INTRODUCTION

At the outset, I need to be clear on my position and interest. I am motivated by self-interest in seeking to promote active and meaningful regulation of the broadly defined "funeral insurance market". I have a significant personal investment in the funeral services industry, assurance and undertaking, and illegal [unregistered] competitors undermine my operations. It is therefore in my interests that proper regulation be introduced and enforced. Lawful competition is accepted and encouraged; unlawful competition is unacceptable.

In addition to my financial interest, I also have a perspective on the abuses that members of the public are subjected to. I am frequently called upon to assist individuals to recover benefits under "funeral policies" where the issuer simply refuses to comply with the agreed terms and/or the applicable legislation. Most of these situations arise at the time of death where innocent individual family members [possibly not party to the original arrangement] are told that there is no claim, that there is no cash benefit available, that the nature and type of funeral the individual thinks he is entitled to is different or that an additional payment is required for the service. It is also not uncommon for retroactive exclusions and waiting periods to be introduced to avoid a claim, especially when cash benefits are claimed. These situations are unacceptable.

It is also important that I am clear that the views and opinions expressed in this presentation are entirely my own. I do not represent any other organisation other than my own and am not a member of any insurance organisation or body, including the LOA. Experience also tells me that my views are not universally endorsed. This may result from the extent of my direct financial investment or simply the fact that I operate on a more hands-on-level than others and have seen more real problems.

ORIGINS OF THE ASSISTANCE POLICY

Before dealing with some of the problems in the industry, it is appropriate to provide a brief background on the origins of funeral assurance and assistance policies as I understand it.

The desire to provide a decent burial is the social motive which has been the principal stimulus for the growth of industrial [funeral] insurance over the years.

The "assistance policy" [previously a funeral policy] has its origins in the original industrial insurance businesses established to meet the needs of the working class. These policies had small sums assured and premiums were paid more frequently than under ordinary life insurance. In most instances, this insurance was sold in premium units and not units of sum assured; in essence the issue was one of affordability and the extent of cover would depend on the amount the insured could afford. A characteristic of this type of business was that there was limited medical underwriting; based on the size of the benefits and premium payments, it was simply uneconomical to apply general underwriting practices. From a practical perspective, underwriting was directly bound to the agency basis upon which this business was written and administered. Underwriting was therefore effected by setting generally higher premiums, excluding certain risks that would apply in ordinary insurance business and imposing waiting periods. In essence, underwriting was the responsibility of the agent.

Another significant characteristic of this type of business was that cash premiums were collected from policyholders, generally on a weekly basis, through the insurers collector force. The area assigned to each collector was regarded as his "debit", the debit being derived from the fact that for each payment the collector debited the policyholders record book. The debit system can be distinguished from the premium notice method where premiums are expected to be paid at the offices of the insurer. The premium is recorded in the policyholders premium receipt book, commonly referred to locally as the "doodsboekie".

There will be no argument in relation to the significant advances in commerce over the past decades since industrial insurance first started. The development of banking methods and systems had obviously had an impact on the way insurance business is conducted. This notwithstanding, in the South African context, the fact is that these developments have not all been extended for the benefit of a majority of the low-income sector. The practical reality is that industrial [now assistance] insurance is still conducted substantially along the lines of the original basis from the perspective of the insured. Benefits remain small, equating to the reasonable cost of a funeral and cash premiums continue to be paid and collected.

There has also been a substantial change in the way insurers participate in this market. Faced with increasing costs of administering this type of business, specifically cash collections, insurers implemented alternative collection methods and linked the business to a related trade, logically those providing the underlying service, undertaking. In time, as undertakers secured larger volumes of business and controlled the new business flow and premium collections, insurers saw an opportunity to underwrite business on the basis of voluntary group schemes, centralising premium collection, claims settlement and administration. From there, as undertakers become more knowledgeable on the insurance aspect, policies were designed to eliminate cash benefits and risk cover was gradually taken away from the insurer and carried by the undertaker directly. It is at this point that the unregistered insurer emerges.

It is generally accepted that funeral benefit insurance, in whatever form, is typically bought rather than sold in the lower income groups. This differs from the position at other levels of the market. This means that individuals actively seek cover rather than being approached by an insurer or agent and offered cover. It is also uncommon for there to be more than one funeral policy for a family due to the cost and perceived extent of necessary benefit; a person can only have one funeral and if the plan is perceived as a pre-paid funeral, then there would clearly be no need for more cover. Multiple policies at other levels of the market is more common.

