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.

25 20 The offering of cell phone insurance by retailers is possibly a result of the success of the cell phone sales, with cell phone sales having by far surpassed landline rollouts amongst lower-income households. However, as noted in Section 4, cell phone insurance has not yet been taken up on large scale by lower-income individuals. Personal accident insurance (marketed as travel insurance) is currently only offered by two clothing retailers, Edgars and Jet, both part of the same group 30. Legal insurance is also offered by Edgars covering legal expenses in civil, criminal and/or labour proceedings. Health insurance. Ellerines include health insurance (covering the cost of ART in the case of accidental HIV exposure) as part of the bundled cover sold with credit purchases. These products will be discussed in more detail in the examples provided in Section Edcon Group

26 6. RETAILER INSURANCE DISTRIBUTION MODELS 21 This section reviews different insurance distribution models currently utilised by retailers in South Africa to distribute insurance to lower-income households. These models do not present an exhaustive list of the potential models that may be applied in the market, but focus on the most prominent models currently applied. Furthermore, given the focus of this study, the review focuses on the relevance to and the potential for unlocking the lower-income market and is not a general evaluation of the model. In addition to the characteristics noted in Section 2, two further characteristics were found to be useful in distinguishing the various retailer models: Bundling. Whether and how they are combined with another product and/or service being offered by the retailer. This varies from complete standalone products (i.e. insurance sold as a product in its own right) to completely embedded products where the consumer does not exercise a choice to obtain the insurance, but rather obtains it as result of another purchase decision (e.g. buying a fridge on credit and being forced to buy insurance with it). Relationship cementing. This considers whether the insurance product is seen as a product to be sold in its own right or whether it is simply a means to strengthen the relationship with existing clients (e.g. some retailers may primarily sell insurance to their accountholders or club members to secure these clients and do not intend to sell the product more broadly). Using these characteristics with the characteristics in Section 2, the following models were identified: Standalone product model (e.g. Shoprite s Money Market Counters selling funeral insurance underwritten by the HTG Life) Bundled credit insurance model (e.g. Ellerines selling of credit insurance as part of the credit sales of furniture products) Accountholder/club member model (e.g. Edgars/Jet s selling of insurance products to accountholders/club member). In the next sections, descriptions of the three models are provided using specific examples in the current market and covering: salient features of the general model; retailer-specific background/context; insurer-specific background/context; basic features of insurance product; and lower-income potential and limitations.

27 STANDALONE PRODUCT MODEL: SHOPRITE/HTG LIFE FUNERAL POLICIES Salient features of general model. The central characteristic of the standalone product model is that the sale of the insurance product is not dependent on the sale of another product. In other words, the decision to buy the insurance product is not associated with any other purchase decision. The standalone product model is the least utilised of the three models discussed in this section. Only one example of this model was found during a scan of the South African retail insurance market. In this case, Shoprite (through its Money Market Counters) act as an intermediary for the risk carrier, HTG Life. According to the Money Market management, the main aim with the introduction of the product is to offer an affordable and simple insurance product to customers. Retailer background. A standalone funeral insurance product is offered at Money Market counters in all Checkers and Shoprite supermarkets. These two chain supermarkets are part of Shoprite Holdings Limited, the largest food retailer operating in Africa. Target market. The group owns a number of different branded stores aimed at different target markets, of which Shoprite and Checkers are the largest. While Checkers is being repositioned to mainly serve higher-income groups, Shoprite and a number of smaller brands in the group 31 focus on attracting the middle to lowerincome groupings (Shoprite Holdings Limited, 2005a). Shoprite s strengthening position as retailer in terms of the lower and middle classes is described as follows (Shoprite Holdings Limited, 2005a): The burgeoning South African middle class that was so evident in the past financial year will continue to be a key driver of growth for the Shoprite brand. Factors that contribute to the growth of the middle to lower market are transformation, mass electrification, formal housing projects and measures aimed at poverty alleviation. In our view no other food retailer is better positioned than Shoprite to capitalise on this growth. Client interface. The Money Market counters in every Shoprite and Checkers supermarket are part of an explicit attempt to capitalise on the above growth. The counters are intended to increase shopping convenience, facilitate customer loyalty (Shoprite Holdings Limited, 2005b) and provide a range of transaction services, including payment of television licenses and municipal accounts with approximately 220 third parties represented at the counters. During the financial year of 2004/05, the number of transactions conducted at Money Market counters increased to 21m per month (Shoprite Holdings Limited, 2005a). Distribution network. Shoprite Holdings Ltd owns 260 Shoprite supermarkets, 91 Checkers supermarkets and 23 Checkers Hyper stores in South Africa (Shoprite 31 Including a number of smaller brands such as Usave, OK Minimart, OK foods, OK Grocer, Megasave and Sentra.

28 23 Holdings, 2005). There are Money Market counters in 350 Shoprite Holdings Ltd supermarkets 32. In addition, the smaller brands in the group add at least 350 more store locations. The numbers indicate that Shoprite and Checkers provide financial services across a large distribution network, which could double if Money Markets could be expanded to all group stores. Insurer context. A funeral policy underwritten by the HTG Life insurance company was introduced at Money Market counters in HTG Life is a member of the HT Group, which also includes a funeral services business and a funeral products business (Doves and Saffas funeral parlours). Basic features of insurance product. Characteristics. The cover, monthly premiums and eligibility criteria of the policy are provided in Table 2, below. Monthly premiums are calculated on the oldest assured life. Although the policy is not specifically tailored with the needs of Shoprite customers in mind, it is exclusively available through Shoprite. Other HTG Life agents are not allowed to sell the policy. Terms and conditions. A compulsory 6 month waiting period is applicable during which no claims will be paid out. If death occurs as a result of an accident during the 6 months waiting period, the cover amount of $ 787 (R5 000) will be paid out if the deceased is aged 18 years and older. The premiums are payable in advance on the first day of the month. The policyholder receives a three month grace period (if payments were missed) during which the policy is put on hold (rather than cancelled) to catch up with late payments. Premium collection. Shoprite is responsible for the marketing, selling and premium collection associated with the policy, while HTG Life handles policy administration and claims management and payout. Shoprite earns commission on each policy sold. The Money Market management recognises that a large percentage of the South African population is unbanked and that these individuals should be able to purchase insurance policies using cash. Because of this recognition, premium collection does not occur through a debit order system, but rather through cash payments at the Money Market counters. 32

