The business of death: Informal insurance by funeral undertakers in South Africa. Anja Smith and Mia de Vos 1

Transcription

1 The business of death: Informal insurance by funeral undertakers in South Africa By Anja Smith and Mia de Vos 1 Paper prepared for the 2012 Research Conference on Microinsurance, April 2012 Abstract A large proportion of global microinsurance is provided on an informal basis. A literature review reveals that within the literature on economic informality, insurance informality has generally not been treated as a manifestation of economic informality. Where informal insurance has been considered, it is generally treated as a membership-based risk management mechanism with a focus on internal organization and functioning (Dercon, De Weerdt, Bold & Pankhurst, 2006), rather than an explicit manifestation of economic informality that requires careful consideration of value offered, risks to clients and the potential need for formalisation. This approach may be justified in considering the role of non-profit, membership-based insurance associations such as burial societies (South Africa), welfare societies (Kenya) or iddirs (Ethiopia). However, funeral undertakers that provide microinsurance on a commercial basis do not only contribute substantially to the economic activity in their communities, but also raise a number of consumer protection risks that require these firms to be considered in the same way as other manifestations of economic informality. The phenomenon of funeral undertakers selling funeral insurance on an informal basis is particularly prevalent in South Africa. While the available literature has considered the contribution of these products to households ability to deal with the costs of a funeral, the nature of informality in insurance provided by these firms, but also in other business dimensions of these firms has not yet 1 Both Centre for Financial Regulation and Inclusion (Cenfri). The paper was completed with research assistance by Sandisiwe Ncube (Cenfri), Nokwanda Mahori (independent field researcher) and Zanele Ramuse (independent field researcher). This work was carried out with the aid of a grant from the International Development Research Centre (IDRC), Ottowa, Canada. Conference participation is made possible from the same grant from the IDRC. We would like to thank Christine Hougaard for her comments on the paper.

2 been described in any great depth. Given the absence of data on this market, we collected survey data to better understand the phenomenon of informal insurance by funeral undertakers. Using a dataset on 72 funeral undertakers in four provinces of South Africa (Kwazulu-Natal, Western Cape, Eastern Cape and Limpopo) we are able to explore the nature of informality, the nature of insurance products, employment and revenue generated by these firms. A more detailed description of the insurance business of 23 undertakers in this sample selling insurance on an informal basis reveals that the revenue generated by funeral insurance premiums forms an important component of total revenue generated. For most of the businesses providing insurance on an informal basis, the data demonstrates very poor or the total absence of even rudimentary prudential risk management practices. While posing risks to the insurance industry at large as well as risks to the individual clients served, it is clear that these informal insurance providers contribute to income and employment in their communities in a country where unemployment rates are very high. This implies that any policy aimed at formalising the market for informal insurance as provided by funeral undertakers would have to carefully balance the economic contribution of these businesses with the benefits of a fully formal insurance market.

3 1. Introduction A large proportion of global microinsurance is provided on an informal basis. The available literature on informal insurance has tended to mainly focus on so-called informal risk-sharing arrangements between households, with this presented as the typical view of informal insurance. Furthermore, where the literature has been focused on informal groups and associations in developing countries, the discussion has mostly centred on these organisations contribution to social capital or on development initiatives that operate through community-based health organisations or on internal organization and functioning of these structures (De Weerdt, Bold & Pankhurst, 2006). Dercon et al. (2006: 686) defines informality in this context with reference to two dimensions: 1) these institutions typically function outside the market place ; and 2) they are informal in the sense that they were [are] not based on well-defined formal associations, with formally defined, written sets of rules or regulations governing their operation. Informality in this sense is thus defined by the total absence, rather than the presence and non-compliance with regulations or rules that apply to the operation of these organisations. In this paper we go beyond the typical analytical approach used to understand informal insurance, as described above. This approach may be justified in considering the role of non-profit, membershipbased insurance associations such as burial societies (South Africa), welfare societies (Kenya) or iddirs (Ethiopia). However, for-profit informal insurers require a different analytical approach. We explore the phenomenon of funeral undertakers providing insurance on an informal, for-profit basis to a client base that could extend beyond their immediate communities and that takes risk sharing beyond a small group of households with intimate knowledge of each other s lives. This requires us to treat informal insurance as a specific manifestation of economic informality. This, in turn, necessitates careful consideration of the value offered by this insurance, risks posed to clients by the informal nature of the provider and product and the potential need for formalisation of the businesses that offer this insurance. As these funeral undertakers not only provide microinsurance 1

