The business of death: Informal insurance by funeral undertakers in South Africa
By
Anja Smith and Mia de Vos1
Paper prepared for the 2012 Research Conference on Microinsurance, April 2012
Abstract
A large proportion of global microinsurance is provided on an informal basis. A literature review
reveals that within the literature on economic informality, insurance informality has generally not
been treated as a manifestation of economic informality. Where informal insurance has been
considered, it is generally treated as a membership-based risk management mechanism with a focus
on internal organization and functioning (Dercon, De Weerdt, Bold & Pankhurst, 2006), rather than
an explicit manifestation of economic informality that requires careful consideration of value offered,
risks to clients and the potential need for formalisation. This approach may be justified in considering
the role of non-profit, membership-based insurance associations such as burial societies (South
Africa), welfare societies (Kenya) or iddirs (Ethiopia). However, funeral undertakers that provide
microinsurance on a commercial basis do not only contribute substantially to the economic activity in
their communities, but also raise a number of consumer protection risks that require these firms to
be considered in the same way as other manifestations of economic informality.
The phenomenon of funeral undertakers selling funeral insurance on an informal basis is particularly
prevalent in South Africa. While the available literature has considered the contribution of these
products to households’ ability to deal with the costs of a funeral, the nature of informality in
insurance provided by these firms, but also in other business dimensions of these firms has not yet
1
Both Centre for Financial Regulation and Inclusion (Cenfri). The paper was completed with research
assistance by Sandisiwe Ncube (Cenfri), Nokwanda Mahori (independent field researcher) and Zanele Ramuse
(independent field researcher). This work was carried out with the aid of a grant from the International
Development Research Centre (IDRC), Ottowa, Canada. Conference participation is made possible from the
same grant from the IDRC. We would like to thank Christine Hougaard for her comments on the paper.
been described in any great depth. Given the absence of data on this market, we collected survey
data to better understand the phenomenon of informal insurance by funeral undertakers.
Using a dataset on 72 funeral undertakers in four provinces of South Africa (Kwazulu-Natal, Western
Cape, Eastern Cape and Limpopo) we are able to explore the nature of informality, the nature of
insurance products, employment and revenue generated by these firms. A more detailed description
of the insurance business of 23 undertakers in this sample selling insurance on an informal basis
reveals that the revenue generated by funeral insurance premiums forms an important component of
total revenue generated. For most of the businesses providing insurance on an informal basis, the
data demonstrates very poor or the total absence of even rudimentary prudential risk management
practices. While posing risks to the insurance industry at large as well as risks to the individual clients
served, it is clear that these informal insurance providers contribute to income and employment in
their communities in a country where unemployment rates are very high. This implies that any policy
aimed at formalising the market for informal insurance as provided by funeral undertakers would
have to carefully balance the economic contribution of these businesses with the benefits of a fully
formal insurance market.
1. Introduction
A large proportion of global microinsurance is provided on an informal basis. The available literature
on informal insurance has tended to mainly focus on so-called “informal” risk-sharing arrangements
between households, with this presented as the typical view of informal insurance. Furthermore,
where the literature has been focused on informal groups and associations in developing countries,
the discussion has mostly centred on these organisations’ contribution to ‘’social capital” or on
development initiatives that operate through community-based health organisations or on internal
organization and functioning of these structures (De Weerdt, Bold & Pankhurst, 2006).
Dercon et al. (2006: 686) defines “informality” in this context with reference to two dimensions: 1)
these institutions typically function “’outside the market place”; and 2) they are ‘’ ‘informal’ in the
sense that they were [are] not based on well-defined ‘formal’ associations, with formally defined,
written sets of rules or regulations governing their operation”. Informality in this sense is thus
defined by the total absence, rather than the presence and non-compliance with regulations or rules
that apply to the operation of these organisations.