VOLUNTARY GROUP FUNERAL SCHEME ARRANGEMENTS

For those that are not familiar with the market, I have included a separate article prepared some time ago, but still applicable, describing the nature of group assurance scheme arrangements as I understand them. This is not to say that all voluntary schemes are a problem but rather that those where there is no real underlying affinity generally are.

For present purposes, it is sufficient to state that most of the problems experienced in the funeral insurance market result from the growth in the number of so-called voluntary group funeral schemes and the more active involvement of undertakers in the insurance transaction. These are also the more difficult schemes to monitor and regulate given that an insurer may not actually be a party to the scheme.

Consumer complaints are one source of identification and in relation to undertakers, their existence can be established through municipal cemetery boards, VAT returns and income tax returns [if registered]. Tracking cancellations with insurers, as is required to be reported, will also indicate whether schemes are moving between insurers or away from insurers so as to be regarded as unregistered. In simple terms, these schemes can be identified for the FSB to take appropriate action.

SPECIFIC PROBLEMS AND ISSUES – PRACTICAL EXAMPLES

I have been asked to highlight some of the real problems and abuses taking place in the funeral assurance market with specific reference to assistance policies. The most practical manner of doing so is to provide examples of some of the so-called policies that actually exist; these are included in your presentation pack of documents. I will highlight particular problems and absurdities with some of these documents so that committee members can see, probably for the first time, the nature and extent of the problem in real terms.

Some may ask how I obtained these documents. Some were given to me by individuals that asked me to assist in recovering benefits. Others were obtained with ease by my staff simply approaching the parties concerned and requesting funeral cover. The sample is limited to the Western Cape being the area where my operations are primarily based. There is no magic in identifying people offering funeral benefits as most undertakers offer these policies. This also highlights the relative ease with which the FSB could obtain information in terms of the Long-Term Insurance Act, FAIS, the Inspection of Financial Institutions Act or the Financial Institutions (Protection of Funds) Act. But it requires direct physical action which would certainly yield results. Some of these entities referred to in the documents may be underwritten [wholly or partially] by a registered insurer, although this is not necessarily clear on the face of the document, a direct contravention of the Long-Term Insurance Act. The specific terms of any underwriting arrangement are also unclear. The intention is in any event to highlight specific provisions which would be problematic, whether or not the policy were to be underwritten.

THE REGULATORY FRAMEWORK

The Registered and Authorised Insurer

The statutory requirements to carry on long term insurance business are clearly set out in the Long-Term Insurance Act and require no further discussion. It is worth noting that the FSB’s stated purpose is to serve the public interest, not the private interests of market participants. Registered insurers are however legitimately entitled to expect that their interests be protected where there is market conduct abuse which impacts on the overall industry.


Functions of the FSB

The functions of the FSB are set out in the FSB Act. This includes, the promotion of" ………………… programmes and initiatives by financial institutions and bodies representing the financial services industry to inform and educate users and potential users of financial products and services". This would therefore also include consumer education aimed, inter alia, at alerting consumers to the risks involved in existing products and the dangers of dealing with unregistered product suppliers, intermediaries and other unscrupulous operators. The issue of consumer education of the deficiencies are discussed later.

Registered insurers are faced with more extensive and costly regulation, most recently FAIS. While the motivation for more regulation is generally understood and this additional regulation must be accepted, there is also the reasonable expectation that the FSB will actively pursue those that fail to comply.

The view has been expressed that FAIS will be the framework to regulate the market. It is submitted that at a practical level, FAIS will not solve many of the issues in the funeral market more so given that most abuses occur under the Long-Term Insurance Act as highlighted later. We also need to move beyond regulation in theory, to regulation in practice and application, enforcement. It is time to see whether the FSB can implement the laws entrusted to it. More laws will not solve the problem, enforcement will. While the FSB may be faced with resource constraints, as all businesses are, the issue is where the resources that are available should be deployed. It is submitted that a disproportionately small allocation is made to the funeral insurance market and this needs to be addressed.

