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FINANCE PORTFOLIO AND FINANCE SELECT COMMITTEES
6 September 2005
FUNERAL BENEFIT SCHEMES: HEARINGS
Co-Chairpersons: Mr K Moloto (NA - ANC) and Mr B Mkhaliphi (NCOP - ANC, Mpumalanga)
Documents handed out
FINANCE PORTFOLIO AND FINANCE SELECT COMMITTEES
Members heard presentations about funeral benefit schemes from the National Treasury, the Financial Services Board (FSB), FinMark Trust and Genesis Analytics. The presenters felt the current regulatory regime for funeral benefit schemes required ‘reinvention’ to achieve: prevention of fraudulent practices, lowering the number of lapsed policies and repudiated claims, elimination of policy design problems, and lowering of costs and an increase in capacity.
Both the presentations of the FSB and FinMark Trust emphasised the importance of the funeral benefit schemes industry, and the enormous impact it had on the poor and vulnerable. The presentation by Genesis Analytics outlined proposals for a new regulatory regime, which included the introduction of a dedicated funeral insurance licence and the removal of burial societies from the Friendly Societies Act.
Members emphasised the necessity for recognising the cultural context within which funerals occurred. They questioned the presented research, and particularly methodology and methods. Other focus areas related to the separation of funeral parlours and funeral cover provision.
National Treasury briefing
Mr Jonathan Dickson (Treasury Chief Director: Financial Sector Policy Unit) said that in terms of funeral insurance and benefit arrangements, the National Treasury had identified five main policy concerns. The first was the high incidence of fraudulent practices. These seemed to result mainly from fraudulent policies and incorrectly repudiated claims. A lack of appropriate risk underwriting, the weak regulation and enforcement of legislation, and the proliferation of unregistered operations shared the rest of the blame.
The second concern centred on lapsed policies and repudiated claims. Here, a great deal of the blame lay with a lack of education and misperceptions of insurance and insurance products. Furthermore, poor disclosure by intermediaries, the commission-driven nature of the industry and the appropriateness of products were also fingered as main problem drivers. Other concerns included problematic policy designs, cost concerns and capacity problems.
These concerns contravened the four cornerstones of financial regulation. These included prudential soundness and financial stability, healthy competition, good consumer protection and industry access and empowerment. In order to counter these problems, National Treasury and the Financial Services Board (FSB) had embarked on four policy initiatives. Firstly, a joint task team was established on the funeral assistance business. Secondly, the FSB had been investigating certain regulatory changes. Thirdly, cost issues in insurance were being investigated. Finally, the establishment of a Financial Sector Charter was also being worked on.
Financial Services Board briefing
Mr Mashudu Munyai (FSB Head of Insurance) said that funeral cover was one of the most widely used financial services in South Africa. National Treasury and the Financial Services Board were jointly considering the FinMark Trust/Genesis Report on the matter. The two institutions set up a working group on the funeral assistance business and were now considering the proposals forwarded in the Genesis Analytics report. The immediate priority was to look at the different licensing options available for the assistance industry. The FSB also endeavoured to set up an enforcement committee that would have powers to impose penalties on parties that contravened the provisions of the Acts. At present the only enforcement option was prosecution. It was also under consideration whether or not to move "Friendly Societies" to the Co-operatives Act, as it would leave them free to conduct long- or short-term insurance.
FinMark Trust briefing
Mr Jeremy Leach (FinMark Executive Director) said that funeral cover was one of the most important and largest financial services markets in South Africa. It had substantial low-income exposure. In order to service this market properly and fairly a new regulatory regime was necessary to ensure fair access, with appropriate safeguards in place. The Financial Services Consumer Education Foundation had to be capacitated to play a co-ordinating role that would include setting standards for consumer education. The need for a clear and well-publicised consumer recourse regime was also apparent.
Genesis Analytics briefing
Mr Doubell Chamberlain (Genesis Associate) said that the introduction of a dedicated funeral insurance licence was necessary, since it was assistance business written on a short-term basis and therefore had a different risk character. It would also formalise the industry and would help manage HIV/AIDS risk.
An appropriate regulatory regime for burial societies was also necessary. For instance, the regulation of risk pooling by burial societies was not necessary, provided that member governance was in place. Also, societies that provided insurance should be removed from the Friendly Societies Act and placed under new co-operatives legislation.
