South Africans are grossly underinsured. In fact, some pundits calculate the insurance gap to be as high as R30 trillion. There are debatable ways of determining this gap, and whether or not this quoted figure is higher than reality, we can safely conclude that the real gap is BIG.
Since the announcement of the MTN and Sanlam insurance partnership, some commentators have highlighted this gap again; and specifically, note that black South Africans are more underinsured than other demographics. These same commentators propose that there are three primary causes of this exaggerated gap:
- Lack of easy access to insurance products
- Lack of disposable income
- Lack of insurance culture in South Africa and the rest of the continent
It’s worth unpacking these proposed causes to see how accurate they are and what can be done about it. Let’s begin with the disposable income argument.
Lack of disposable income
In order for this to be plausible, the following conflicting statements would need to be true at the same time:
- Black South Africans have enough disposable income to buy funeral cover (which is in high demand and sold in significant volumes countrywide)
- Black South Africans do not have enough disposable income to buy life insurance
I will concede that funeral cover is not the same thing as life insurance. First and foremost, they are designed to do two very different jobs. Funeral cover is designed to pay out cash very quickly following a death in order to assist with funeral and related expenses. Life insurance will often take a lot longer to pay out and is designed for legacy purposes such as settling debt, leaving behind financial security for loved ones and handling estate taxes and expenses. Life insurance cover amounts are typically multiple times higher than funeral cover, and the buying process is more complex and often involves some level of medical and occupational underwriting.
However, if we’re making the argument around affordability, life insurance is often significantly cheaper than funeral cover when comparing how much cover R1 of premium will buy. At the extremes, an individual may be able to get as much as 15 times more life cover for the same premium as funeral cover.
Bottom line: if there is disposable income for funeral cover (and we know there is), there is disposable income for life insurance. After all, some life insurance has a baked-in benefit which pays a portion of the cover as quickly as funeral cover would pay – effectively killing two birds with one stone.
Lack of insurance culture
The cultural argument is much more interesting. Our research suggests that in many cases, extended family and community are expected to (and often do) step in to take care of left-behind children and loved ones when a breadwinner passes away. If this is the case, the need for life insurance to help secure the financial futures of left behind family may be less compelling in black communities.
That being said, debt (like home and car loans) remains one of the primary drivers of life insurance demand. This is culture and race agnostic. I also believe that even in the case of the community and extended family stepping in to take care of orphaned children, there is certainly still a case for money to be left behind to support them.
In general, if the industry did a better job of educating people about the needs and benefits of life insurance, then cultural differences would be less obvious when measuring demand for their products.
Lack of access
This is, in my opinion, the most important reason for the insurance gap and, in particular, for black South Africans.
There are a number of drivers behind a historical lack of access to life insurance, but one of the most prominent is the nature of the traditional life insurance distribution model itself. Since the dawn of South Africa’s life insurance industry over 100 years ago, products have been distributed predominantly through face-to-face methods – via financial advisors and brokers.
The financial advice process starts by assessing a client’s needs, before putting together a financial plan and recommendations. After identifying a need for life insurance, the intermediary attempts to match that need with a recommended product. Should the client purchase a product, the intermediary is rewarded with commission, which is tied directly to the size of the premium written.
Over time, as more regulation was steadily introduced (primarily aimed at client protection), the compliance burden of being a financial advisor increased. Not only do top financial advisors require years of training and demonstrable competence, but each individual piece of advice dispensed is subject to rigorous compliances processes. Essentially, this compliance requirement, as well as the time invested in an individual client’s financial plan and product recommendations, means that an individual policy sale will take many hours of an advisor’s time and effort.
Given that time is a finite resource, and the effort involved in selling a small life insurance policy is generally similar to selling a large one, it is rational for financial advisors to invest their efforts in the segment of the market where the largest life insurance policies are needed; and hence where they are likely to earn the most remuneration for the time invested (remember, their commission is tied to premium size). All things being equal, this means a focus on higher-income earners and older clients.
Due to historical factors, we know that the average income of individuals in South Africa is skewed by race, so it’s no surprise that black South Africans are generally underserved by traditional distribution channels compared to other demographic groups.
Peter Castleden is the CEO of Sanlam Indie.