4 on a commercial basis but also contribute to the economic activity in their communities, it raises a number of consumer protection risks that require these firms to be considered in the same way as other informal firms. In this context, rather than defining informality as the total absence of rules governing the functioning and operation of these firms and their insurance, we define informality as non-compliance with the regulation that applies to their particular sphere of operations. The provision of insurance on an informal basis can be considered problematic from at least two perspectives. First, the existence of informal insurance providers contributes to an un-level playing field between compliant and non-compliant insurance providers. Compliant insurance providers incur regulatory costs whereas their informal competitors do not, which may discourage investment in the formal insurance sector. Second, the existence of informal insurance providers generates certain social and consumer protection risks. Insurance is different from other products and services provided in the informal sector in that it relies on the pay-out of a financial amount somewhere in the future based on a promise made by the insurer today. Informal insurers thus have to be sufficiently financially stable to ensure that they are able to pay out all future amounts claimed legitimately (given the premiums collected today), while also being able to inform clients of the product that they are purchasing and follow appropriate marketing practices. As the insurance activities of non-compliant insurance providers are not subject to any supervision by the insurance regulator, the product and its sales process do not benefit from oversight that ensures that clients are protected from abuses. The phenomenon of funeral undertakers selling funeral insurance on an informal basis is particularly prevalent in South Africa. Data from FinScope 2010, a nationally representative survey that measure South African adults usage of various financial services, indicates that almost 4m South African adults or 12.2% of the adult population purchase funeral insurance from a funeral undertaker (Ncube, de Vos, Hougaard & Smith, 2012). It is a country characterised by strong emphasis on the value of a dignified funeral where especially low-income households spend large amounts on these 2

5 events. Collins and Leibbrandt (2007) find that funerals cost up to 7 months of household income and that in a small sample of low-income households where these households use a variety of insurance instruments (including funeral insurance from undertakers) 61% of households are underinsured against the cost of a funeral. Case, Garrib, Menendez & Olgiati (2008) also explore the impact of insurance products sold by funeral undertakers on South African households ability to cope with the financial burden of a funeral. From a global perspective South Africa is not unique in funeral undertakers provision of informal insurance. Bester, Chamberlain and Hougaard (2008) describe the provision of microinsurance on by funeral undertakers in Colombia as a salient feature of the larger Colombian microinsurance market. They cite industry sources as estimating the number of users of informal insurance by these businesses to as up to 3 million adults or 10% of the adult population. Similarly, in Brazil microinsurance products are also provided and distributed by funeral undertakers on an informal basis (Bester, Chamberlain, Hougaard and Smit, 2010) 2. Apart from a brief description in Roth (1999) of the insurance operations of one such business in South Africa, the nature of informal microinsurance business by these firms has not yet been explored in any detail. Given the absence of data on this market, we collected survey data to describe the contribution of informal insurance provision by funeral undertakers in South Africa to total revenue and profit generated by these businesses. 2. Defining informality amongst undertakers Kanbur (2009) proposes that economic informality or, conversely, formality, should be considered relative to whether specified regulations apply to an economic activity. Four categories of interaction with regulations are identified: a) regulations apply and the economic activity in question 2 It is, however, important to point out that the provision of funeral insurance by funeral undertakers who are not registered insurance providers in both Colombia and Brazil is not in contravention of insurance regulation as the provision of in-kind funeral assistance in return for a regular premium is excluded from the legal definition of insurance in these countries. It can thus not be directly equated to informality as we define it in the paper. 3