In this paper we go beyond the typical analytical approach used to understand informal insurance, as
described above. This approach may be justified in considering the role of non-profit, membershipbased insurance associations such as burial societies (South Africa), welfare societies (Kenya) or
iddirs (Ethiopia). However, for-profit informal insurers require a different analytical approach. We
explore the phenomenon of funeral undertakers providing insurance on an informal, for-profit basis
to a client base that could extend beyond their immediate communities and that takes risk sharing
beyond a small group of households with intimate knowledge of each other’s lives. This requires us
to treat informal insurance as a specific manifestation of economic informality. This, in turn,
necessitates careful consideration of the value offered by this insurance, risks posed to clients by the
informal nature of the provider and product and the potential need for formalisation of the
businesses that offer this insurance. As these funeral undertakers not only provide microinsurance
1
on a commercial basis but also contribute to the economic activity in their communities, it raises a
number of consumer protection risks that require these firms to be considered in the same way as
other informal firms. In this context, rather than defining informality as the total absence of rules
governing the functioning and operation of these firms and their insurance, we define informality as
non-compliance with the regulation that applies to their particular sphere of operations.
The provision of insurance on an informal basis can be considered problematic from at least two
perspectives. First, the existence of informal insurance providers contributes to an un-level playing
field between compliant and non-compliant insurance providers. Compliant insurance providers
incur regulatory costs whereas their informal competitors do not, which may discourage investment
in the formal insurance sector. Second, the existence of informal insurance providers generates
certain social and consumer protection risks. Insurance is different from other products and services
provided in the informal sector in that it relies on the pay-out of a financial amount somewhere in
the future based on a promise made by the insurer today. Informal insurers thus have to be
sufficiently financially stable to ensure that they are able to pay out all future amounts claimed
legitimately (given the premiums collected today), while also being able to inform clients of the
product that they are purchasing and follow appropriate marketing practices. As the insurance
activities of non-compliant insurance providers are not subject to any supervision by the insurance
regulator, the product and its sales process do not benefit from oversight that ensures that clients
are protected from abuses.
The phenomenon of funeral undertakers selling funeral insurance on an informal basis is particularly
prevalent in South Africa. Data from FinScope 2010, a nationally representative survey that measure
South African adults’ usage of various financial services, indicates that almost 4m South African
adults or 12.2% of the adult population purchase funeral insurance from a funeral undertaker
(Ncube, de Vos, Hougaard & Smith, 2012). It is a country characterised by strong emphasis on the
value of a dignified funeral where especially low-income households spend large amounts on these
2
events. Collins and Leibbrandt (2007) find that funerals cost up to 7 months of household income
and that in a small sample of low-income households where these households use a variety of
insurance instruments (including funeral insurance from undertakers) 61% of households are underinsured against the cost of a funeral. Case, Garrib, Menendez & Olgiati (2008) also explore the
impact of insurance products sold by funeral undertakers on South African households’ ability to
cope with the financial burden of a funeral.
From a global perspective South Africa is not unique in funeral undertakers’ provision of informal
insurance. Bester, Chamberlain and Hougaard (2008) describe the provision of microinsurance on by
funeral undertakers in Colombia as a salient feature of the larger Colombian microinsurance market.
They cite industry sources as estimating the number of users of informal insurance by these
businesses to as up to 3 million adults or 10% of the adult population. Similarly, in Brazil
microinsurance products are also provided and distributed by funeral undertakers on an informal
basis (Bester, Chamberlain, Hougaard and Smit, 2010)2.
Apart from a brief description in Roth (1999) of the insurance operations of one such business in
South Africa, the nature of informal microinsurance business by these firms has not yet been
explored in any detail. Given the absence of data on this market, we collected survey data to
describe the contribution of informal insurance provision by funeral undertakers in South Africa to
total revenue and profit generated by these businesses.
2. Defining informality amongst undertakers
Kanbur (2009) proposes that economic informality or, conversely, formality, should be considered
relative to whether “specified regulations” apply to an economic activity. Four categories of
interaction with regulations are identified: a) regulations apply and the economic activity in question
2
It is, however, important to point out that the provision of funeral insurance by funeral undertakers who are
not registered insurance providers in both Colombia and Brazil is not in contravention of insurance regulation
as the provision of in-kind funeral assistance in return for a regular premium is excluded from the legal
definition of insurance in these countries. It can thus not be directly equated to informality as we define it in
the paper.
3
complies; b) regulations apply and economic activity in question does not comply; c) the regulations
turn out non-applicable for the relevant economic activity after adjustment of the activity (in most
cases with the purpose of avoiding regulation); and d) regulation does not apply to the activity. For
the purpose of our study, we use the second category as our definition of informality.
