MR Microinsurance_2012_03_29.indd - International Labour ...

Is microinsurance a profitable business for insurance companies?
18.2.2 Old Mutual, South Africa
Traditional insurance provision in South Africa is highly developed and is comparable
to developed nations in terms of both size and degree of sophistication.
However, the low-income market is underserved. As a result, there have been
increased efforts in recent years, in both the public and private sectors, to improve
the provision of insurance in this market. A variety of insurance products are now
available to low-income South Africans, the most dominant of which are voluntary
funeral products provided by both formal (e.g. insurers) and informal providers
(e.g. burial societies and funeral parlours). The funeral insurance market is
highly competitive. Insurers have used a range of distribution channels to reach
the market from the traditional agent model, to partnerships with church groups,
retailers, burial societies and funeral parlours. Products are also sold through banks.
Old Mutual is the country’s largest and oldest life insurer, offering a wide
range of products across all income segments in South Africa. The Retail Mass
Market, which targets clients in the middle- to low-income groups, is an important
business unit for Old Mutual, making a significant contribution to its growth
and profitability. The success of the Retail Mass Market unit led to the creation
of the Foundation Market business unit in 2008 to develop products exclusively
for the low-income market. The Foundation Market was set up as an independent
business unit to provide microinsurance with sufficient attention to allow it
to grow and eventually contribute to Old Mutual’s profitability.
Old Mutual’s burial society support plan provides a cash payout on the death
of a covered life. It covers the principal member, with the option to add immediate
family members, and is distributed through burial societies and funeral parlours
using salaried agents. Once a burial society or funeral parlour opts to take
the cover, the cover becomes compulsory for all members, who each pay a
monthly premium. Burial societies and parlours can select from a range of sums
assured, with the selected cover level applicable to all members, who therefore all
pay the same monthly premium. Both the product design and the distribution
model are common in the South African market.
Due to existing cultural norms, the product is popular and therefore relatively
easy to sell. However, using salaried agents to distribute the product is
expensive. Furthermore, burial societies tend to be small, so that scale has been
difficult to achieve. Another challenge has been the large number of competitors
in the market, which has meant that the high distribution costs of the product
could not be fully reflected in the product premiums. The Foundation Market
unit has, however, benefited from access to technical skills and infrastructure in
other business units, which has helped keep overheads low. Old Mutual is prepared
to provide this support until the business unit becomes profitable and can
sustain its own expense base.
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