6 complies; b) regulations apply and economic activity in question does not comply; c) the regulations turn out non-applicable for the relevant economic activity after adjustment of the activity (in most cases with the purpose of avoiding regulation); and d) regulation does not apply to the activity. For the purpose of our study, we use the second category as our definition of informality. We identify three types of activities relative to which the business activities of a funeral undertaker can be considered to be informal and describe our sample s compliance with regards to these three categories of compliance requirements: Business informality or non-compliance with business registration and taxation requirements; Health informality or non-compliance with health regulations that apply to funeral undertakers in South Africa; Insurance informality or non-compliance with insurance regulations that apply to the provision and intermediation of insurance in South Africa. Although we briefly describe informality with regards to business registration and health compliance, we limit most of our focus to informality in the provision of insurance or, more specifically, non-compliance with insurance regulations in South Africa. There are two categories of informality with regards to insurance by funeral undertakers in South Africa: Informality with regards to insurance provision, i.e. selling a product that they may or may not market as insurance that requires clients to pay premiums on a regular basis and offers a guaranteed cash pay-out or service, without underwriting by a licensed insurer. In this case, funeral undertakers act as insurers or insurance companies, even though they do not comply with the relevant insurance regulation. Informality with regards to the intermediation of insurance products. In this case, the insurance is underwritten by a licenced insurer, but the funeral undertakers who act as 4

7 intermediation channels do not comply with the relevant market conduct regulation that applies to insurance agents or brokers. Although we do briefly describe informality with regards to insurance intermediation, we turn most of our focus to informality with regards to insurance provision rather than intermediation. 3. Data and methodology The descriptive data presented in this paper forms part of the output of a larger research project on informality in insurance amongst funeral undertakers in South Africa. Data for this project was collected through qualitative research in the form of exploratory interviews to inform survey design, as well as quantitative data in the form of surveys and so-called deep dives 3. In this paper, we present the survey data only. The survey broadly covered general business information; the nature of funeral undertakers operations; compliance with various business requirements, such as labour laws, business registration, tax; risk management practices; insurance business and the nature of products offered; and business financial information. A sample of 80 funeral undertakers was selected for the survey in low-income areas in four provinces of South Africa: the city centre and three townships 4 of Durban 5 (Kwazulu-Natal), Thohoyandou (Limpopo), the towns of Butterworth, King Williams Town and Willowvale (Eastern Cape) and the townships of Cape Town 6 (Western Cape). The survey data was collected during October to November A combination of purposive 7 and convenience sampling techniques were used to select funeral undertakers in these areas. Due to data collection errors, the sample of funeral undertakers described in this paper decreased to 72 and it is this data that is presented here. Although there exists no data on the exact 3 Deep dive is a term used to denote an in-depth examination of the actual financial data of a small group of funeral undertakers. 4 Townships or locations refer to urban living areas that were reserved for non-whites during the Apartheid era. Townships were usually built on the outskirts of towns and cities, implying large travel costs for the township residents who are employed in business centres of formerly mainly white areas.. 5 Kwa-Mashu, Umlazi and Umbilo 6 Gugulethu, Khayelitsha, Langa and Nygana 7 All selected undertakers were required to offer funeral insurance. One of the objectives of sampling was to reach both formal and informal undertakers with regards to insurance provision. 5