We identify three types of activities relative to which the business activities of a funeral undertaker
can be considered to be informal and describe our sample’s compliance with regards to these three
categories of compliance requirements:

Business informality or non-compliance with business registration and taxation
requirements;

Health informality or non-compliance with health regulations that apply to funeral
undertakers in South Africa;

Insurance informality or non-compliance with insurance regulations that apply to the
provision and intermediation of insurance in South Africa.
Although we briefly describe informality with regards to business registration and health
compliance, we limit most of our focus to informality in the provision of insurance or, more
specifically, non-compliance with insurance regulations in South Africa. There are two categories of
informality with regards to insurance by funeral undertakers in South Africa:

Informality with regards to insurance provision, i.e. selling a product – that they may or may
not market as insurance – that requires clients to pay premiums on a regular basis and offers
a guaranteed cash pay-out or service, without underwriting by a licensed insurer. In this
case, funeral undertakers act as insurers or insurance companies, even though they do not
comply with the relevant insurance regulation.

Informality with regards to the intermediation of insurance products. In this case, the
insurance is underwritten by a licenced insurer, but the funeral undertakers who act as
4
intermediation channels do not comply with the relevant market conduct regulation that
applies to insurance agents or brokers.
Although we do briefly describe informality with regards to insurance intermediation, we turn most
of our focus to informality with regards to insurance provision rather than intermediation.
3. Data and methodology
The descriptive data presented in this paper forms part of the output of a larger research project on
informality in insurance amongst funeral undertakers in South Africa. Data for this project was
collected through qualitative research in the form of exploratory interviews to inform survey design,
as well as quantitative data in the form of surveys and so-called “deep dives”3. In this paper, we
present the survey data only. The survey broadly covered general business information; the nature
of funeral undertakers’ operations; compliance with various business requirements, such as labour
laws, business registration, tax; risk management practices; insurance business and the nature of
products offered; and business financial information. A sample of 80 funeral undertakers was
selected for the survey in low-income areas in four provinces of South Africa: the city centre and
three townships4 of Durban5 (Kwazulu-Natal), Thohoyandou (Limpopo), the towns of Butterworth,
King Williams Town and Willowvale (Eastern Cape) and the townships of Cape Town6 (Western
Cape). The survey data was collected during October to November 2011. A combination of
purposive7 and convenience sampling techniques were used to select funeral undertakers in these
areas. Due to data collection errors, the sample of funeral undertakers described in this paper
decreased to 72 and it is this data that is presented here. Although there exists no data on the exact
3
“Deep dive”’ is a term used to denote an in-depth examination of the actual financial data of a small group of
funeral undertakers.
4
Townships or locations refer to urban living areas that were reserved for non-whites during the Apartheid
era. Townships were usually built on the outskirts of towns and cities, implying large travel costs for the
township residents who are employed in business centres of formerly mainly white areas. .
5
Kwa-Mashu, Umlazi and Umbilo
6
Gugulethu, Khayelitsha, Langa and Nygana
7
All selected undertakers were required to offer funeral insurance. One of the objectives of sampling was to
reach both formal and informal undertakers with regards to insurance provision.
5
number of funeral undertaker in South Africa, this is unlikely to be a representative sample of
undertakers.
4. Research findings
4.1 What does informality look like amongst funeral undertakers?
In this section, we describe the nature of informality amongst our sample of funeral undertakers in
terms of the three areas highlighted above: business registration, compliance with health
regulations and compliance with insurance regulations.
Business registration
Slightly more than 90% of our sample indicated that their business is registered in some way with
the South African authority that manages business registration8. Of this group, 2.8% are companies
and 87.5% are close corporations9. 9.7% of the sample indicated that they are single proprietors and
are therefore not required to register with any business registration authority. The survey also
included two questions on tax compliance. In response to whether their business is registered with
the South African Revenue Services (the tax authority), 93% of the sample answered “yes”. The
majority of the sample (56.9%) indicated that they are registered Value Added Tax (VAT) vendors.
Unfortunately there was no way in which this information could be verified. It should, however, be
pointed out that the annual turnover threshold for VAT registration is R1 million (US$131,769)
(South African Revenue Services, 2012). It can therefore be assumed that the response to this
question elicited upward response bias as it is unlikely that so many of these vendors would legally
meet this threshold.