29 24 Eligibility Cover Monthly premium Policyholder must be between ages of 14 and 68. No medical examination required. Cover for all children. Ages 0-6: $197 (R1 250); Ages 7-13: $393 (R2 500); Ages 14 and older: $787 (R5 000); Policyholder: $787 (R5 000); Spouse of policyholder: $787 (R5 000). Ages 14-55: $3.93 (R25); Ages 56-68: $6.61 (R42). Table 2: Basic features of Shoprite/HTG Life funeral policy Source: Policy background document Policy payouts. In the event of a claim, the policy payout may be received in one of two ways. Beneficiaries of the policy have the option of conducting the funeral through any of the HT Group funeral providers or other identified agents. If this option is selected, the policyholder and/or beneficiaries qualify for a discount on the funeral services provided. The second option is applying for a cash claim which is payable from the HTG Life head office within 48 hours of presentation of the required documentation. If the customer requires a cash payout, the money is paid into the bank account of the policyholder and/or beneficiaries. In the circumstance of the policyholder or beneficiaries not having a bank account, the money is paid out at a participating local funeral parlour. However, as the latter approach poses a security risk, the HTG Life management tries to avoid it where possible. This raises some questions about the appropriateness of the policy for lower-income clients as a large percentage is still unbanked. Shoprite and HTG Life s competitive advantage in the provision of insurance policies, i.e. its ability to overcome the obstacle of clients not having a bank account on the premium collection side, may thus become an obstacle in speedy processing of policy payouts. The distribution network is limited by the fact that policy payouts (in the form of funeral services) can only be collected at participating funeral parlours, while the cash payouts have to be coordinated telephonically via the HTG Life head office. The potentially limited reach of the outlets where policy payouts can be accessed in especially rural areas, may undermine the benefit offered by selling this policy (and collecting payments) through the retailer s extensive distribution network. Potential and limitations. Passive sales model limits take-up. Despite its potential appeal as distribution channel, there are currently only approximately 6,000 policyholders. The main reason for the low take-up has been noted is that the product is not actively sold by Shoprite staff but rely on the customer approaching the counter and inquiring about the product. A need for greater cover has been identified and HTG Life is planning to introduce a second funeral policy with greater cover ($ 1574 for the main member and spouse) early in The Money Market management is also negotiating with other insurers for the introduction of a broader range of insurance products. This includes funeral insurance and some general

30 25 insurance policies. The key objective in these negotiations is to identify affordable policies that will suit the needs of current customers. Retailer network not utilised for claims payment. One of the primary benefits of the retailer distribution model is its ability to reach retail customers in geographical areas where insurance companies do not have physical reach. While Shoprite/HTG has utilised the retailer s distribution advantage for selling the policies and collecting the premiums, it has not utilised this on the claims payment aspects of the policy. The policyholder or beneficiaries have the option of receiving the claims payment in the form of funeral services at a participating funeral parlour or as a cash payment into a bank account. However, if the policyholder or beneficiaries do not have a bank account, the cash amount is paid out at the nearest participating funeral parlour. Management indicated that this option is, where possible, discouraged as large cash amounts held at funeral parlours pose a security risk. It is possible that this payout option can lead to a number of administrative delays, thus not fulfilling the policyholder s need for speedy processing of claims and almost immediate access to finance for the funeral. This may limit the usefulness of this model as speed and ease of claims payment is a key feature to potential lowincome clients. The association with Shoprite allows the insurer to utilise the brand awareness and trust vested in the Shoprite brand. At the same time, however, potential problems arising on claims payment may pose a risk to the Shoprite brand BUNDLED 33 INSURANCE MODEL: ELLERINE HOLDINGS CREDIT LIFE INSURANCE Salient features of general model. The bundled product model of retailer insurance distribution is an almost standard feature of all transactions where furniture and/or electronic goods are bought on credit at a relevant retailer. The most important characteristic of insurance offered through this model is that it is linked to the credit purchase of another product (e.g. furniture and/or appliances) and only provides cover for the duration of the repayment period. Two related types of insurance are usually offered. The first type only provides credit life insurance 34, i.e. cover for the remaining value of the outstanding debt in the event of the policyholder s death. The second provides credit insurance 35 which 33 Whether these products are bundled or embedded is debateable. The credit provider has the right to insist on credit life insurance, but the client has a choice of the provider. Although the client legally has the right to choose their own provider of insurance rather than the one provided with the credit product, it is unlikely that a low-income customer would be aware of this or would be in a position to easily exercise this right. In practice, these insurance products may, therefore, work similar to embedded products. 34 The National Credit Act (see Box 3), which came into effect on 1 June 2006, contains two definitions that describe the product category under discussion. Credit insurance is defined as an agreement between an insurer, on one hand, and a credit provider or a consumer or both, on the other hand, in terms of which the insurer agrees to pay a benefit upon the occurrence of a specified contingency, primarily for the purpose of satisfying all or part of the consumer s liability to the credit provider under a credit agreement as at the time that the specified contingency includes. This definition explicitly includes a credit life insurance agreement. 35 The second relevant definition is for specifically credit life insurance. It is defined as including cover payable in the event of a consumer s death, disability, terminal illness, unemployment, or other insurable risk that is likely to impair the consumer s ability to earn an income or meet the obligations under a credit agreement. Other contingencies (riders)

31 26 includes credit life insurance, as well as a number of riders and, more specifically, asset insurance and life insurance (e.g. funeral cover). Retailer background. The JD Group and Ellerine Holdings Ltd are two examples of holding companies that utilise the above insurance model in their furniture stores. Both these companies own a number of furniture and household appliance stores targeted at markets across the whole LSM spectrum. As both companies offer consumer credit as an option to pay for purchased items, credit insurance forms an integral part of the package of services offered. Of these two examples, Ellerine Holdings was selected for a more in-depth discussion due to the interesting relationship with its insurance companies. While Ellerine Holdings owns all three its insurance companies 36, the JD Group utilises an external insurance company. Some interesting developments within the JD Group are noted in Box 1. Box 1: The Maravedi group: a new player in the retail financial landscape In May 2005, a new financial services group, Maravedi, was formed. The JD Group 37, has a 45% interest in Maravedi, with the remaining shares being held by ABSA Bank and Thebe Investment Corporation (JD Group, 2005: 105). Maravedi was created with the goal of providing greater access to financial services to the so-called mass market. Maravedi will operate through physical outlets established in JD Group stores. At present, there are outlets in 53 stores and it is intended that these outlets will eventually be expanded to 500 JD Group stores. Services to be offered through the two arms of the Maravedi Group, Maravedi Financial Services and Maravedi Credit Solutions, include unsecured personal loans with a later movement to secured loans, transaction products (e.g. debit cards), investments products, low-cost housing mortgages, asset finance and over the long term also other, innovative products (Laschinger, 2005). According to Maravedi management, insurance distribution is not a first priority in the development of their package of financial services. However, Maravedi is already selling a funeral policy provided by ABSA Life 38 to customers via the 53 JD Group stores in which they are testing the Maravedi concept. In addition, a standard credit insurance product also supports the microloans which they are currently issuing. A number of asset and life insurers are also negotiating with Maravedi for the possibility of distributing their products through Maravedi outlets. Target market. Ellerine Holdings Limited is a corporate group operating in the retail furniture and appliance sectors. In July 2005, the merger of Relyant Retail Limited 39 with Ellerine Holdings was approved by the South African Competition Tribunal. The primary reason for the merger was Ellerines relative weakness in targeting the not mentioned in the definition of credit life insurance but often covered in credit life policies include material damage to the product in question and loss of income due to reduced working hours (employer s decision). 36 The fact that there are three insurance companies in the group is the result of mergers over the last five years. It is expected that the insurance components will eventually be reduced to one life insurer and one short-term insurer. 37 The JD Group is a holding company for a number of furniture and electric and electronic appliances. These stores are targeted at the lower, middle and upper income targets and sell goods on credit. If a product is purchased on credit, the customer has the option of buying a credit life insurance product from the relevant store if he/she does not already have a policy covering the acquired product. 38 ABSA is a large South African banking conglomerate. 39 Also a holding company for a number of furniture and appliance retail stores.