8 number of funeral undertaker in South Africa, this is unlikely to be a representative sample of undertakers. 4. Research findings 4.1 What does informality look like amongst funeral undertakers? In this section, we describe the nature of informality amongst our sample of funeral undertakers in terms of the three areas highlighted above: business registration, compliance with health regulations and compliance with insurance regulations. Business registration Slightly more than 90% of our sample indicated that their business is registered in some way with the South African authority that manages business registration 8. Of this group, 2.8% are companies and 87.5% are close corporations % of the sample indicated that they are single proprietors and are therefore not required to register with any business registration authority. The survey also included two questions on tax compliance. In response to whether their business is registered with the South African Revenue Services (the tax authority), 93% of the sample answered yes. The majority of the sample (56.9%) indicated that they are registered Value Added Tax (VAT) vendors. Unfortunately there was no way in which this information could be verified. It should, however, be pointed out that the annual turnover threshold for VAT registration is R1 million (US$131,769) (South African Revenue Services, 2012). It can therefore be assumed that the response to this question elicited upward response bias as it is unlikely that so many of these vendors would legally meet this threshold. Compliance with health regulations 8, The Companies and Intellectual Property Commission, previously the Companies and Intellectual Property Registration Office (CIPRO), handles all registration and on-going information submissions of companies and close corporations. 9 A close corporation (CC) is a more simplified and flexible business entity than a company, designed in such a way that the ordinary person is able to draft the papers and register the corporation by herself. It should, however, be mentioned that under the recently promulgated new Companies Act, CC s are being phased out and current CC s are encouraged to convert to private companies. 6

9 All funeral undertakers in South Africa are required to comply with the regulations on Funeral Undertakers Premises of 1985, a schedule to the National Health Act of These regulations state that in order to operate as a funeral undertaker and to store and prepare corpses for burial, a certificate of competence is required (Republic of South Africa, 1985). The regulations delegate the power of enforcement, and thus also the ability to issue a certificate of competence upon a funeral undertaker s compliance with the regulations, to the municipal level of government, commonly referred to as the local authority 10. One of the most basic requirements for qualifying for a certificate of competence is having refrigeration facilities that meet specified requirements on the premises of the funeral undertaker. In order to ensure that funeral undertakers premises continue to comply with the national health requirements, the regulations to the Health Act on inspections and investigations require inspections to be carried out on a quarterly basis in terms of the regulations relating to inspections and investigations (Republic of South Africa, 1991). The data shows that only 38 of the 72 undertakers in our sample (52.8%) have their own refrigeration facilities. Of the 38 undertakers with fridges, 30 (79% of all those with fridges) state that they have been issued with a certificate of competence from their local authority. Less than half (41.7%) of our sample therefore comply with the national health requirements. Of the 38 undertakers with fridges, only 24 (63%) indicated that their premises had been visited by a health inspector during the last 3 months as required by the inspection regulations. Low levels of compliance with health regulations can be partly ascribed to poor enforcement and low levels of knowledge and awareness of the funeral undertaking market by local authorities. As part of the survey data quality control process, we conducted telephonic interviews with the health departments of all the local municipalities of the towns and townships in which survey data were collected. The purpose of these interviews was to establish whether we could use local municipality data to verify the health compliance status of the undertakers in our sample. Due to the poor nature 10 South Africa has a three-tier government system: national, provincial and municipal levels of government all have legislative and executive authority in their own spheres. 7

10 of data on health compliance in their jurisdictions, this was not possible for most of the authorities. Some of the authorities interviewed were unaware of the phenomenon of funeral undertakers operating without their own mortuaries, even though the data shows the contrary. Compliance with insurance regulations As mentioned earlier, funeral undertakers can be considered compliant or non-compliant and, therefore, formal or informal with regards to two dimensions of insurance regulatory requirements: 1) the provision of insurance; and 2) the intermediation of insurance. For the provision of insurance, the main consideration is whether the insurance product provided by the funeral undertaker is underwritten by a registered insurance company. We asked our sample of 72 undertakers whether they are underwritten by a registered insurance company. Almost one third or 23 of the 72 undertakers in our sample (31.9%) indicated that they are not underwritten, implying that they do not have any relationship with a formal insurance company (see Error! Reference source not found.). Their funeral insurance products are therefore offered on an informal basis. We describe this group of undertakers in more detail later in the paper. Figure 1: Insurance informality (underwriting and intermediation) in the funeral undertaker sample 8