Compliance with health regulations
8
, The Companies and Intellectual Property Commission, previously the Companies and Intellectual Property
Registration Office (CIPRO), handles all registration and on-going information submissions of companies and
close corporations.
9
A close corporation (CC) is a more simplified and flexible business entity than a company, designed in such a
way that the ordinary person is able to draft the papers and register the corporation by herself. It should,
however, be mentioned that under the recently promulgated new Companies Act, CC’s are being phased out
and current CC’s are encouraged to convert to private companies.
6
All funeral undertakers in South Africa are required to comply with the regulations on Funeral
Undertakers’ Premises of 1985, a schedule to the National Health Act of 1977. These regulations
state that in order to operate as a funeral undertaker and to store and prepare corpses for burial, a
certificate of competence is required (Republic of South Africa, 1985). The regulations delegate the
power of enforcement, and thus also the ability to issue a certificate of competence upon a funeral
undertaker’s compliance with the regulations, to the municipal level of government, commonly
referred to as the local authority10. One of the most basic requirements for qualifying for a
certificate of competence is having refrigeration facilities that meet specified requirements on the
premises of the funeral undertaker. In order to ensure that funeral undertakers’ premises continue
to comply with the national health requirements, the regulations to the Health Act on inspections
and investigations require inspections to be carried out on a quarterly basis in terms of the
regulations relating to inspections and investigations (Republic of South Africa, 1991).
The data shows that only 38 of the 72 undertakers in our sample (52.8%) have their own
refrigeration facilities. Of the 38 undertakers with fridges, 30 (79% of all those with fridges) state
that they have been issued with a certificate of competence from their local authority. Less than half
(41.7%) of our sample therefore comply with the national health requirements.
Of the 38 undertakers with fridges, only 24 (63%) indicated that their premises had been visited by a
health inspector during the last 3 months as required by the inspection regulations. Low levels of
compliance with health regulations can be partly ascribed to poor enforcement and low levels of
knowledge and awareness of the funeral undertaking market by local authorities. As part of the
survey data quality control process, we conducted telephonic interviews with the health
departments of all the local municipalities of the towns and townships in which survey data were
collected. The purpose of these interviews was to establish whether we could use local municipality
data to verify the health compliance status of the undertakers in our sample. Due to the poor nature
10
South Africa has a three-tier government system: national, provincial and municipal levels of government all
have legislative and executive authority in their own spheres.
7
of data on health compliance in their jurisdictions, this was not possible for most of the authorities.
Some of the authorities interviewed were unaware of the phenomenon of funeral undertakers
operating without their own mortuaries, even though the data shows the contrary.
Compliance with insurance regulations
As mentioned earlier, funeral undertakers can be considered compliant or non-compliant and,
therefore, formal or informal with regards to two dimensions of insurance regulatory requirements:
1) the provision of insurance; and 2) the intermediation of insurance.
For the provision of insurance, the main consideration is whether the insurance product provided by
the funeral undertaker is underwritten by a registered insurance company. We asked our sample of
72 undertakers whether they are underwritten by a registered insurance company. Almost one third
or 23 of the 72 undertakers in our sample (31.9%) indicated that they are not underwritten, implying
that they do not have any relationship with a formal insurance company (see Error! Reference
source not found.). Their funeral insurance products are therefore offered on an informal basis. We
describe this group of undertakers in more detail later in the paper.
Figure 1: Insurance informality (underwriting and intermediation) in the funeral undertaker sample
8
Many of the undertakers in the larger sample that provide insurance on an informal basis are not
only informal with regards to insurance, but are also informal with regards to health regulatory
compliance. Of the 23 respondents that are informal in terms of insurance provision, only 12 (52.2%)
have their own refrigeration facilities. The remaining 11 (47.9%) indicated that they outsource the
storage of corpses to the refrigeration facilities of another funeral undertaker. Of the 12 funeral
undertakers with fridges, 9 have been issued a certificate of competence by the local municipal
authority. It can therefore be concluded that 11 of the 72 funeral undertakers in our sample (15.3%)
are informal with regards to both insurance provision and health requirements.