32 27 middle LSM categories. While it had brands (before the merger) that were wellpositioned in the higher- and lower-income categories of the retail furniture and appliance markets, it was missing out on the growing middle-income segment (Competition Tribunal of South Africa, 2005). In contrast, Relyant had built up a strong clientele amongst the middle-income groups (LSM 4-7) in its furniture stores. The merger thus created a group that is able to target all income groupings in its product offerings. The target markets for specific stores are shown in Table 3 below. While furniture and appliances can be bought cash, all of the mentioned stores also sell their products on credit. Store Target market Savells & Fairdeal Upper LSM 3 and 4 Lubners Upper LSM 4 to 5 Beares Upper LSM 5, 6 and mid-7 Ellerines LSM 5 to 7 Town Talk LSM 5 to 7 Mattress Factory LSM 6 and 7 FurnCity LSM 6,7 and 8 Green & Richards LSM upper 7 to 9 Dial-a-Bed LSM 6 to 10 Furniture City LSM 7 to 10 Table 3: Target markets of Ellerine Holdings stores 40. Source: Distribution network. Ellerine Holdings owns a total of 1,220 stores, located across South Africa, which could all potentially sell insurance products 41. Insurer context. Following the merger, Ellerine Holdings includes three whollyowned subsidiary insurance companies, providing credit life insurance and funeral cover to customers upon the credit purchase of a product. The three companies, the Customer Protection Insurance Company Ltd, the Relyant Insurance Company Ltd and the Relyant Life Assurance Company Ltd, provide cover for different types of contingencies. While the Customer Protection Insurance Company and the Relyant Insurance Company are registered for the provision of general insurance (e.g. household cover), the Relyant Life Assurance Company is registered for the provision of life insurance (e.g. funeral cover). The Customer Protection Insurance Company covers only those credit insurance policies sold through Ellerine stores that do not have a life insurance component. Similarly, the Relyant Insurance Company covers the general insurance components of credit life policies sold in stores which previously belonged to Relyant Retail. The Relyant Life Assurance Company 40 Before the merger store ownership was as follows: Relyant Geen & Richards, Beares, Lubners, Savells/Fairdeal, Furniture City, Glicks, Dial a Bed, Mattress Factor. Ellerine: Ellerines, Town Talk, FurnCity. It is important to note that the above stores mainly sell furniture and/or electric appliances. 41 Not all currently sell insurance products as the recently acquired Wetherleys only sell furniture on a cash basis.

33 28 provides cover for the life insurance components of all the credit life policies sold through the group. This three insurance-company structure is an anomaly of the merger as one general insurance company and one life insurance company would be sufficient to provide cover to the customers of Ellerine Holdings. Over the longer term, management see the two asset insurance companies merging (Dritz, 2005). None of the three insurance companies are cell captive insurance companies. However, the Customer Protection Insurance Company has a limited general insurance licence which allows it to only sell insurance to Ellerine Holdings customers. Distribution. The policies are sold in-store upon the credit purchase of a product and have the branding of the relevant Ellerine insurance company. Claims are lodged at the insurer and the financial payout, except for instances of funeral cover and personal accident insurance, is paid to the relevant store. All policy administration and claims management are handled by the relevant insurance company. Basic features of insurance product. A typical credit life policy sold with the instalment purchase of furniture or other household goods at an Ellerine Holdings store was obtained for the purposes of this study. The policy contains four main types of insurance Asset insurance provides for the replacement or repair of the purchased item in the case of it being damaged, lost or stolen. Depending on the discretion of the insurer, the policyholder can also receive cash compensation. Credit life insurance provides for the full repayment of the outstanding balance of the loan if the policyholder dies, is injured and/or retrenched. Life insurance provides a fixed payout in the case of accidental death and/or a defined funeral benefit for the policyholder (i.e. not for the family of the policyholder) (any outstanding debt is deducted from the value). Health insurance provides benefits if the purchaser discovers that he or she is HIV positive during the term of the policy, but only if he or she undergoes immediate treatment for HIV/AIDS. This cost of the treatment, which may include the provision of ARVs, is also covered by the health policy and paid for by the insurer. Payment for ARVs treatment continues only so long as the underlying policy endures. 42 The four types of insurance contained in the policy overlap in a variety of ways. This overlap tends to limit the final liability of the insurer and, by implication, the policyholder s ultimate cover. Overlap, for example, occurs if the policyholder dies in an accident. In this scenario, the outstanding balance on the policyholder s 42 Payment is made directly from the insurer to the supplier of the medical service, not the client. In terms of the acts governing insurance contracts in SA law, a health policy cannot contemplate the ongoing payment of an unquantified sum to a medical service provider. This is the right only of medical schemes who are governed by separate legislation. The insurer in this case uses a technical loophole around this demarcation by offering the policy not as health product, but as a disability product, which does not attract the same restriction i.e. contracting HIV/AIDS is viewed as a disability.

34 29 account will be covered by funeral insurance (a form of life insurance) if it is less than the defined monetary benefit, while the beneficiaries of the policy will also be entitled to a pre-defined lump sum through personal accident insurance (also life insurance). If the outstanding debt, however, is greater than the defined funeral benefit, the excess of the debt (i.e. that part greater than the defined funeral benefit) will be covered by the credit life insurance. In most of the above-mentioned cases, the standard term applies that the policyholder must not have fallen behind with monthly instalments. Potential and limitations. Take-up and future expansion. Ellerine Holdings management indicated that 95% of all customers that purchase products on credit at pre-merger Ellerine Holdings stores also buy the credit insurance product. Only 6,400 claims emanated from pre-merger Ellerine Holdings stores 500,000 credit consumer base during the financial year of 2004/05 (Dritz, 2005). This implies that for every 100 individuals that actually bought the policy at pre-merger Ellerine Holdings stores, only 1.28 claims were received. It is easy to interpret this claims ratio as indicative of the fact that customers are not befallen by the contingencies covered by the policy. However, the South African context of high crime rates and high mortality due to HIV/AIDS begs another interpretation of the claims ratio. This low claims ratio could be indicative of the fact that very few customers actually know that they purchased an insurance policy and therefore are not lodging claims (see discussion in Section 4). In a recent presentation of the consolidated audited results of Ellerine Holdings, it emerged that the group views its financial services division as having major growth potential as it has an existing furniture customer base of 2m individuals and 1,220 outlets which could all potentially be used to distribute financial services (Ellerine Holdings, 2005). It was also indicated that the introduction of a number of financial services will form a key future strategic thrust (Ellerine Holdings, 2005). Products that are being considered include insurance, revolving credit, a credit card and second-tier banking facilities 43. Management has indicated that if any new insurance products are added in the future, it will be funeral (long-term) insurance intended to cover not only the policyholder, but also the extended family of the policyholder. Enforcing the right to choose insurance provider. The National Credit Agreement Act of 1980, which was in force until the beginning of 2006, enabled retailers to insist that credit purchases are backed by some form of life insurance for the eventuality of the customer s death, leaving dependents unable to repay the remaining balance of the loan. In addition, the purchased item often also needed to be insured against theft or other physical damage. Most lower-income South Africans, especially those that reside in townships, have difficulty obtaining 43 A second-tier bank is a deposit-taking institution allowing the provision of basic financial services. There are two types of second-tier banks core and narrow. Core banks are allowed to take invest deposits in certain prescribed assets, offer secured loans (up to a certain maximum), unsecured loans (but not exceeding qualifying capital and reserves) and transmission facilities. Narrow banks are allowed to invest deposits in only highly liquid assets, offer basic transmission facilities and are not allowed to extend loans (Hawkins, 2004).