11 Many of the undertakers in the larger sample that provide insurance on an informal basis are not only informal with regards to insurance, but are also informal with regards to health regulatory compliance. Of the 23 respondents that are informal in terms of insurance provision, only 12 (52.2%) have their own refrigeration facilities. The remaining 11 (47.9%) indicated that they outsource the storage of corpses to the refrigeration facilities of another funeral undertaker. Of the 12 funeral undertakers with fridges, 9 have been issued a certificate of competence by the local municipal authority. It can therefore be concluded that 11 of the 72 funeral undertakers in our sample (15.3%) are informal with regards to both insurance provision and health requirements. Even of those undertakers complying with insurance provision requirements, in that they state they are underwritten by a formal insurance company, many do not have refrigeration facilities. 23 of the 49 (47%) funeral undertakers who sell insurance products underwritten by a formally registered insurance company do not have the required refrigeration facilities. With regards to compliance with insurance intermediation (or market conduct) requirements, South Africa s Financial Advisory and Intermediary Services (FAIS) Act requires that any business that provides intermediary services with regards to any financial services product (including insurance) should be registered as a Financial Services Provider (FSP) with the Financial Services Board (FSB) and comply with the various requirements of FAIS and its supporting regulations (Republic of South Africa, 2002). In the case of insurance, funeral undertakers have two basic options to comply with the financial intermediation legislation. Firstly, they can register as an FSP in their own right. Alternatively, in cases where an undertaker is distributing the insurance products on behalf of an insurance company that is already registered as an FSP, they have the option to not go through the onerous and expensive registration process of registering as an FSP, but rather to register as a representative of the FSP (the insurance company) if the FSP allows this. This option of registering as a representative rather than a full FSP implies reduced compliance requirements. It is not clear what factors influence funeral undertakers decision to register as a FSP or representative, but it is clear 9

12 that in order to be viewed as formal with regards to complying with insurance intermediation requirements, a funeral undertaker has to be registered as either a FSP or a representative of a FSP. Information on all registered FSPs and their representatives are available on the Financial Services Board s (FSB) s website 11. We were therefore able to verify the survey data against information on the FSB s database. Of the 49 funeral undertakers who indicated that they are underwritten by a registered insurance company, 22 indicated that they are registered FSPs. After verification against the website database it turned out that only 2 of these 22 undertakers are registered Financial Services Providers (FSPs). 31 of the 49 underwritten undertakers indicated that they are registered representatives of a FSP (some undertakers indicated that they are both FSPs and representatives), while we were only able to confirm that 5 of this group have been officially registered as representatives of a FSP (see Figure 1). Thus only 7 of the 49 (14%) undertakers who intermediate the insurance product of a registered insurance company are complying with insurance intermediation regulation in some way. 4.2 Prudential management and the contribution of informal insurance to revenue In this section, we present some high-level indicators on the prudential management practices of undertakers who provide insurance on an informal basis, as well as consider the contribution of informal insurance to total revenue generated by the 23 undertakers in our sample who indicated that they offer funeral insurance on an informal basis. We start by describing the 23 undertakers in terms of age of business, geography, education of the business owner and client base. Most of the informal insurance undertakers in our sample are relatively new businesses: only 3 of the 23 started their businesses before If one considers the geographic spread of the informal insurance undertakers it is interesting to note that the majority of the sample (14 of the 23) are situated in the only rural area that we included in our sample Thohoyandou in Limpopo Province. The owners of these businesses are relatively well-educated: 10 of the 23 indicated that they have

13 some form of tertiary education; 11 indicated that they completed high school (matriculated); and the remaining 2 have indicated that they nearly completed high school (completed grade 11). The highly skilled nature of some of the respondent is further confirmed by qualitative information also collected through the survey process. Some of respondents indicated that prior to establishing their funeral undertaking business they worked, for example, as lawyers or teachers. Of the 17 undertakers who were willing to share the size of their insurance client base with us, there are 6 who can be considered small in terms of number of policyholders. These undertakers have no more than 150 policyholders each. The majority (7 of the 17), however, have between 150 and 1,000 policyholders, with 2 undertakers that have a client base of between 1,000 and 3,000 policyholders. Our sample also includes two very large undertakers who have a client base of 4,000 policyholders each. In terms of size of the client base, these two undertakers start to resemble small insurance companies. For most funeral undertakers selling insurance on an informal basis, data collected on the management of insurance funds show that there is little separation in the management of revenue generated from the delivery of funeral services and revenue from insurance premiums. Only 4 of the 23 funeral undertakers (17.4%) that sell insurance on an informal basis have a separate bank account for insurance funds (premiums) received. Most informal insurance respondents seem oblivious to the possibility that multiple insurance claims may arise at the same time. In response to the question of how they are preparing for this possibility, only 4 respondents (17.4%) indicated that they put some money aside for insurance claims when they first started their business, while only 9 (39.1%) said that they specifically keep some of the insurance premiums received aside to ensure that there is always enough money to pay claims. However, of the 9 that indicated they keep premiums aside as a means of managing the risk of their insurance scheme, only 2 have separate bank accounts for insurance money. The majority 11