Even of those undertakers complying with insurance provision requirements, in that they state they
are underwritten by a formal insurance company, many do not have refrigeration facilities. 23 of the
49 (47%) funeral undertakers who sell insurance products underwritten by a formally registered
insurance company do not have the required refrigeration facilities.
With regards to compliance with insurance intermediation (or market conduct) requirements, South
Africa’s Financial Advisory and Intermediary Services (FAIS) Act requires that any business that
provides intermediary services with regards to any financial services product (including insurance)
should be registered as a Financial Services Provider (FSP) with the Financial Services Board (FSB)
and comply with the various requirements of FAIS and its supporting regulations (Republic of South
Africa, 2002). In the case of insurance, funeral undertakers have two basic options to comply with
the financial intermediation legislation. Firstly, they can register as an FSP in their own right.
Alternatively, in cases where an undertaker is distributing the insurance products on behalf of an
insurance company that is already registered as an FSP, they have the option to not go through the
onerous and expensive registration process of registering as an FSP, but rather to register as a
representative of the FSP (the insurance company) if the FSP allows this. This option of registering as
a representative rather than a full FSP implies reduced compliance requirements. It is not clear what
factors influence funeral undertakers’ decision to register as a FSP or representative, but it is clear
9
that in order to be viewed as formal with regards to complying with insurance intermediation
requirements, a funeral undertaker has to be registered as either a FSP or a representative of a FSP.
Information on all registered FSPs and their representatives are available on the Financial Services
Board’s (FSB)’s website11. We were therefore able to verify the survey data against information on
the FSB’s database. Of the 49 funeral undertakers who indicated that they are underwritten by a
registered insurance company, 22 indicated that they are registered FSPs. After verification against
the website database it turned out that only 2 of these 22 undertakers are registered Financial
Services Providers (FSPs). 31 of the 49 underwritten undertakers indicated that they are registered
representatives of a FSP (some undertakers indicated that they are both FSPs and representatives),
while we were only able to confirm that 5 of this group have been officially registered as
representatives of a FSP (see Figure 1). Thus only 7 of the 49 (14%) undertakers who intermediate
the insurance product of a registered insurance company are complying with insurance
intermediation regulation in some way.
4.2 Prudential management and the contribution of informal insurance to revenue
In this section, we present some high-level indicators on the prudential management practices of
undertakers who provide insurance on an informal basis, as well as consider the contribution of
informal insurance to total revenue generated by the 23 undertakers in our sample who indicated
that they offer funeral insurance on an informal basis. We start by describing the 23 undertakers in
terms of age of business, geography, education of the business owner and client base.
Most of the informal insurance undertakers in our sample are relatively new businesses: only 3 of
the 23 started their businesses before 2000. If one considers the geographic spread of the informal
insurance undertakers it is interesting to note that the majority of the sample (14 of the 23) are
situated in the only rural area that we included in our sample – Thohoyandou in Limpopo Province.
The owners of these businesses are relatively well-educated: 10 of the 23 indicated that they have
11
www.fsb.co.za
10
some form of tertiary education; 11 indicated that they completed high school (matriculated); and
the remaining 2 have indicated that they nearly completed high school (completed grade 11). The
highly skilled nature of some of the respondent is further confirmed by qualitative information also
collected through the survey process. Some of respondents indicated that prior to establishing their
funeral undertaking business they worked, for example, as lawyers or teachers.
Of the 17 undertakers who were willing to share the size of their insurance client base with us, there
are 6 who can be considered small in terms of number of policyholders. These undertakers have no
more than 150 policyholders each. The majority (7 of the 17), however, have between 150 and 1,000
policyholders, with 2 undertakers that have a client base of between 1,000 and 3,000 policyholders.
Our sample also includes two very large undertakers who have a client base of 4,000 policyholders
each. In terms of size of the client base, these two undertakers start to resemble small insurance
companies.
For most funeral undertakers selling insurance on an informal basis, data collected on the
management of insurance funds show that there is little separation in the management of revenue
generated from the delivery of funeral services and revenue from insurance premiums. Only 4 of the
23 funeral undertakers (17.4%) that sell insurance on an informal basis have a separate bank
account for insurance funds (premiums) received.