The meaning of being Underwritten

At its simplest, underwriting means accepting a risk and agreeing to provide a benefit on occurrence of a defined event. At least one of the parties to an assistance policy must be a registered insurer [underwriter] as only a registered insurer may assume a risk to provide policy benefits under a long-term policy.

Administrators / intermediaries may not assume a risk in relation to a life event, as defined, and undertake to pay policy benefits. They may however assist with sales, premium collections, claim settlement and other administrative functions on behalf of a registered insurer. But that is the full extent of their permitted activity. Anything further, if it involves accepting a risk, oversteps into the insurer arena.


The Nature of the Contract of Insurance

The Long-Term Insurance Act does not define a contract of insurance although it describes certain types or kinds of policies, principally for regulatory purposes. Each type of policy is however defined as first being a contract. While this may be a case of stating the obvious, it is necessary to examine this further.

The common law contract of insurance and the essential requirements must therefore be fully considered. Briefly, at common law, a contract of insurance must contain the following essential terms, express or tacit:

- a term that the premium will be paid by the insured or a term making the contract dependant on the premium being paid by the insured;
- a term that the insurer will compensate the insured for either a patrimonial loss or non-patrimonial loss by payment of a benefit [sum of money or equivalent] by the insurer;
- a term that the insurer’s obligation is dependant on the occurrence of an uncertain event;
- an insurable interest on the part of the insured.

It is worth mentioning that assistance policies may be issued as indemnity or non-indemnity policies. This is a complex issue and it is unnecessary to consider this further at this time. Whatever the position however, the Long-Term Insurance Act will apply if the defined criteria are satisfied.

In so far as these essentials are not present, then the contract is not one of insurance but some other type of contract. It will be seen from the documentation provided that in all instances, the contracts meet the essential requirements of a contract of insurance. They are therefore contracts of insurance and fall within the provisions of the Long-Term Insurance Act.

The Deemed Insurer

The position of an unregistered insurer providing or undertaking to provide policy benefits is dealt with in the Long-Term Insurance Act. A person will be deemed to be conducting the business of a long-term insurer in so far as that person undertakes to provide policy benefits which must be in terms of a policy, which in turn is a contract of insurance as described above. It is submitted that this deeming provision operates automatically once the defined conditions are met.

The [intended] consequence of the deeming provision, as set out in the Explanatory Memorandum to the Long-Term Insurance Act is that the person, deemed insurer, then falls under the auspices of the Registrar even though not formally registered and authorised. This deeming provision, intentionally, represents a significant departure from the erstwhile Insurance Act, 1943.

This provision is significant in relation to the position of the Registrar and his ability to deal with unregistered insurers. While there may be some interpretive difficulty with this provision from certain quarters in relation to other provisions of the Act, the fact is that it can and should be applied as part of an overall enforcement policy.

PARTICULAR PROBLEMS AND ISSUES

Set out below is a brief summary of certain of the problems and issues that I have identified and experienced over the past few years. It is not intended to provide an exhaustive description and discussion on each issue but rather to identify problem areas that require regulatory attention. It is intended that these issues will be discussed in greater detail at the end of the presentation based on questions by committee members and others.

Benefits are not available in cash

Many policies do not offer a cash benefit but a described funeral service.

Policyholders do not have an election to obtain a cash benefit despite the provisions of section 53 of the Long-Term Insurance Act. This only applies to assistance policies and is an area that should be addressed in future to avoid abuse on other policies.

If the funeral costs less than the stated sum assured [if one is in fact stated], no cash payment equal to the difference is generally made to the beneficiaries.

This all results in overpricing of funeral services as the full value of the policy is applied to the cost of a funeral, regardless of the actual costs. It also limits the consumer’s right of choice in selecting the undertaker to perform the services as the consumer does not have the funds to pay for another undertaker. As such, the consumer is forced to accept the potentially inferior service at an inflated price.

Entitlement to Benefits – No beneficiary nominations

Almost without exception, policies do not make provision for beneficiary nominations. Benefits are then legally payable to the estate of the deceased which is seldom attended to. Payment otherwise does not necessarily discharge the obligation to pay benefits. The fact that the policy is an assistance policy does not alter this position although there is a general misconception that assistance policies are never included in an estate. This may be the result of the older group life schemes that were registered under the Pension Funds Act where there is a discretion in awarding benefits. Whatever the reason, insurers need to became more aware of the legal framework applicable to the conduct of insurance business.