35 30 household insurance due to the high risk profiles associated with these areas. If they are indeed able to obtain the insurance, premiums are high. Because of an inability to obtain credit insurance through the normal channels, the customer is then forced to buy the insurance from the retailer. Due to the opaque nature of the credit agreement and disclosure, many customers do not realise that they have the option of buying insurance from other providers. This created a captive market, allowing the insurance company of the retailer to charge higher premiums and add a number of riders to the insurance policy. Awareness of insurance product. The tick-of-the-box method employed in the selling of the policy also creates a distinct possibility that many customers will not be aware of the fact that they actually own a policy covering a specific contingency. The low level of awareness amongst credit purchase customers that they also have credit insurance has been noted in Section 4. Table 4 illustrates that of the individuals in LSM 1 to 5 that regularly shop at three Ellerine Holdings furniture stores (Beares, Ellerines and Lubners), 34%-38% regularly pay for purchased items in monthly instalments. However, only 8%, 0% and 0% of the same group of individuals that regularly shop at, respectively, Beares, Ellerines and Lubners, say they have credit insurance. Given that furniture stores will not allow their customers to make credit purchases without accompanying insurance and that very few individuals in LSM 1-5 have their own life or general insurance policies, one would expect a closer correlation between the figures in column 2 and 3 in Table 4. As this is not the case, it suggests that most of the Beares, Ellerines and Lubners customers who pay in instalments are not aware that they have a credit insurance policy. Most likely, the situation for other credit providers is similar. This situation is, however, expected to change with the introduction of the newly passed National Credit Act (which will replace the National Credit Agreement Act), which seeks to address abuse in the credit market and will emphasize consumer choice and protection (See Box 3) 44. Store Number of people that shop regularly at store % who usually pay in instalments % who say they have credit insurance Beares 137,512 38% 8% Ellerines 917,998 36% 0% Lubners 193,727 34% 0% Table 4: Awareness of credit insurance at three Ellerine Holdings furniture stores (LSM 1 to 5) Source: FinScope 2005 Burden of proof. A potential complication resulting from policy conditions is that the onus to prove that a given eventuality has occurred (through presentation of the proper formal documentation, e.g. police affidavits, letter from the employer, etc.) rests on the policyholder. Within the South African context of low financial and legal literacy amongst lower-income groups, very few customers that purchase the 44 At the time of writing the Act and its regulations had not yet come into effect.

36 31 specific credit insurance policy will, firstly, be aware of their rights with respect to the purchased policy and will, secondly, be able to comply with all the requirements. This is particularly problematic for policy riders such as insurance providing anti-retroviral treatment only on accidental exposure to HIV. The burden would be on the policyholder to prove that the virus was contracted due to accidental exposure. Box 2: Quote for a credit purchase at typical furniture retailer For illustrative purposes of the cost of credit insurance, a quote for a credit purchase at a furniture store was obtained. The product selected for the quote was a Sansui 74cm colour television set, which includes a VCR. The total value of the product (including value-added tax) if purchased on a cash basis is $ (R3,479). The quote: calculated for a 12-month repayment period, took on the following structure and values: Initial payment Deposit $62.93 Financial details of agreement Total exclusive price $ Delivery charge $47.35 Contract fee $9.44 Value-added tax (VAT) $74.18 Insurance (including VAT) $ Sub-total $731 Deduct initial payment $62.93 Principal debt $ Finance charge (32.5% per annum) $ Contract balance $ Club fee (for 12 months, including VAT) $26.34 Account balance to be paid $ instalments of $68.12 Final instalment of $66.57 Financial literacy and cost to cover. Related to the issue of disclosure, the example shown in Box 2 raises questions on the cost of cover. A number of points can be noted: The multiple costs included in the calculation of premiums raises questions on whether customers understand all the charges levied. In the example shown in Box 2, for example, the club membership is optional and it is not clear that this is disclosed to the consumer. In addition, it is not clear why a separate contract charge is required. Given the bundled nature of the product, it is difficult to asses the overall value of cover relative to the premium charged. However, as noted, the overlapping nature of cover means that the total cover for all the insurance elements is limited to the maximum value of the outstanding loan or the funeral benefit. The effective cost to cover ratio is not improved by the multiple riders included and questions can be raised about the value for lower-income customers. At $ for the year, the insurance charge is

37 32 almost 25% of the purchase value of the product (including value added tax). If for simplicity, the full amount is assumed to go towards the risk charge 45, this suggests that up to one in four clients is expected to claim on this policy. Industry information, however, suggests that claims are fewer than 2 per 100 policies sold in practice. In the example shown in Box 2, the cover to cost ratio was (or stated differently the premium equates to $181 per $1,000 insured per annum). This is significantly more expensive than other credit life products available with cost to cover ratios in excess of (i.e. costing less than $40 per $1,000 insured per annum). In addition, the insurance premium is deducted up front and capitalised to the loan, which increases the interest paid on the purchase. Cover ceases on repayment of credit: The repayment period for store credit is up to 36 months. At the end of the period, all the cover provided as part of the bundled product ceases. While this may be appropriate for the credit life component of cover, its appropriateness is questionable for the funeral, health and asset cover provided. The consumer does not have the option of extending these components of cover beyond the repayment period ACCOUNTHOLDER/CLUB MEMBER PRODUCT MODEL: EDGARS AND JET SELLING OF HOLLARD FUNERAL INSURANCE Salient features of the general model. A number of South African retailers offer insurance products to customers when they become accountholders and are thus, by definition, able to buy clothing and/or other goods on credit. It must, however, be noted that the purchase of insurance is not linked to the purchase of any other product the insurance is a standalone product. The monthly premium of the insurance policy is added to the balance of the customer s account and the premium is payable as part of the monthly instalment on the balance of the account. Most retailers that offer this type of insurance policy also offer an affinity club membership to accountholders. Club membership entails a fixed monthly fee, for which the accountholder receives a package of benefits, which may, for example, include funeral cover. Typical club membership includes the following benefits: Funeral cover to the value of a pre-specified amount for member and spouse (normally less than $800 cover); A monthly/quarterly club magazine; 45 Given the low administrative burden of selling credit insurance policies bundled with credit purchases, the contribution of administrative costs to the premium is expected to be low. This assumption may, therefore, not be too far removed from reality. 46 For the credit life example, the cost to cover ratio is defined as the total insured value (total principle debt including interest) over the insurance premium, i.e. a benefit of $6.22 for every $1 premium. 47 This is based on credit life insurance from a large insurer on a typical low-income consumption loan product. In fact, if the administrative fees are excluded, the risk charge could be as low as $12 per $1,000 insured.