14 (11 of the 23) indicated that they have never experienced multiple claims at the same time and therefore they do not feel that they need to prepare for it in advance. We furthermore collected data that allowed us to calculate the contribution of revenue from insurance premiums to total annual revenue. These calculations were done under the assumption that the informal undertakers in our sample generate their total revenue only from the delivery of funeral services for which clients either pay for in cash or with insurance premiums. We calculated total annual revenue generated from cash funerals by multiplying the number of funerals that was provided to cash clients with the price of the most popular cash funeral package. In order to calculate total annual insurance revenue, we collected marketing data (printed or handwritten pamphlets) on the various funeral insurance products offered for the undertakers in our sample. This includes information on the premiums of the different insurance products, in some instances up to 5 different products, as well as the services and goods (the benefits) offered as part of the insurance package. Very few of the informal insurance undertakers specify the monetary value of the insurance benefits, but denote an increase in monetary value for between packages through the names of their insurance products, in some cases, alphabet letters (A, B, C, D) or metals (e.g. silver, gold and platinum packages). As very few of these undertakers would have been able to provide accurate data on the number of clients for each funeral product offered, we calculated an average premium amount from the premiums of the various products offered by each undertaker (See Appendix A). Using a simple calculation, we estimated total annual insurance revenue by multiplying the average premium by total number of insurance clients. This simple calculation is unable to take into account dynamic factors such as client attrition due to mortality or non-payment of premiums or client growth during the period, but does provide an indication of likely revenue. Of our sample of 23 undertakers, we were able to estimate total insurance revenue for only 16 as some respondents did not provide marketing material or did not want to tell us the cost of their insurance premiums. For these 16 12

15 informal insurance undertakers, total annual revenue from insurance premiums ranged between R18, (US$2, ) and R6,000, (US$790,616). Our calculations showed that a quarter (4 out of 16) generate between R10,000 (US$1,3178) and R100,000 (US$13,177) annual revenue from insurance premiums; 5 earned between R100,001 (US$13,177) and R500,000 (US$465,885); 3 earned between R500,001 (US$465,885) and R1,000,000 (US$131,769); and 4 earned above R1,000,000 (US$131,769) annually. See Appendix A for the data on each undertaker. Total annual revenue from Number of undertakers premiums R10,000 - R100,000 4 R100,001 - R500,000 5 R500,001 - R1,000,000 3 R1,000,001 or more 4 Table 1: Total annual revenue from insurance premiums Finally total annual revenue was calculated by adding total annual revenue from cash funerals to total annual revenue from insurance premiums. The contribution of total insurance premiums to total annual revenue could be calculated using the latter amount. A limited number of respondents (only 12 of the 23) provided all the information that was needed for this calculation. For the majority of the informal insurance undertakers who answered this question (8 of the 12), income from insurance premiums contributes 30% or more to their total annual income. 4.3 The contribution of informal insurance undertakers to employment Data collected on employment indicate that these firms do contribute to employment and income generation in their communities in a country with a very high unemployment rate 15. While the majority of the informal insurance providers in our sample of informal insurance undertakers (18 or 12 This respondent s insurance business has 26 clients, whom he charges an average of R60 (US$ 7.91) per month for funeral cover. 13 Using an exchange rate of R /US$1 as obtained from on 28 March This particular respondent indicated that he has 4,000 insurance clients who pays on average a premium of R125 (US$ 16.47) per month. 15 In the fourth quarter of 2011 South African had an official unemployment rate of 23.9% (Statistics South Africa, 2011). 13