Regulation over administrators and intermediaries should be better enforced through the Financial Advisory and Intermediary Services (FAIS) Act and the position of funeral parlours in terms of the Friendly Societies Act should be noted. The right to a monetary benefit should also be enforced and unregulated insurance and the movement of insurance pools by administrators should be closed in on.
Closer co-operation should be fostered between the various regulatory bodies and consumer education and options for recourse should be made more accessible to and focussed on the needs of the most vulnerable.
Mr M Johnson (ANC) asserted that the issue of funerals and funeral cover was of great importance and sensitivity for the poorer, rural and more traditional constituencies. He emphasised that no policy changes in this regard could be made on behalf of these constituencies without their input and co-operation. He wanted to know how this problem had been overcome in the process that lead up to the presentations heard by the Committee, and how it would be overcome in any action that might follow.
Mr Y Bhamjee (ANC) emphasised the importance of funerals to the social fabric and family bonds of working class and traditional families. He stated that it could lead to serious instability in such constituencies if misconceptions of this cultural issue filtered through to any legislation or future regulatory framework on funeral benefit schemes. He asked for an assurance that these matters had been taken into account in the drafting of the presented proposals.
Ms J Fubbs (ANC) also emphasised the importance of the cultural context in which funerals took place. She said that it was important to ensure that monetary benefits not be absorbed by overblown "valid incidental" charges such as mortuary and hearse costs.
Mr Doubell Chamberlain (Genesis) responded that the Genesis Analytics project recognised that different cultural groupings had different conceptions of what represented a dignified funeral. Thus, while it attempted to learn about these differing conceptions, the ultimate aim was to put forward a set of recommendations that would service the demands of the market in a value-neutral manner. This was also important where the aim was to prevent abuse of cultural sensitivities by the industry.
The issues of cost and the exploitation of cultural sensitivities were highly problematic. The enforcement of the monetary benefit was seen as key to unlocking some of this dynamic. It would let competitive forces loose to reign in suspect intermediaries insofar as the market was unable to do so by itself. This would, however, not be practicable over the short term, and it would require a certain amount of consumer education.
Mr Bhamjee required clarity on what was meant by "financial stability" as it was put across in the FinMark Trust / Genesis Analytics presentation.
Mr Chamberlain told the Committee that the Genesis Analytics Project assumed that the focus of regulation was a very important basis for financial stability, but other issues such as industry access could not be discounted completely.
Mr Bhamjee asked for further explanation of the purported low level of savings in South Africa and how consumers dealt with this in making provision for funeral cover.
Mr Jeremy Leach (FinMark) said the view that there was a relatively low savings rate in South Africa could be challenged on the basis of the extent of informal savings because of lack of access to appropriate formal products. Particularly in the case of black African societies, membership to burial societies and participation in stokvels (to the tune of R500 million per annum) were examples of this. Information from the FinScope Survey and the Financial Diaries Project also indicated that significant amounts of money were put aside by poor households to cater for future risks.
Mr B Mnguni (ANC) asked for clarity on avenues of immediate recourse where the family of the deceased was experiencing difficulties with advisory and intermediary services during the course of arranging a funeral.
Mr Mashudu Munyai (FSB) told the Committee that if the benefit of the funeral cover was R10 000 or more it would fall within the ambit of the Insurance Act. If the benefit were less than R5 000, it would fall within the ambit of the Friendly Societies Act. Currently, there were 80 long-term insurance companies, of which 57 provided funeral assistance products. There were 3 000 to 5 000 funeral parlours and 80 to 100 burial societies. It was highly possible that some of these entities were carrying on illegal insurance business. Currently, the FSB was not able to cover the activities of all these entities. The findings of the FinMark Trust / Genesis Analytics Report would inform future corrective measures.
The Genesis Analytics report proposed that, regardless of whether people were empowered to claim a monetary benefit from their funeral cover, the recourse mechanisms should be revised to cater for any possible eventuality.
Mr Mnguni also asked why it was that Genesis Analytics proposed the removal of funeral parlours that provided funeral insurance from the Friendly Societies Act.
Mr Chamberlain responded that the recommendation that funeral parlours needed to be removed from the Friendly Societies Act had to be tested further. Normal profit-seeking funeral parlours did not resort under this legislation, as they did not comply with the "association of persons" requirement. Where there were instances where funeral parlours belonged to an association of persons, the belief was that they could be suitably provided for under the Co-operatives Act of 2005. Currently, the belief held by Genesis Analytics was that it would be less problematic to have a more consolidated regime that provided for all instances, rather than having a fragmented legislative framework that was open to abuse.