38 33 Access to a number of care lines (medical assistance, legal assistance, financial advice, trauma counselling, etc); Automatic entry into monthly cash giveaways and/or account clearance competitions; and Invitations to preview shopping events. For a discussion on how the National Credit Act can potentially affect insurance sold through this model and the bundled product or credit life model, see Box 3. Box 3: Impact of the National Credit Act on the South African retail sector and the implications for insurance offered through retail outlets The newly introduced National Credit Act holds a number of implications for retailers currently offering consumer credit. In general, it is thought that the Act may increase the administrative costs associated with the processing of credit applications, thus potentially increasing the cost of credit to consumers. Increases in credit costs and more stringent credit requirements may impact on individuals access to insurance provided by retail outlets. The Act requires that retailers run thorough and extensive checks on all consumers before they are offered consumer credit. Retailers can be found to be reckless if it turns out that newly accepted or existing clients are not creditworthy. As part of the consumer background check, retailers will have to perform a means test to determine whether the frequency and regularity of income and the combined financial means of adults in a household is of such a nature that it will allow payment of existing obligations (Hall, 2005). Some of the direct costs imposed on the retailer will include staff training and electronic crossreferencing required by the National Credit Bureau (Hall, 2005). The Act also restricts credit increases to one per client on an annual basis. Furthermore, the Act requires that retailers should be able to explain to clients why their credit applications were refused, implying increased transaction costs to retailers (Cliffe Dekker, 2005). However, a potential opportunity for retailers arising from the Act is an increase in the level at which interest rates, through the Usury Act, are currently capped (Edcon, 2005b). It is expected that the caps may eventually be set at higher level in order to stimulate credit extension to consumers who were previously unable to access credit because of their poor risk profiles. It is argued that this change will enable retailers that also provide personal loans to compete with other microloan providers on a more equitable basis (Edcon, 2005b). Due to potentially stricter eligibility criteria for consumer credit, individuals that would have (before inception of the Act) qualified to become store accountholders might now be turned down. This implies that some individuals will not be able to access the insurance only available to accountholders, e.g. the Edgars and Jet insurance products. Retailer background. The best example of this model is Edcon Insurance Services, a joint venture between Edgars Consolidated Stores Ltd (Edcon) and Hollard Insurance. Through this joint venture, insurance policies are offered to all accountholders in Edgars and Jet clothing stores.

39 34 Products. Edgars Consolidated Stores (Edcon) is the largest clothing, footwear and textiles retailing group in South Africa and the largest credit retailer in Southern Africa. Its Financial Services Division provides credit and other financial services to approximately 3.5m active accountholders (Edcon, 2005a). The businesses of the group are structured under two main divisions, according to different target markets. The Department Stores Division, which encompasses the Edgars, CNA, Boardmans, Prato and Red Square chain stores, targets mainly the middle- and higher-income markets. The Discount Division includes the Jet, Jet Mart, Jet Shoes and Legit chain stores and is targeted at middle- and lower-income groups (Edcon, 2005a). Target markets. The two clothing store groups through which the policies are sold, Edgars and Jet, have very different target markets. While Edgars targets individuals from upper-lsm 7 to LSM 10 with an average monthly household income of more than $787, Jet is focused on attracting individuals in LSM 4-7 with a monthly household income of between $236 and $865 (Edcon, 2004). The stores also differ in terms of their geographic positioning. While Edgars can be described as a mall-based department store, Jet is positioned as a high-street or rural community store. Although both these stores offer (very similar) insurance products to their clients, it is the Jet policies characteristics (rather than that of Edgars policies) that are considered in Table 5. As Jet has a lower-income target market, its policies are more relevant for the purposes of this study. Having said this, it is interesting to note that despite Edgars s well-defined target market of middle- and higher-income consumers, it is also reaching a large number of lower-income consumers. According to Finscope 2005 data, there are 684,723 Edgars accountholders in LSM 1-5. Of these, 653,129 (95%) do not have general insurance, while 499,460 (73%) do not have life insurance. In contrast, Jet s reach in terms of lower-income customers, according to Finscope 2005 data, is much more consistent with its defined target market. Jet has 835,420 accountholders in LSM 1-5 of which 815,049 (98%) have no general insurance and 636,210 (76%) have no life insurance. These statistics very clearly illustrate the potential for distributing insurance to lower-income customers through the utilisation of the accountholder and/or club member model. Distribution network. There are more than 280 Jet stores located across South Africa, while Edgars owns more than 150 South African stores. In total, the Edcon Group owns more than 800 stores under 9 different brands in Southern Africa 48. Insurer context. Edcon and Hollard Insurance Ltd established a joint venture, Edcon Insurance Services, in June In terms of the agreement underlying this venture, the Edcon group sells a wide range of insurance policies underwritten by the Hollard Life Assurance Company Ltd and Hollard Insurance Ltd. Basic features of insurance product. The insurance policies have store branding (i.e. not that of the insurer) and are sold in two clothing store chains, Edgars and 48 (Accessed on 9 December 2005).

40 35 Jet. The main characteristic of the Edcon insurance approach is that policies are only sold to accountholders and provided to affinity club members as part of a package 49. Customers do not require a bank account to be eligible for a store account. Eligibility is determined by a scientific score card applied to the information contained in each application (O Neill, 2005). Basic features. The basic features of the insurance products offered at Jet Stores are summarised in Table 5. Design, sales and marketing. Both Edcon and Hollard Insurance were actively involved in the design of the products. All of the products were designed to suit the needs of the average Edcon customer. The key insurance products are offered in all Edgars and Jet stores and all Edcon customers comprise the target market of policies (O Neill, 2005). As far is it is apparent, policies are sold over-the-counter and are also available over the Internet. The sales personnel provide the insurance as a tick-of-the-box offering and therefore, as they are not actively providing advice to clients, fall outside the Financial Advisory and Intermediary Services (FAIS) Act requirements 50. They are therefore not trained to be FAIS compliant (O Neill, 2005). Premium collection and payouts. Edcon Insurance Services is responsible for the marketing and sales of the policies, while Edcon is responsible for premium collection and paying over the premiums to Hollard. Hollard manages the policy and claims administration and also handles the actual payment of claims to the majority of clients (O Neill, 2005). The rationale behind the store-card model, as used here, is that monthly premiums can be more easily collected if they are simply added to the store account balance and the monthly premium then paid together with the total monthly instalment due. A drawback of this approach is that customers that do not qualify to become accountholders will not be able to purchase insurance through this method. This model of insurance will therefore exclude individuals that would potentially be able to afford a small monthly insurance premium, but do not qualify for consumer credit. Profitability. During the 2005/05 financial year, a growth of 23.4% in active insurance policies was experienced, increasing the Edcon profit for insurancerelated products from $30.2m to $41.4m (Edcon, 2005a). At the end of the 2004/05 financial year, Edcon customers owned a total of 1.1m financial service products sold through Jet and Edgars stores (Edcon, 2005b). Potential and limitations. Cost to cover. The Edcon/Hollard model provides accountholders and club members with a wide variety of insurance products at 49 Only accountholders can join the store affinity clubs as the monthly member fee is charged to customers accounts. 50 The Financial Advisory and Intermediary Services Act requires all financial service providers dispensing financial advice or providing intermediary services to be suitably licensed. Licensing requirements include, amongst other things, the financial service provider to meet certain fit and proper or learning standards.

41 36 competitive prices (see Table 5). As noted in Section 6.5, the cover provided by the Edcon/Hollard model significantly exceeds that of other models evaluated. Low-income exposure. Although the Edgars/Hollard insurance model is mainly targeted at the middle- to upper-income groups, evidence from FinScope 2005 indicates that a large number of individuals in the lower LSM groupings do have accounts at Edgars and Jet and would therefore be able to purchase the offered insurance on their accounts.