Speed of claim settlement is important in this market but disputes can and do arise as to who is entitled to the benefits. Death is not the time to be arguing about he payment of benefits. Consumer education is therefore important.

The Extent of Underwriting
The fact that a policy may be underwritten is not the end of the problem for the reasons highlighted below –

Over Insurance
The situation where the administrator / intermediary procures that the policy is underwritten by a registered insurer but for an amount in excess of the stated policy benefit. This allows the administrator/ intermediary to profit at the time of death of the policyholder.

Double Insurance
The situation where the administrator / intermediary procures that a policy is underwritten twice by two different underwriters without the knowledge of the policyholder. Again, the administrator / intermediary is able to profit on death of the policyholder.

Under Insurance
The situation where not all members of a scheme are underwritten; typically the older members would not be underwritten due to underwriting costs and the fact that premiums are not age related to policyholders.

Part Insurance
The situation where the individual member’s benefits are not fully insured.

Premiums
Premiums are not necessarily actuarially sound, especially where commission is considered. Generally, premiums are set based on competitor prices, adjusted for commission. There is seldom any actuarial investigation. This issue arises equally in relation to registered insurers and instances have been identified where premium rates could not have been actuarially sound based on actuarial and mortality investigations.

Premiums are averaged for family benefits, again possibly making them actuarially unsound for some age categories.

Premiums are frequently increased although there is no provision in the policy itself.

Premium receipts which are generally issued frequently fail to comply with the provisions of section 47 of the Long-Term Insurance Act.

Premiums are seldom reduced following death of one of the lives insured under the policy.

Nature and Extent of Cover
Cover is typically whole life and premiums are payable until death. This exposes policyholders to the risk of having to continue with premium payments after retirement. This increases the chance of lapse as premiums increase and income reduces over time. The effect will be an increase in the number of uninsured individuals. Policies of this nature generally attract no paid up or non-forfeiture value and cessation of premiums results in termination of cover.

Previously, before the expansion of voluntary group schemes, insurers issued direct policies where premiums were fixed and payable to age 65 with benefits remaining on a whole life basis and specific non-forfeiture provisions were included in the erstwhile Insurance Act.

Where individuals buy based on affordability, they will select the policy with the lowest initial premium, not understanding that this will increase over time. While it is reasonable and prudent to review premiums from time to time based on actual mortality experience, the policyholder needs to understand the implications. My experience is that they don’t, hence the short duration of some policies.

Consumer education is essential on this issue and the question can be asked if this type of business should be permissible at all at certain levels of the market. The possibility of "premium setting" has been raised by the FSB as a means to protect consumers and this should be fully considered. Despite the argument that this may be heavy handed and excessive from a regulatory perspective, even anti competitive, it may be an effective method to protect consumers. I understand similar measures have previously been introduced in the United States.

Lack of Insurable Interest
It is becoming evident that insurable interest requirements are not considered or complied with in many group and individual arrangements. Proof of interest is problematic and failure to disclose an interest can result in a claim being rejected. The problem is highlighted where extended family benefits are offered and people believe they have an obligation to incur funeral expenses where no obligation exists. It also results in multiple cover of the lives assured without their knowledge or consent. These third party arrangements result in limited medical information being disclosed as it is not within the knowledge of the proposer. Consumer education is essential.

Policyholder Contact Details
Many group arrangements are constructed to effectively avoid a direct relationship between the assurer and policyholder, at the insistence of the administrator / intermediary. As such, it is virtually impossible for the assurer to advise policyholders of changes in cover, premium increases or termination of cover. Obviously, the insurer has only itself to blame for contracting on this basis and the consumer should not be penalised in any way. The fact is that they are. And to the extent that the consumer is unable to resort to legal remedies due to costs, the problem simply goes away. This is unacceptable and demonstrates a poor understanding of the Long-Term Insurance Act by registered insurers.

Continued Premium Payments
Despite cancellation of a master policy and termination of the underwriting arrangement, premiums continue to be collected and policyholders are not advised of the termination. This is an extension of the problem previously addressed.

