The business of death: Informal insurance by funeral undertakers in South Africa

Anja Smith and Mia de Vos, Centre for Financial Regulation and Inclusion (Cenfri)

Research Conference on Microinsurance 2012, University of Twente, 11-13 April

Coffins, caskets and domes…

Informal insurance by undertakers vs. community-based mechanisms

• Literature on informal insurance typically focused on informal insurance as activity by non-profit community-based mechanisms – for-profit organisations not mentioned

• Departure point: For-profit informal insurers require different analytical approach, raise different problems and issues than community-based informal insurers.

• Research questions:– What are risks of informal insurance by undertakers to

clients (and market)?– What are the economic benefits generated by informal

insurance at both a revenue and employment level?– Ultimate policy question: do the benefits outweigh the

risks? (Not yet answered in this research...)

Data

• Mainly quantitative data through non-representative survey October-November 2011:– Business operations and business financial information– Compliance with various regulations/requirements (business

registration, tax, health, insurance)– Insurance business and products offered

• Combination of convenience and purposive sampling– Most basic selection criteria: sell insurance

• 72 undertakers in four provinces of South Africa:– Western Cape, Kwazulu-Natal, Eastern Cape, Limpopo

• Basic descriptive analysis applied

Defining informal insurance

• Four categories of interaction with regulation (Kanbur, 2009):

– regulations apply and economic activity complies– regulations apply and economic activity does not comply– regulations become non-applicable for economic activity after

adjustment of activity– regulation does not apply to activity

• Informality with regards to insurance provision– need to have risk carried by registered insurance company

• Informality with regards to intermediation– registered as either Financial Services Provider (FSP) or

representative of FSP with Financial Services Board (FSB), non-bank supervisor

Informal insurance in the sample

Only 7 (14% of undertakers who

claim to be underwritten) comply with

intermediation or regulation

Client base of informal insurers

Policyholder range # % of informal providers (N=17)

<150 policyholders 6 35.3%150-1,0000 policyholders 7 41.2%

1,000-3,000 policyholders 2 11.8%

>3,000 policyholders 2 11.8%

Prudential risk management practices of informal insurers

Statement # % of informal provider sample (N=23)

I keep my insurance funds in a separate bank account (inferred from many open and double check questions)

4 17.4%

When I first started my business I put some money aside [for many claims at the same time]

4 17.4%

I keep some funds aside to ensure that there is always enough money to pay claims

9 39.1%

If many insurance claims have ever come in at the same time and you did not have enough money to pay out all the claims, how did you deal with this? …This has never happened before.

11 47.8%

Contribution of informal insurance to revenue

• Able to estimate both total revenue and total insurance revenue using simple calculations and key variables:

― Calculated average insurance premium― Number of policyholders― Total funerals annually (asked about number of funerals per week)― Percentage cash vs. own insurance funerals― Number of cash funerals provided (per annum)― Price of most popular cash funeral package

Contribution of informal insurance to revenueTotal annual premium revenue # % of total

(N=16)R10,000-R100,000/US$1,378-US$13,177 4 25.0R100,001-R500,000/US$13,177-US$65,955 5 31.3R500,001-R1,000,000/US$65,955-US$131,769

3 18.8

>R1,000,001/>US$131,769 4 25.0

• Also calculated contribution of total annual premium revenue to total annual revenue (includes income from cash funerals):

― Sample decreases to 12― For 8 of 12 (66.67%) income from insurance premiums contributes 30% or more to

total annual income

Contribution of informal insurers to employment

• Permanent vs. temporary staff• Smaller undertakers manage funerals on a project basis: temporary staff/”contractors”

brought in to help deliver funeral• 23 undertakers=236 employment opportunities

Staff size range

# % of sample (N=23)

Salary/wage bill range

10 or less 18 78.3 11 to 30 3 13 US$3,953-US$5,27130 or more 2 8.7 <US$21,083

Preliminary conclusions and policy implications• Total absence of prudential risk management practices AND

sizeable percentage of population exposed to these products:– 4 million SA adults purchased insurance from a funeral

undertakers (FinScope 2010) (but difficult to distinguish beteween formal and informal)

– 23 informal insurance undertakers serves more than 16,000 policyholders

• Informal insurance contributes substantially to total revenue: >30% of calculated total annual revenue for 8 (of 12) undertakers

• Informal insurance undertakers also a source of employment, especially part-time employment

Preliminary conclusions and policy implications (2)• For few undertakers in sample informal insurance is highly

lucrative businesses. If policy goal is level playing field and ensuring consumer protection, better enforcement of regulation is required.

• Follow targeted approach in any enforcement strategy to formalise informal insurers:– more help for undertakers where insurance is larger

proportion of total revenue– more help for undertakers who are larger employers, serve

more clients• Further research:

– contribution of informal insurance to business profitability– client risk profiles and mortality rates