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Micro-insurance opportunity for the funeral industry

Article provided by Absa

The professionalization of the funeral industry is long overdue to rid itself from unscrupulous dealers who have tarnished its reputation.  The industry is now in a transformational phase due to regulations that are being phased in.

The funeral industry has traditionally relied on insurers for maintenance and compliance of funeral policy books. Before the introduction of the FAIS Act no 37 of 2002, the financial industry was regulated by different acts that focused more on regulating the institution than protecting clients who were being offered intermediary services and advice. The FAIS Act, however, brought about the regulation of advice and intermediary services to protect clients from misrepresentation.

“Advice” is classified as any recommendation, guidance or proposal of a financial nature furnished, by any medium, to a client or group of clients. Thus the funeral industry falls within the ambit of the FAIS Act and policies taken by policyholders must be managed appropriately by funeral directors who are acting as an insurance intermediary.

A micro-insurance license aims to risk-manage products designed to meet the needs of lower income households, termed as the emerging mass market. Micro-insurers can be profit-making, not-for-profit or co-operatives, opening up the market to existing community finance groups that want to extend their operations. Funeral directors generally apply for micro-insurance licenses, as various barriers to entry have been lowered, such as revised prudential requirements.

Micro-insurance is key in driving transformation and inclusion as it addresses financial inclusion and promotes the formation and development of regulated and well-capitalised small business insurance providers. By lowering barriers to entry into the insurance market, healthy competition is promoted.

By expanding into micro-insurance, funeral directors are able to extend their business outside of what they were traditionally exposed to. For many years, funeral directors acted merely as agents, or intermediaries, for the insurance sector and the opportunity to operate in the mainstream of micro-insurance emerged when the Insurance Act was promulgated in 2018.

Key characteristics of micro-insurance and implications for the funeral parlour

  1. Only micro-insurers are allowed to use the word “micro-insurance”.
    Funeral parlours who have not registered with relevant authorities are contravening the Act if they continue to offer advice on funeral policies after the grace period of three years.
  2. Risk-only benefits with no surrender value are included in the micro-insurance product category.
    The micro-insurer cannot add on any other products beside the policy’s risk benefits.
  3. Exclusions for pre-existing conditions are not allowed for funeral and credit life classes of micro-insurance policies.
    The clause is aimed at protecting the general public by ensuring fair and consistent treatment.
  4. Funeral policy claims must be settled within 48 hours after receiving all the necessary documents.
    Time is of the essence for the grieving family and the sooner the funds are released, the better.
  5. Insurers must reinstate policyholders on the same terms as previously, if a policy has lapsed. It is, however, not mandatory for the insurer to reinstate a policy when it has lapsed.
    In practice, the lapsed policy is treated like a new policy with waiting periods applicable, which does cause some confusion.
  6. No waiting period may be imposed when a policyholder cancels a policy with one insurer in favour of one providing similar cover with another insurer. Stickiness to the product is created – a service provider could be anyone provided that renders a similar service. 

Requirements for a micro-insurance application

In conclusion, if you intend to apply for your micro-insurance licence, you need to ensure that you understand the legislation and what is included and excluded by the Act. As a starting point, you need to contact the South African Reserve Bank Regulatory Department, which will highlight the application requirements while working hand-in-hand with the Financial Sector Conduct Authority. Key requirements include:

  • A standard application form;
  • A memorandum and articles of association in the case of a company, or a constitution in the case of a co-operative, as well as the official registration documents;
  • A business plan and five-year financial projections;
  • A personal questionnaire to be completed by board members and management to ensure that they are fit and proper;
  • An application for approval for the auditor(s).

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