42 37 Characteristics Product Contingency covered Partner Cover Monthly Premium Terms Account Protection Plan $0.05 for every Hollard Pays the outstanding balance on Account must be up to date to qualify. Death, retrenchment and $15.73 outstanding Insurance main member's Jet account up to Number of limiting terms and conditions in permanent disability on the account of Company Ltd maximum of $1,574. the event of retrenchment. main member Partner Protection Account Protection Plan with Partner Protection Parent Funeral Plan Family Funeral Plan Plus Personal Funeral Plan Travel Insurance Personal Accident Insurance Plan Cell phone Insurance Jet Club Funeral Cover Death, retrenchment and permanent disability Death, retrenchment and permanent disability Death of parent Death of core family member Death of main member Death and disability because of travel using public and private transport Death and personal disability in case of accident Theft, loss or accidental damage of cell phone Death Hollard Insurance Company Ltd Hollard Insurance Company Ltd Hollard Life Assurance Company Ltd Metropolitan Life Ltd Hollard Life Assurance Company Ltd Hollard Life Assurance Company Ltd Hollard Life Assurance Company Ltd Hollard Insurance Company Ltd Information not available Pays the outstanding balance on the partner of the main member's Jet account up to maximum of $1,574. Pays the outstanding balance on main member's and partner of the main member's Jet account up to maximum of $1,574. $787 per parent; covers up to four parents. Up to $5,900 cover for core family members $1,574 funeral cover for main member Family cover - covers member, spouse and up to five children up to the value of $17,305. Personal cover - cover to the value of $2,360 for main member. Cover provided ranges from $4,720 to $23,598 depending on option selected. $0.05 for every $15.73 outstanding on the account of main member $0.10 for every $15.73 outstanding on the account of main member $6.45 $5.20 $2.91 Family cover - $2.82 per month. Personal cover - $1.57. From $3.15 Account must be up to date to qualify. Number of limiting terms and conditions in the event of retrenchment. Account must be up to date. Number of limiting terms and conditions in the event of retrenchment. Account must be up to date to qualify. General funeral policy terms and conditions apply Account must be up to date to qualify. General funeral policy terms and conditions apply Account must be up to date to qualify. General funeral policy terms and conditions apply Account payments must be up to date to qualify. Account must be up to date. Cover provided up to value of $315 $5.35 Account must be up to date. $472 cover for Club member's death, $236 cash cover in the event of spouse's death. Club fee of $2.12 Account must be up to date to qualify. Table 5: Overview of Jet/Hollard insurance products; Source: JET information pamphlet

43 ALLOCATION OF DISTRIBUTION FUNCTIONS ACROSS PARTNER INSTITUTIONS Table 6 provides a summary of the allocation of distribution functions across the retailer/insurer partners for each of the retailer examples discussed. It is interesting to note that for all three retailer examples, the retailer is responsible for premium collection. This assignment of responsibilities can be ascribed to the retailers physical reach in terms of infrastructure, as well as to the fact that retailers form a non-intimidating interface for insurance clients. Distribution Retailers function Shoprite/HTG Life Ellerine Holdings Edgars/Jet and Hollard Insurance Insurance joint venture is responsible for the production of all marketing materials and activities. Marketing Retailer markets policies through in-store Money Market counters. Sales Policies are available at Money Market counters in Shoprite stores. Not actively sold. Policy administration Premium collection Claims administration All policy administration is handled by the insurer. Retailer collects premiums on cash basis at in-store Money Market counters. Client has to lodge claim directly through the insurer. This interaction normally takes place telephonically. Claims payment Insurer is responsible for claims payments. Claims payments occur through participating funeral parlours in form of services. A cash payout or payment into bank account is discouraged. Credit insurance product is not actively marketed as included in credit sales process. Retailer simply sells the insurance product to the client by bundling it with the credit purchase. The insurer is responsible for all policy administration. Premiums are collected through debit order and/or cash payments in-store. Claim is lodged at the insurer and insurer takes responsibility for claims administration. Depending on the nature of insurance, the insurer pays the claim to the retailer (credit insurance) and/or the beneficiaries of the policy. Table 6: Allocation of distribution functions across retailer/insurer relationship Source: Genesis Insurance policies sold in-store using tick-of-the-box method during account opening procedure. Insurance joint venture is responsible for all policy administration. Premiums are collected by retailer upon the payment of the monthly instalment on the client's account. Account payment can occur through debit order or on cash basis. Claim is lodged at the insurance joint venture and joint venture takes responsibility for claims administration. Insurance joint venture pays claims into bank account of policyholder or beneficiaries. A distinct dilemma presents itself with the misalignment between the requirements of Shoprite s premium collection function and the insurer s claims payment function. Shoprite collects premiums on a cash basis and therefore does not require clients to have a bank account. If the client chooses to receive the policy payout in cash rather than in the form of funeral services, the insurer has to pay the approved claim into the bank account of the policyholder or other beneficiaries. However, clients are generally discourages to receive payouts in cash AFFORDABILITY OF INSURANCE COVER Cost of cover. The concept of affordability is a complex issue in the evaluation of risk products where the cost is not only related to the value of the benefits, but also

44 39 to the risk profile of the consumer. Given the limited scope of this study, affordability is assessed by comparing the relative cost of cover for the different distribution models. Table 7 shows the comparative cost of funeral cover for a standardised family portfolio 51. Provider Total monthly premium Total nominal cover Cover/premium 52 Shoprite/HTG Life $3.93 (R25.00) $3, (R23,750.00) $ Edcon/Hollard $5.19 (R33.00) $7,866 (R50,000) $1, Formal insurer with own funeral parlour $16.68 (R106.00) $8, (R52,000) $ Large formal insurer $4.33 (R27.50) $3,933 (R25,000) $ Table 7: Funeral insurance premiums charged for a standardised family portfolio (formal voluntary scheme) Source: Genesis Analytics Table 7 shows that the two funeral policies sold by the Edcon/Hollard (see discussion in Section 6.3) and Shoprite/HTG Life (see discussion in Section 6.1) models provide better cost to cover value 53 to their clients than two other policies sold through alternative distribution channels. The funeral policy provided by the large formal insurer provides the third highest cover ratio, while that provided by the funeral insurer with its own chain of funeral parlours provides the least cover given the monthly premium. Although this is a very small sample, it provides some indication that the funeral policies sold by retailers can be considered affordable relative to other alternatives in the market. 51 The total cover was calculated for a standardised family portfolio which includes a main member (age 44), spouse (age 40), child 1 (age 21, full-time student), child 2 (age 16), child 3 (age 10) and child 4 (age 6). 52 This is a simple calculation dividing the total nominal cover provided by the total premium charged and provides an indication of the value per rand spent. 53 The cost to cover ratio was calculated by dividing the total nominal cover for a standardised family by the total monthly premium. The higher the ratio, the greater the extent of cover provided.