16 43.5%) have 10 or less employees; 3 of the undertakers can be considered medium-sized in terms of employment with between 11 and 30 employees; and 2 of the undertakers, both from Thohoyandou, can be considered large in terms of employment, one having 40 employees and the other 80 employees. Half of the small informal undertakers (10 or less employees) indicated that they make use of parttime employees: some hire part-time employees in addition to their permanent employees, while others only hire part-time staff in the event of a funeral and pay them per funeral. One respondent has 4 part-time employees: a graveyard worker, an employee who installs tombstones in graveyards and 2 who are serving mourners. This particular undertaker provides on average 1 funeral per week and pays his part-time employees R50 (US$6.60) per funeral, his total monthly wage bill is approximately R900 (US$119). The monthly wage bill for the small undertakers ranges between R900 (US$119) and R20,000 (US$2,635), with the majority (10 of the 18) that have a wage bill of below R10,000 (US$1,318) per month. The data indicates that the medium and large-sized informal undertakers (in terms of employment) have only permanent staff members whom they pay a fixed salary every month. Medium-sized undertakers spend between R30,000 (US$3,953) and R40,000 (US$5,271) on salaries per month, while the large-sized undertakers spend up to R160,000 (US$21,083) on salaries per month. The 23 informal undertakers in our sample provide a total 236 employment opportunities. Although these informal insurance undertakers pose a risk to their consumers and the insurance market at large, they do contribute to employment creation within their communities. 5. Conclusion and policy implications In this paper, we presented descriptive data on a non-representative sample of 72 funeral undertakers in South Africa, with a specific focus on the 23 undertakers in the sample who provide insurance on an informal basis. Data presented on both the absolute size of revenue generated from 14

17 informal insurance business and the contribution of informal insurance revenue to total revenue demonstrates that informal insurance contributes substantially to the total revenue generated by funeral undertakers providing insurance on an informal basis in our sample. The data, however, did not allow us to determine profitability and it is therefore difficult to come to any conclusion about the contribution of informal insurance to business viability. Furthermore, the data demonstrates very poor or the total absence of even rudimentary prudential risk management practices by these informal insurers. At a most basic level, there is almost no separation of insurance revenue from other business revenue in our sample of informal insurance undertakers, with no reserving practices, and no actuarial grounds for pricing being used. While prudential management in insurance can most fundamentally be considered a consumer protection issue, we did not explicitly explore other consumer protection risks in the same systematic way. Although we found that 42 of the 49 undertakers who intermediate the insurance product of a registered insurance company do not comply with the necessary market conduct regulation, we did not further explore the implications of this for consumer protection. However, it should be obvious that a sizeable population of funeral insurance users may be at risk of no consumer protection if regulators apply no or limited enforcement of insurance regulations to informal insurance undertakers. A total of 4m South African adults stated in 2010 that they have a funeral insurance product purchased from a funeral undertaker (Ncube, de Vos, Hougaard & Smith, 2012). Our sample of 16 informal insurance undertakers that provided data on the size of their client base alone serves a total of 16,409 policyholders. The objective of this paper was to demonstrate that the risks posed by the nature of informal insurance provided by funeral undertakers requires that this type of informal insurance be treated as a specific manifestation of economic informality. This, in turn, would then necessitate careful consideration of the value offered by this insurance, risks posed to clients by the informal nature of the provider and product and the potential need for formalisation of the businesses that offer this 15

18 insurance. While the data presented in this paper should have demonstrated some of the potential risks to the insurance industry as well as risks to the individual clients, it is also clear that these informal insurance providers contribute to income generated and employment in their communities in a country where unemployment rates are very high. This implies that any policy aimed at formalising the market for informal insurance as provided by funeral undertakers would have to carefully balance the economic contribution of these businesses with the benefits of a fully formal insurance market. 16