Lack of Consistency in Documentation
There is frequently an inconsistency between the terms of the master underwriting policy and the member’s policy book. When underwriters change, the policyholder’s book remains and terms are not changed. For the policyholder, this may result in exclusions and other terms being applied which are inapplicable. This is largely the responsibility of the underwriter.

In many other jurisdictions, master policy contracts must be registered so that the regulator can control terms and conditions. We have no such facility in South Africa. The suggestion has also been made that standard contract terms be introduced to protect the interests of consumers in certain markets. This has merit and can only assist in an overall consumer education campaign.

The Pre-paid Funeral
The perception that exists amongst many consumers that they are prepaying their future funeral in installments rather than taking out an insurance policy. This is reinforced by the fact that an undertaker has issued the policy and that the benefit is defined with reference to a funeral benefit rather than a cash amount.

Based on this understanding, the disclosure of existing medical conditions seldom occurs [even if asked for] as it is regarded as unnecessary. It is submitted that this is exactly what the undertaker wants the consumer to understand that he or she has bought and this improves and increases the "backlog" of future funeral business. Selling funerals in advance is extremely difficult and people in the low-income market do not have the means to pay the full price today, ignoring the future effects of inflation. An installment plan is more easily saleable.

While a pre-paid funeral can be issued, this would be somewhat different from the terms of the usual funeral policy available and in any event if issued as a policy would still need to be underwritten. In the United States, this is an issue that is receiving wide spread attention and the regulatory basis for the issue of pre-paid plans is onerous, but protective of the consumer.

Replacement Policies
Many policyholders insured by unregistered insurers will not cancel the policy and effect a new policy through a registered insurer due to the [erroneous] belief that they will then lose what they have paid. This must be considered based on the understanding that the arrangement is not one of assurance but a pre-paid funeral. As such, they continue paying premiums even knowing they are at risk.

Commission Regulation
A dangerous but necessary area to discuss. There is no limitation on the commission that may be paid in respect of an assistance policy, group or individual. Commission in my experience may amount to as much as 50% of the gross monthly premium. Accepting that commission may be high in percentage terms but not in value terms due to the nature and cost of cash collections, there realistically needs to be some limit placed on the extent of commission. This has a direct impact on affordability and reduces available benefits.

The extent of commission is seldom disclosed to the policyholder. It is motivated and justified by the risk and cost of collection and if the policyholder has no banking facilities, there is little choice in the matter.

One cannot and should not take away a persons livelihood especially when some collectors have been doing the same work for decades. They have no formal training and I very much doubt that they would meet all the requirements of FAIS to continue plying their trade. This will also impact directly on the policyholder with no other means of paying premiums. Regulatory goals in this area are understood but inappropriate imposition to the detriment of the policyholder is not sustainable.

Income Tax and Vat issues
Income Tax case law supports the view that tax is payable based on the actual business being conducted regardless of compliance with statutory formalities such as registration. A deemed insurer should therefore be taxed as a long-term insurer in terms of the Income Tax Act, a significantly different position to the normal taxpayer. SARS should look carefully into this issue.

Long-term insurers cannot register as vendors for VAT purposes although an undertaking business may. There may therefore be an over-recovery of VAT in terms of input credits by undertakers. Again, SARS needs to look into this.

WHY IS THIS RELEVANT?

I suspect that the above paints a gloomy picture of the industry. It should as it is. And there is no reasonable prospect of there being any improvement in the short term.

Relevance is simple. Death is inevitable and there are costs associated with death, including funeral expenses. These costs are therefore also inevitable. If individuals do not make provision for these expenses themselves, someone else will have to pay. Taking out insurance to cover these costs is prudent and should certainly be encouraged. But only if the insurance is through a registered insurer otherwise nothing has really been achieved.

If people don’t have the necessary funds to meet funeral expenses because they didn’t plan, paying for the funeral becomes and enormous burden at the most devastating time. Micro-lenders are often approached so that a decent funeral can be provided. It is more than a coincidence that many micro-lenders are situated close to undertakers. Sacrifices are made in services and there is a move to more basic funerals and cremations to reduce the costs. Decisions are being made on financial grounds for the wrong reason.

And what if the policy doesn’t pay out due to the factual insolvency of the insurer? This is more than possible and not unique in relation to unregistered insurers only; registered insurers can and do fail. But the risk is certainly greater in relation to an unregistered insurer. This is a problem, certainly in relation to unregistered insurers that can in fact be avoided. This requires a combined effort of consumer education and regulatory action.