45 40 7. CONCLUSION The larger South African financial services environment is characterised by a growing phenomenon of retailers serving the low-income market with insurance and other financial products. As discussed in this document, certain retailers have built up an extensive knowledge of the lower-income market and are able to leverage off strong credit scoring abilities in order to serve this market. Retailer brands enjoy significant trust amongst low-income consumers, which is crucial in helping allay fears associated with the purchase of insurance for the first time. Furthermore, retailers have extensive geographic reach, with their branch networks being more extensive than those of South African banks. The infrastructural presence of retailers provides them with the significant advantage of being able to collect premiums in cash at places conveniently located or, at least, more conveniently located than insurers. This infrastructural presence will improve further as, especially, the large retailers expand their networks from upper-income into lower-income areas (e.g. Jet, Pick n Pay and other franchises) of South Africa 54. Although retailers seem to have significant potential to serve as distribution channels for micro-insurance products in South Africa, this potential has, however, proven difficult to realise and the low-income channels have not yet achieved significant scale on voluntary insurance sales. To conclude, we will assess the access potential of the retail distribution models presented in this document. This will be followed by some instructive points on the potential for retailers, in general, to act as insurance intermediaries ASSESSING THE ACCESS POTENTIAL OF RETAILER DISTRIBUTION This section summarises the findings for the models in terms of the access criteria as outlined in Section 1.2. Although the scope of this study does not allow for a detailed analysis of each of the criteria, the access framework provides the basis for a high-level assessment of the access unlocking potential of the retailer distribution models. Table 8 provides an overview of the performance of the three models across the access criteria. The Shoprite/HTG Life and Edcon/Hollard models score well across all access criteria while the Ellerines model does not score well on three of the four criteria. 54 A retailer like PEP is already in many of these areas

46 41 Criteria Insurance product assessed Shoprite/HTG Life standalone product model Funeral Ellerines bundled product model Bundled product including credit life, asset, funeral and health insurance Edcon/Hollard accountholder/club member model Funeral (but also provides personal accident, credit life, legal and cell phone insurance) Proximity Affordability 55 Product features 56 Product terms Table 8. Summary of performance of models across access criteria Source: Genesis Analytics PROXIMITY As noted in Section 4, the food, furniture and clothing retailers have a combined distribution network in excess of 6,500 stores of which a large proportion will have some low-income exposure. In addition, the retailer stores have a significant rural presence. This suggests that all of the retailer models score highly on the proximity dimension of access. Retailer network not utilised for claims payment. As noted in Section 6.1, the proximity benefit is undermined in some cases by claims payment procedures. While Shoprite/HTG has utilised the retailer s distribution advantage for selling the policies and collecting the premiums, it has not utilised this on the claims payment side of the policy. This may limit the usefulness of the model as speed and ease of claims payment is a desirable feature to potential low-income customers AFFORDABILITY As noted in Section 6.5, the cost-to-cover ratio for funeral products provided by Shoprite/HTG Life and Edcon/Hollard models are higher (i.e. are more affordable than for other products) than that of other insurance providers. However, in the case of the bundled products offered by Ellerines our review found that the cost-tocover ratio for cover provided under credit life policies was substantially lower than typical rates quoted in the open market. 55 Premiums suggest much higher risk rating than is experienced in practice. 56 Theoretically the credit customer has the right to obtain insurance from a provider of his/her choice. Due to lack of disclosure during the sales process, many consumers are not aware of this right. In addition, the insurance offered by the retailer often consists of a bundle of products and the consumer does not have the option to select the components of insurance they require. Cover lapses once the credit has been repaid.

47 PRODUCT FEATURES For the standalone and accountholder models, no serious problems were noted with regards to the product features. For the bundled product model, the following concerns were noted: The bundling of insurance with credit purchases combined with insufficient disclosure undermines the right of the credit consumer to obtain cover from an insurance provider of his/her choice. This, in practice, results in a captive market for the retailer s insurance policy and may lead to inflated costs. Due to insufficient disclosure, many policyholders are unaware of the cover they have purchased. Cover also ceases on repayment of credit, which does not seem appropriate for components such as the funeral and asset cover PRODUCT TERMS In both the bundled and accountholder models, access to the insurance products is potentially linked to access to credit, which may limit the potential of these models to extend access to the general public (beyond access to credit). Evidence from the FinScope 2005 survey, however, suggests that this restriction has not prevented the Edgars/Hollard model from achieving low-income penetration. No evidence was found to suggest the same for the bundled product model. Furthermore, in the case of the Ellerines bundled product model, the burden of proof on claim rests with the policyholder and the manner in which some of the riders are specified will make it difficult to claim in practice (e.g. cover for accidental HIV exposure) INSTRUCTIVE POINTS Although the potential of retailers to sell insurance is strong, a few points need to be noted: Retailers need to form a comprehensive understanding of the whole insurance chain and how the various functions of insurance can be successfully incorporated with their business models. This includes finding a workable solution for the utilisation of branch networks in the payment of claims. Clients right to a cash (rather than service) payment, even in the absence of a bank account, should not be compromised. There exists a trade-off between product simplicity and lower costs (on the one hand), and advice and higher cost (on the other hand). While low premiums will not allow for the provision of advice, it is necessary to simplify products as far as possible and provide at least a standard (industry-agreed) minimum level of disclosure to prevent client abuse and mis-selling.

48 43 Lastly, if the low-income market is to be reached with insurance, retailers need to actively sell their insurance products and not merely place it somewhere in the store. The need for active rather than passive selling clearly manifested in the Shoprite example where only 6,000 policies were sold over seven years. Moving from a passive to a more active sales model could entail incentivising retailer staff members that are responsible for insurance sales or even placing a representative of the insurance company somewhere in the store.

49 44 BIBLIOGRAPHY Bridge, S., Lapsed policies cost public R2bn. Business Day. 5 December Cliffe Dekker, Cliffe Dekker reviews the implications of the National Consumer Credit Bill for grantors of credit. 25 October Available at: (Accessed on 29 November 2005). Churchill C (ed), 2006, Protecting the poor: A microinsurance compendium. International Labour Office, Geneva, Forthcoming. Competition Tribunal of South Africa, Decision on the large merger between Ellerine Holdings Ltd and Relyant Retail Ltd. Case No. 56/LM/AUG04. July Available at: (Accessed on 30 November 2005). Dritz, J., Personal Communication. Ellerine Holdings Ltd, Executive Director. 6 December Edcon, Presentation of Financial Results for the Year to March May. Available at: 4ED7DC70D972/0/2004_Prelim_Results_Presentation.pdf (Accessed on 1 December 2005). Edcon, 2005a. Profile. 14 January. Available at: (Accessed on 1 December 2005). Edcon, 2005b. Edcon Annual Report Available at: htm (Accessed on 25 November 2005). Eighty20, Towards a Benchmark for Access to Life Insurance in LSM 1-5. Prepared for the LOA Access Commitee. 29 October. Available at: (Accessed on 8 December 2005). Ellerine Holdings Limited, Presentation of Consolidated Audited Results. November. Available at: (Accessed on 25 November 2005). Genesis Analytics, Insurance Scoping Study: South Africa. Genesis Analytics: Johannesburg. Available at: (Accessed on 19 December 2005). Genesis Analytics, A regulatory review of formal and informal funeral insurance markets in South Africa: A market review and regulatory proposal prepared for FinMark Trust. April. Genesis Analytics: Johannesburg. Available at:

