Death and burial are not topics one wants to dwell on too often. The reality is, however, that every person will at some stage go through this process, and as a result, death has become a global industry worth billions of dollars a year.
South Africa is no exception. The sub-sectors within the industry are substantial, too. The first of these is a vibrant funeral supplies sector (caskets, flowers, catering, clothing), followed by an undertaker market that includes both legalised undertakers operating on a national level, as well as smaller regional undertakers (that are often unregulated). Besides this, there is a flourishing funeral insurance industry. In fact, funeral insurance is the most popular insurance cover in South Africa, worth US$490m in 2015.
A typical South African funeral costs anything from US$450, for a very basic service, to many thousands of dollars. The cost depends on the size of the event, as determined by the number of people that attend, and, very importantly, the traditional requirements, based on the individuals’ ethnicity and culture. The majority of funerals cost between $1,200 and $2,500.
High penetration rate
Because of the relative affordability of funeral cover in South Africa, the number of people with funeral insurance has increased significantly from 2000. Currently there are 7.6 million policy holders. If we take into consideration that there are around 14 million households in the country, this shows that the penetration rate for this product is extremely high, as the majority of policies cover the main policy holder and their immediate family (or nominated persons).
Despite the decrease in deaths, the funeral industry is expecting strong growth, with a consensus of around 12% per annum expected for the period 2016 to 2020. This growth is driven by two elements. The first is that employers are increasingly offering funeral cover as part of a standard benefits package. The second is that urbanisation is rapidly driving rural dwellers to the city. These new arrivals typically do not have the network of people they were used to in rural areas, where informal burial societies still cater for a large proportion of the cost of funerals. As they move into the formal economy, they typically engage in credit-related activity, which means that they get onto the radar of the service providers targeting the middle and lower-income segments. Even persons on the welfare system get targeted: the only pre-deduction allowed for state-support beneficiaries is funeral cover.
The funeral insurance industry in South Africa had a generated income of $490.7m in 2014, with pay-outs amounting to $191.4m. It is therefore clear that the demand for insurance is substantially higher than the pay-outs. It makes sense that the competition in this market has increased significantly over the last 10 years. The growth in non-traditional service providers has been especially high.
As a result, there is a booming funeral insurance industry in South Africa. There are at least 52 funeral insurance providers registered with the relevant authorities, but there are also a number of unregistered schemes. The largest of the local players is Hollard Insurance, followed by Liberty, Assupol and Safrican, each of which has more than 10% market share.
Companies with large databases of current customers – especially in the middle income segment of the population – have diversified their product offering to include funeral cover at a nominal fee to existing customers. The banking, mobile and clothing retailers with credit customers are among the companies that now offer such services. The immediate result has been a price war, with monthly premiums being reduced across the industry, while the number of products and associated benefits has increased.
Funeral insurance typically covers the main policy holder, as well as his or her immediate family members. $3,570 worth of funeral cover for a healthy 26-year-old costs between $7.50 and $14.90 per month, with each company offering the basic cash lump sum and some added benefits like airtime to make calls, or special transport packages. A similar benefit package to a person that is 56 years old costs between $9.60 and $21.40 per month.
Increased market regulation
The South African funeral insurance industry is highly regulated, with all service providers having to register with government through the Financial Services Board (FSB). Companies that do not comply with regulations are closed down or fined. The public is continuously advised to request proof of registration before conducting business with any service provider. Unregistered providers may continue to collect monthly contributions, only to disappear when there is a claim.
The registration of a new service provider is relatively straightforward and can be completed in a short space of time. The main requirement is, however, a sufficient cash reserve to cover immediate claims. Foreign-owned companies are required to have a larger cash buffer before they are allowed to trade legally in South Africa. Besides registering with the FSB, there are also a number of local registration processes that have to be completed, and information around the requirements is available from the Department of Trade and Industry.
In contrast to this, the South African funeral parlour (undertaker) market is relatively unregulated. The industry consists of a small number of national service providers that are registered with government and operate in the formal sector, as well as many small local service providers that are not registered, yet provide an important service to the community. Government is in the process of formalising the industry more, in order to curb unethical practices and protect the rights of customers.
Cornelius van der Waal is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was written specifically for the Centre.