If one considers the expected increase in deaths due to HIV/AIDS, the financial strain on these unregistered insurers must increase thereby increasing the likelihood of financial failure. Not having a capital base to fund adverse experience and given the lack of actuarial method in premium pricing, it is only a matter of time before the problem becomes public knowledge and a public problem. Obviously the same problem is faced by registered insurers but one assumes that the capital and general reporting and regulatory requirements reduce the potential for these problems. That said, it is generally believed that failures can and should take place.
 
The situation is worse in that the individual did plan [for which he paid] and had an expectation that the funeral expenses would be covered. It is this issue that requires the FSB’s attention as the continued operation of these unregistered insurers with the knowledge of the FSB reinforces the expectation. I would also submit that to the extent that the FSB is aware of instances of unregistered insurers [as it is] and fails to take appropriate steps, liability may flow from such omissions.

Ultimately, it may therefore be that the liability for individual funeral expenses will fall on the State if there is no-one else to provide the funds. This is already the case in relation to pauper funerals and one can reasonably expect this to increase over time unless something is done.

CONSUMER EDUCATION

Most consumer education undertaken by the FSB and LOA is too complex for the average policyholder to understand. It is respectfully submitted that those attempting to provide consumer education are too far removed from the target market to appreciate the nature and magnitude of the problems and how to reach the consumer.

The assumption is being made that the policyholder understands the meaning of industry terms such as "being underwritten", a key focus of consumer education. Policyholders are also assumed to be aware of their rights in relation to an assistance policy generally and unregistered insurers specifically. They are not in my experience. Feeling aggrieved and ripped off about something is vastly different to knowing how to deal with the issue.

Literacy levels are low in the low income market, trust is high and and access to the chosen medium is limited. Community newspapers are far more appropriate than national newspapers to promote education. Consumer education is also not about "feeling good" that something has been published but rather on achieving meaningful and measurable results. I am of the view that there is a greater effort to be seen to be doing something than actually doing something. Again, many of those preparing the consumer education "campaigns" have never actually met target policyholders, operated and experienced their environments and dealt with aggrieved and devastated families at the time of death. It’s an experience that cannot be reprodcued in theory. The appointed consumer educators therefore need to be educated in the real world of funeral insurance and resources then need to be refocused, otherwise valuable resources are being wasted.

Consumer education also requires visible "regulation" and enforcement. The FSB needs to be seen by members of the public and unregistered insurers to be actively involved in the market, conducting inspections, requesting proof of underwriting and curtailing illegal operations. Only when the FSB is seen as a real threat to illegal operations will the level of illegal activity reduce. Protecting policyholder interests is obviously essential but this can be achieved if the nature of the problem is correctly understood and the action taken is timeous and appropriate.

SUGGESTED REGULATORY ACTION

The Registrar has extensive powers to enforce the Long-Term Insurance Act and some of the other acts mentioned. And while there are certainly changes that could be brought about to the Act, at this stage this is unnecessary in my opinion. A greater understanding of the relevant issues and commitment to resolve them is essential.

Contrary to popular opinion and belief, it is submitted that FAIS alone will not solve the problems or improve the position of the consumer. Those that have decided not to comply with the Long-Term Insurance Act will not voluntarily comply with FAIS.

The problems in the funeral assurance market are somewhat unique and therefore different from other market conduct problems. Specific regulatory steps must be taken in this market and resources, personnel and funding, allocated.

In conclusion, it must also be stated that not all the blame can or should be passed on to the FSB. The criminal prosecution authorities are overloaded and I suspect an unregistered insurer does not rate as a priority. Consumer Affairs and Protector Offices are seldom interested and may be precluded from intervening.

Many registered insurers must also shoulder some of the blame for the current position in the market. They too are paying insufficient attention to the legal basis of funeral assurance and directly and indirectly allowing consumer abuse to continue. To a large extent, as they have outsourced functions relating to assistance policies, consumer abuse has escalated.

CONCLUSION

I have probably said enough and possibly overstated my position. No doubt, I have also touched on some sensitive issues. But real problems require real solutions. Hopefully, everyone present now has a better understanding of the problems.

Thank you.
Chris Shone