Ms J Fubbs (ANC) noted the assertions that improved regulation was necessary to prevent market failure, but that certain burial societies did not warrant such regulation by virtue of their size and their self-regulatory practises. She asked how the exploitation of these unregulated burial societies by funeral parlours and insurance brokers would be prevented if they were not recognised in the same manner as other, bigger burial societies. Noting the convenience of funeral parlours that also offered funeral insurance, she asked whether it was not perhaps possible to retain the existence of such outfits, but with better regulation.
Mr Chamberlain said that it was not necessarily the size of the burial society that determined whether it warranted regulation or not. It was rather the nature of the product that they offered which determined whether they needed to be regulated as an insurer or not. It was true that if burial societies were not regulated, they would forego the protection that went along with it. However, if they were provided for and allowed to operate under the Co-operatives Act, then the suitable existing standards and criteria could be applied. Registration for burial societies under a certain size could then be made voluntary so that they could choose whether they would like the protective benefits of regulation or not. Such a regulatory environment would, in fact, be beneficial to the development of emerging burial societies.
Thirdly, Ms Fubbs asked about the impact of the increased mobility of South Africans on the ability of funeral parlours and other intermediaries to deliver, since these businesses tended to rely largely on a localised market.
Mr Chamberlain told the Committee that the mobility of the population was not explicitly considered in the Genesis Analytics study. However, it did become clear that a burial society was infinitely more able to deal with a mobile population than a funeral parlour. This was so because they were willing to provide a monetary benefit in exchange for services that they did not have the capacity to provide.
Ms Fubbs had concerns over the sampling practices employed in the Genesis Analytics report and asked if consumer opinion had been probed via focus groups only.
Mr Chamberlain told the Committee that the research design was done with the particular aim to capture the needs of the most vulnerable of the consumers, and therefore, the bulk of the Members’ constituencies. The goal was to understand the real demand of the market, so that it would not be met with an "ivory tower" response at the end of the day. Within the limitations of the research project underlying the presentations, the focus group method was seen as preferable to a statistical survey as it afforded in-depth investigation into how people viewed funerals and the necessity for funeral cover.
Mr Leach stated that in addition to the focus group technique, it also utilised the findings of the FinScope National Representative Survey of Financial Services. The focus group discussions, themselves, were split between urban and rural populations. A number of secondary sources were also consulted, including an investigation by the International Labour Organisation into the effective management of risk by low-income households. In addition, information was also gained from the Financial Diaries Project, which was close to completion. The latter entailed a twelve months survey of household financial management, based on twice-monthly interviews with 167 households spread throughout South Africa.
Mr Chamberlain added that Genesis Analytics also consulted with a number of industry associations. Consultation with burial society associations were found to be of particular value as they were member-driven and, thus, much more in touch with the demand-side needs of the market. The door-to-door, "mystery shopper" approach was also followed. This was used to access information on funeral parlours and insurers in the same way that a client would have.
Mr K Moloto (ANC) acknowledged that under the current licence dispensation for funeral cover providers the protective measures for the consumer were quite good, but the entry requirements for the industry were prohibitive. The short-term insurance proposals forwarded by Genesis Analytics, however, seemed to entail that the insurer could terminate the policy at will and reject certain groupings on the basis of predetermined risks.
Mr Chamberlain said that one of the requirements that did not currently feature for funeral cover under the Long Term Insurance Act was the actuarial requirement that the policy must meet the expectations of the policyholder. The belief was that the policy period and the way the policy should be structured should be separated from the nature of the risk. The nature of the risk seemed to be of a short-term nature. Whether the policy period should be for one month or twelve months was a question for a broader debate. The suggestion was not that the policy period should be one month, but it was necessary for the client’s expectations to be filtered into the deal.
Mr Moloto’s second point related to the need to enforce the regulation of administrators and Policy Protection Rules very vigorously. He asked what measures were being taken to protect consumers in the case of insurance administrators moving their client portfolio from one insurance company to another.
Mr Munyai said that the Policy Protection Rules and the FAIS Act had drastically reduced the incidences of funeral cover administrators moving from one insurer to another. This now required approval from the FSB. There had been two such cases since 2003, which had since been settled in the courts.
The meeting was adjourned.