Most informal insurance respondents seem oblivious to the possibility that multiple insurance claims
may arise at the same time. In response to the question of how they are preparing for this
possibility, only 4 respondents (17.4%) indicated that they put some money aside for insurance
claims when they first started their business, while only 9 (39.1%) said that they specifically keep
some of the insurance premiums received aside to ensure that there is always enough money to pay
claims. However, of the 9 that indicated they keep premiums aside as a means of managing the risk
of their insurance scheme, only 2 have separate bank accounts for insurance money. The majority
11
(11 of the 23) indicated that they have never experienced multiple claims at the same time and
therefore they do not feel that they need to prepare for it in advance.
We furthermore collected data that allowed us to calculate the contribution of revenue from
insurance premiums to total annual revenue. These calculations were done under the assumption
that the informal undertakers in our sample generate their total revenue only from the delivery of
funeral services for which clients either pay for in cash or with insurance premiums.
We calculated total annual revenue generated from cash funerals by multiplying the number of
funerals that was provided to cash clients with the price of the most popular cash funeral package. In
order to calculate total annual insurance revenue, we collected marketing data (printed or
handwritten pamphlets) on the various funeral insurance products offered for the undertakers in
our sample. This includes information on the premiums of the different insurance products, in some
instances up to 5 different products, as well as the services and goods (the benefits) offered as part
of the insurance package. Very few of the informal insurance undertakers specify the monetary
value of the insurance benefits, but denote an increase in monetary value for between packages
through the names of their insurance products, in some cases, alphabet letters (A, B, C, D) or metals
(e.g. silver, gold and platinum packages).
As very few of these undertakers would have been able to provide accurate data on the number of
clients for each funeral product offered, we calculated an average premium amount from the
premiums of the various products offered by each undertaker (See Appendix A). Using a simple
calculation, we estimated total annual insurance revenue by multiplying the average premium by
total number of insurance clients. This simple calculation is unable to take into account dynamic
factors such as client attrition due to mortality or non-payment of premiums or client growth during
the period, but does provide an indication of likely revenue. Of our sample of 23 undertakers, we
were able to estimate total insurance revenue for only 16 as some respondents did not provide
marketing material or did not want to tell us the cost of their insurance premiums. For these 16
12
informal insurance undertakers, total annual revenue from insurance premiums ranged between
R18,72012 (US$2,46713) and R6,000,00014 (US$790,616). Our calculations showed that a quarter (4
out of 16) generate between R10,000 (US$1,3178) and R100,000 (US$13,177) annual revenue from
insurance premiums; 5 earned between R100,001 (US$13,177) and R500,000 (US$465,885); 3
earned between R500,001 (US$465,885) and R1,000,000 (US$131,769); and 4 earned above
R1,000,000 (US$131,769) annually. See Appendix A for the data on each undertaker.
Total annual revenue from
premiums
R10,000 - R100,000
R100,001 - R500,000
R500,001 - R1,000,000
R1,000,001 or more
Number of undertakers
4
5
3
4
Table 1: Total annual revenue from insurance premiums
Finally total annual revenue was calculated by adding total annual revenue from cash funerals to
total annual revenue from insurance premiums. The contribution of total insurance premiums to
total annual revenue could be calculated using the latter amount. A limited number of respondents
(only 12 of the 23) provided all the information that was needed for this calculation. For the majority
of the informal insurance undertakers who answered this question (8 of the 12), income from
insurance premiums contributes 30% or more to their total annual income.
4.3 The contribution of informal insurance undertakers to employment
Data collected on employment indicate that these firms do contribute to employment and income
generation in their communities in a country with a very high unemployment rate15. While the
majority of the informal insurance providers in our sample of informal insurance undertakers (18 or
12
This respondent’s insurance business has 26 clients, whom he charges an average of R60 (US$ 7.91) per
month for funeral cover.
13
Using an exchange rate of R7.58902/US$1 as obtained from http://www.oanda.com/currency/converter/ on
28 March 2012.
14
This particular respondent indicated that he has 4,000 insurance clients who pays on average a premium of
R125 (US$ 16.47) per month.
15
In the fourth quarter of 2011 South African had an official unemployment rate of 23.9% (Statistics South
Africa, 2011).
