards Cell phone insurance Personal accident insurance Food retailers None Credit card Money Market counter Transaction account Furniture Account facilities Instalment purchases Personal loans Table 1: Financial products offered across retailer categories Source: Genesis Transaction account Savings booklet Funeral insurance None None Credit insurance CREDIT AND LOANS A brief survey of retailers identified three categories of credit products on offer: credit card facilities, in-store credit and personal loans. Credit card facilities are offered through outlets that, in general, serve highend customers 22. This is to be expected as lower-income clients will not qualify for a credit card facility. Currently, credit cards are not offered through any of the furniture stores or lower-end clothing stores. However, the 22 For example, Edgars, Woolworths.

23 18 Maravedi Group (see Box 1), which is part of the JD Group, is considering offering this type of product. Consumer credit is primarily the domain of furniture retailers and clothing retailers 23. This credit is extended for the purchase of products from the relevant retail outlet. Credit insurance is usually a prerequisite for this type of credit and is often sold by the retailer providing the credit. However, where a customer has their own general or life insurance this will be sufficient and no further insurance will need to be purchased through the retailer. Only certain retailers offer personal loans. These are loans that a customer can use for any purpose and are not linked to the purchase of an in-store product. The key observation here is that before they qualify for a personal loan, the creditworthiness of a customer will already have been assessed through the use of consumer credit. Examples of retailers who offer personal loans are Foschini clothing stores through its subsidiary business, Retail Credit Solutions, and Ellerines Holdings through its subsidiary, Rainbow Loans TRANSACTIONS Transaction banking, according to the FinMark definition 24, refers to a service offered by banks that allows day-to-day transactions, in particular, electronic payments to and from accounts 25. Transaction products offered through retailers are limited with only a few examples identified. The following products are mostly targeted at middle- and higher-income customers: The Go Account offered by Pick n Pay 26 Go Banking, a joint venture between the food retailer Pick n Pay and Nedbank, provides full transaction capability in that it allows cash withdrawals, debit orders and stop orders. The credit cards offered by two clothing retailers, Woolworths and Edgars, also allow transactability. As noted above, these products are mostly limited to higher-income clients. Only one transaction product explicitly targeted at lower-income customers was identified: Shoprite in-store Money Market counters do not offer full banking services but offer specific payments services relating to the accounts of specific thirdparty providers 27, thus allowing limited transactability. 23 There are examples of furniture and electronic retailers and clothing retailers who do not offer in-store credit (i.e. up to now stores in the Mr Price Group did not offer credit, although they seem to be testing the waters at certain outlets), but this is not the norm. 24 Definition available at: (Accessed on 6 December 2005). 25 This category includes current accounts and most debit and ATM-card accounts. 26 Pick n Pay is a large South African food retailer. 27 Limited to those with whom Shoprite has established an agreement, but includes a fairly extensive list of institutions (e.g. municipalities and even law firms).

24 SAVINGS The transaction or credit card accounts offered through Pick n Pay Go Banking or the credit card facilities offered by the other retailers could also be used as savings vehicles. As noted, however, these products are not directly aimed at this purpose and are mostly limited to higher-income clients. Shoprite provides a very specific type of pre-paid/savings product aimed at lowerincome clients. Clients purchase can purchase stamps to the value of $0.78 (R5), which are then pasted into a savings booklet. The total value of the savings booklet can only be redeemed at Shoprite stores through the purchase of products sold in the store. This is a very popular mechanism to save cash for purchases at Christmas time (Smit, 2006). The product does not pay interest on the money saved, but also do not have any transaction charges. In general, the offering of savings products is limited by South African banking legislation, which requires deposit-taking institutions to be registered and regulated as banks INSURANCE A number of insurance products are offered across all categories of retailers identified above. Based on our review of the market, the most widely offered products is credit insurance, which is usually limited to insuring the value of the outstanding debt in the case of the policyholder s death, but may include riders 28 varying from insurance on the value of the product if lost or damaged to funeral insurance for the purchaser. Credit or credit life insurance is considered indispensable by retailers and, more specifically, furniture retailers offering consumer credit. It affords retailers protection against payment default in the case of a debtor s death, while protecting the deceased borrower s family from repossession and potential entry into or furthering deepening of a state of poverty. As noted in Section 4, the value of this product to the consumer has been drawn into question because of the low customer awareness at purchase. Although, according to legislation, retailers are not allowed to force consumers to buy the insurance product they offer, they have effectively embedded the insurance product with the credit through the sales process. Apart from credit insurance, other (mostly voluntary) insurance products through retailers include 29 : Funeral insurance has been one of the most successful products sold through retailers, confirming that funeral insurance is an exception to the old adage that insurance is sold, not bought (Genesis, 2004). 28 A rider is defined as an amendment to an insurance policy that modifies the policy by expanding or restricting its benefits or excluding certain conditions from coverage (Glossary Table 9 in Appendix B provides a summary of the features of different types of insurance products available through South African retailers acting as insurance distributors.