50 45 Genesis Analytics, Brokering change in the low-income market: The threats and opportunities to the intermediation of micro-insurance in South Africa. August. Genesis Analytics: Johannesburg. Hall, W., Heavy cost to comply with new credit law. Business Day. 22 November Hawkins, P., Presentation: Getting to grips with tiered banking. Available at: (Accessed on 13 December 2005). I-Net Bridge, Edgars, Standard offer fee-free card. 22 August. Available at: (Accessed on 25 November 2005). JD Group, JD Group Annual Report JD Group: Johannesburg. Laschinger, K., Hidden Jewel: Absa, JD Group and Thebe s secret weapon Finance Week. 16 November Leftley, R., An overview of insurance product development within the Opportunity International Network, Insurance CGAP Report. Available at: (Accessed on 28 November 2005). O Neill, M., Personal communication. Edcon, Head of Joint Ventures. 6 and 7 December Porteous, D., Making Financial Markets Work for the Poor. FinMark Trust Paper. Republic of South Africa (RSA), National Credit Bill (As introduced as a section 76 Bill). B Roth J & Chamberlain D, 2006, Retailers as microinsurance distribution channels. In Churchill C (ed), 2006, Protecting the poor: A microinsurance compendium. International Labour Office, Geneva, 2006 Shoprite Holdings Limited, 2005a. Financial Preliminary Results for Available at: (Accessed on 30 November 2005). Shoprite Holdings Limited, 2005b. Shoprite Holdings Limited Annual Report Available at: (Accessed on 30 November 2005). Smit, F., Personal communication. Shoprite Holdings, Money Market Services Manager. 20 February 2006.

51 46 Appendix A: The Financial Sector Charter The Financial Sector Charter (referred to as the Charter) was released on October 17, 2003 following months of negotiation between representatives of the financial services industry and black business (Government supervised the negotiations but where not directly involved). The goal of Financial Sector Charter is to provide for increased access to financial services for poor households and communities, as well as direct investment into certain targeted areas of the economy. The Charter deals, in clause 8, with access to financial services. The financial sector commits itself to substantially increase effective access to first-order retail financial services to a greater segment of the population within LSM 1 to 5. First order retail financial services are defined in clause 2.27 of the Charter to include contractual savings products such as endowment policies as well as insurance products and services being the mitigation of impact of defined first order basic risks (e.g. life insurance, funeral insurance, burial societies, household insurance and health insurance). 57 In terms of the Charter, the financial sector specifically undertakes by 2008 to make available appropriate first-order retail financial services, affordably priced and through appropriate and accessible physical and electronic infrastructure such that: a percentage (to be settled with the life assurance industry) of LSM 1 to 5 households have effective access to life assurance products and services; 6% of LSM 1 to 5 has effective access to asset risk insurance products and services (as defined in paragraph ). The Charter has been published as a Transformation Charter in terms of the Broad-based Black Economic Empowerment legislation, giving it regulatory status and sanction. As result of the FSC commitments, the Long-term and Short-term industries have launched initiatives to develop products suitable to lower-income markets and that will allow them to meet the negotiated targets. The Long-term insurance industry followed a CAT (charges, access and terms) approach by developing a set of minimum standards for number of low-income products. The individual insurers are free to develop their own products within, which will count towards their Charter commitments if the standards are met. The short-term insurance industry developed a specific short-term insurance product, which will be offered by all insurers. Both these initiatives were only recently concluded and the products are yet to reach the market. 57 Paragraph of the Charter.

52 47 APPENDIX B: SUMMARY OF INSURANCE PRODUCTS SOLD THROUGH SPECIFIC RETAILERS Insurance Product Type Product Features Funeral 58 Credit Life 59 Personal Accident 60 Cell phone 61 Legal 62 Sold through Clothing retailer, supermarket Furniture and clothing retailers Clothing retailer Clothing retailer Clothing retailer Group or individual Group Group Group Group Group Riders None Can also provide cover to value of None None None outstanding balance in case of retrenchment, accident, disability, loss of income, lump sum in case of accidental death, funeral benefit minus outstanding amounts in case of death, HIV treatment in case of accidental exposure to the virus. Term One to twelve months Policy ends when all credit repaid Information not available Information not available Information not available Eligibility requirements for policyholder Older than 18 years Older than 18 years Older than 18 years. Maximum entry age is 64. Older than 18 years Older than 18 years Renewal requirements Automatically renewed on payment of premium. Must remain accountholder. Policy ends when all credit repaid Voluntary or compulsory Voluntary Choice to buy the insurance from the specific retailer is voluntary, but it is compulsory to have insurance for covering a product brought on credit through furniture and/or appliance retailer. Premium collection Cash and debit order (may be added to account) Cash and debit order (added to store account) Automatically renewed on payment of premium. Must remain accountholder. Table 9: Summary of insurance products sold through specific retailers Automatically renewed on payment of premium. Must remain accountholder. Voluntary Voluntary Voluntary Cash and debit order (may be added to store account) Cash and debit order (added to store account) Automatically renewed on payment of premium. Must remain accountholder. Cash and debit order (added to store account) Basic cover Policyholder, core family and/or extended family Policyholder Policyholder and/or family Policyholder Policyholder and core family Benefits Ranges between $787and $5,600 Outstanding account balance Ranges between $2, and $23,598 Cell phone value limited to $ Depending on package selected, can provide cover up to $5,506 per year for civil, criminal and labour matters. Key exclusions Death by suicide or criminal activity not covered. No benefit payable in respect of death of insured person due to natural causes during waiting period (only accidental death covered during waiting period). In the case of retrenchment, the policyholder is not covered where she knew (before entering into the policy) that she would be made redundant/retrenched, where she had received written or verbal warning and were the subject of prior disciplinary procedure, lost her job as result of accident, sickness and disease, where she intentionally injured herself. No HIV cover is provided if exposure occurred through consensual sex. Account must be up to date. Account must be up to date. Account must be up to date. Monthly premium range (cost) $2.91 to $6.45 Dependent on value of product and repayment period of credit. On a product of $473.06, with a monthly instalment plan over 12 months, an insurance cost of $ was quoted. Starts from $2.82 depending on benefit level selected In the region of $2.82 Two levels of premiums, depending on package selected: $2.83 and $ Based on available funeral policies from Edgars and Jet. 59 Based on a credit insurance policy obtained through Ellerine Holdings and financial quotes obtained from Russels, a JD Group furniture store. 60 Based on a personal accident insurance policy sold by Jet. 61 Based on a cell phone insurance policy sold by Jet. 62 Based on a legal insurance policy sold by Edgars.

53 48 APPENDIX C: INSURANCE PRODUCTS COVERED BY FINSCOPE DATA The various categories shown in Figure 2 are aggregations of questions on a number of individual financial products in the FinScope survey. The products included under each category are listed below. Life insurance refers to formal risk or investment life insurance products and includes: Life insurance/assurance policy with a big institution Endowment/investment policy/savings policy Life cover to pay off any money that you owe when you die Disability insurance with a big institution Education policy Disability cover from your current employer Dreaded disease/critical illness insurance Life cover through your current employer Life cover through your trade union Life cover through your church group Professional insurance (in the event of loss of earnings) (NOTE: Not UIF) Credit insurance that pays your credit repayments if you are unable to pay General insurance (or short-term insurance as it is referred to in South Africa) refers to a form of property or asset insurance and includes: Car insurance Household content insurance Cell phone insurance Travel insurance Home owners insurance (e.g. insurance on building) Store card includes individuals with a store card where you buy on account and pay later (e.g. Edgars, Sales House) or a retail store account for the purchase of household goods (e.g. fridge or bed, which has a fixed credit limit, fixed repayment period and fixed repayments). Currently banked includes all individuals with some form of bank account.