19 Bibliography Bester, H., Chamberlain, D. & Hougaard, C.,2008. Making insurance markets work for the poor: microinsurance policy, regulation and supervision. Evidence from five country case studies. International Association of Insurance Supervisors (IAIS)/Microinsurance Network Joint Working Group on Microinsurance Report. Bester, H., Chamberlain, D., Hougaard, C. & Smit, H., Microinsurance in Brazil: towards a strategy for market development. Report by the Centre for Financial Regulation and Inclusion (Cenfri). February. Case, A., Garrib, A., Menendez, A. & Olgiati, A., Paying the Piper: The high costs of funerals in South Africa. NBER Working Paper No October. Collins, D., 2006 Financial decisions and Funeral Costs. Southern Africa Labour and Development Research Unit (SALDRU) Working Paper. University of Cape Town: Cape Town. Collins, D. & Leibbrant, M., The financial impact of HIV/AIDS on poor households in South Africa. AIDS (Suppl 7): S75-S81. Dercon, S., De Weerdt, J., Bold, T. & Pankhurst, A., Group-based funeral insurance in Ethiopia and Tanzania. World Development. 34(4) Kanbur, R., Conceptualising Informality: Regulation and Enforcement. IZA Discussion Paper No Available at SSRN: (accessed March 2012). Ncube, S., de Vos, M., Hougaard, C. & Smith, A, Opportunities for insurance inclusion in South Africa: Exploring the potential in the South African insurance market based on insights from the FinScope survey. Unpublished report prepared by the Centre for Financial Regulation and Inclusion (Cenfri) for the FinMark Trust. 17

20 Republic of South Africa, Health Act of 1977, Act 63 of Pretoria: Government Printer. [Laws]. Republic of South Africa, Regulations relating to funeral undertakers premises. Pretoria: Government Printer. [Laws]. Republic of South Africa, Regulations relating to inspections and investigations. Pretoria: Government Printer. [Laws]. Republic of South Africa, Financial Advisory and Intermediary Services Act, Act 37 of Pretoria: Government Printer. [Laws]. Roth, J., Informal micro-finance schemes: The case of funeral insurance in South Africa. Social Finance Unit Working Paper No. 22. International Labour Office, International Labour Organization: Geneva. South African Revenue Services, What is VAT? [Online]. Available: [27 March 2012]. 18

21 Appendix A Funeral Undertaker Province Average number of funerals per year Proportion of funerals paid for in cash (vs. with insurance) Number of cash funerals per year Cost of most popular cash funeral package Total annual revenue from cash funerals Number of insurance clients Average cost of premium Total annual revenue from insurance premiums Total annual revenue % of total annual revenue from cash funerals 1 Western Cape R R R105 R R Limpopo R5 500 R R103 R R Limpopo / / / R5 000 / / R50 / / / / 4 Limpopo 520 / / R / / / / / / / 5 Limpopo R9 500 R R125 R R Limpopo 104 / / R5 000 / 2000 R100 R / / / 7 Limpopo R R R50 R R Limpopo R R / R60 / R / / 9 Limpopo R5 000 R / R87 / R / / 10 Limpopo R7 000 R R73 R R Limpopo 26 / / R6 500 / 200 R70 R / / / 12 Limpopo R7 000 R / R / / 13 Limpopo 26 / / R / 26 R60 R / / / 14 Limpopo 12 / / R4 500 / / R80 / / / / 15 Limpopo 312 / / R / 4000 R63.3 R / / / 16 Eastern Cape R3 500 R R100 R R Eastern Cape R6 000 R R87 R R KwaZulu Natal R7 000 R / R73 / / / / 19 KwaZulu Natal R6 000 R R70 R R KwaZulu Natal R6 000 R R100 R R KwaZulu Natal R2 000 R R75 R R KwaZulu Natal R R R73 R R KwaZulu Natal R R R60 R R % of total annual revenue from premiums 19