13
43.5%) have 10 or less employees; 3 of the undertakers can be considered medium-sized in terms of
employment with between 11 and 30 employees; and 2 of the undertakers, both from
Thohoyandou, can be considered large in terms of employment, one having 40 employees and the
other 80 employees.
Half of the small informal undertakers (10 or less employees) indicated that they make use of parttime employees: some hire part-time employees in addition to their permanent employees, while
others only hire part-time staff in the event of a funeral and pay them per funeral. One respondent
has 4 part-time employees: a graveyard worker, an employee who installs tombstones in graveyards
and 2 who are ‘serving mourners’. This particular undertaker provides on average 1 funeral per week
and pays his part-time employees R50 (US$6.60) per funeral, his total monthly wage bill is
approximately R900 (US$119). The monthly wage bill for the small undertakers ranges between
R900 (US$119) and R20,000 (US$2,635), with the majority (10 of the 18) that have a wage bill of
below R10,000 (US$1,318) per month.
The data indicates that the medium and large-sized informal undertakers (in terms of employment)
have only permanent staff members whom they pay a fixed salary every month. Medium-sized
undertakers spend between R30,000 (US$3,953) and R40,000 (US$5,271) on salaries per month,
while the large-sized undertakers spend up to R160,000 (US$21,083) on salaries per month.
The 23 informal undertakers in our sample provide a total 236 employment opportunities. Although
these informal insurance undertakers pose a risk to their consumers and the insurance market at
large, they do contribute to employment creation within their communities.
5. Conclusion and policy implications
In this paper, we presented descriptive data on a non-representative sample of 72 funeral
undertakers in South Africa, with a specific focus on the 23 undertakers in the sample who provide
insurance on an informal basis. Data presented on both the absolute size of revenue generated from
14
informal insurance business and the contribution of informal insurance revenue to total revenue
demonstrates that informal insurance contributes substantially to the total revenue generated by
funeral undertakers providing insurance on an informal basis in our sample. The data, however, did
not allow us to determine profitability and it is therefore difficult to come to any conclusion about
the contribution of informal insurance to business viability.
Furthermore, the data demonstrates very poor or the total absence of even rudimentary prudential
risk management practices by these informal insurers. At a most basic level, there is almost no
separation of insurance revenue from other business revenue in our sample of informal insurance
undertakers, with no reserving practices, and no actuarial grounds for pricing being used. While
prudential management in insurance can most fundamentally be considered a consumer protection
issue, we did not explicitly explore other consumer protection risks in the same systematic way.
Although we found that 42 of the 49 undertakers who intermediate the insurance product of a
registered insurance company do not comply with the necessary market conduct regulation, we did
not further explore the implications of this for consumer protection. However, it should be obvious
that a sizeable population of funeral insurance users may be at risk of no consumer protection if
regulators apply no or limited enforcement of insurance regulations to informal insurance
undertakers. A total of 4m South African adults stated in 2010 that they have a funeral insurance
product purchased from a funeral undertaker (Ncube, de Vos, Hougaard & Smith, 2012). Our sample
of 16 informal insurance undertakers that provided data on the size of their client base alone serves
a total of 16,409 policyholders.
The objective of this paper was to demonstrate that the risks posed by the nature of informal
insurance provided by funeral undertakers requires that this type of informal insurance be treated as
a specific manifestation of economic informality. This, in turn, would then necessitate careful
consideration of the value offered by this insurance, risks posed to clients by the informal nature of
the provider and product and the potential need for formalisation of the businesses that offer this
15
insurance. While the data presented in this paper should have demonstrated some of the potential
risks to the insurance industry as well as risks to the individual clients, it is also clear that these
informal insurance providers contribute to income generated and employment in their communities
in a country where unemployment rates are very high. This implies that any policy aimed at
formalising the market for informal insurance as provided by funeral undertakers would have to
carefully balance the economic contribution of these businesses with the benefits of a fully formal
insurance market.
16
Bibliography
Bester, H., Chamberlain, D. & Hougaard, C.,2008. “Making insurance markets work for the poor:
microinsurance policy, regulation and supervision. Evidence from five country case studies.”
International Association of Insurance Supervisors (IAIS)/Microinsurance Network Joint Working
Group on Microinsurance Report.
Bester, H., Chamberlain, D., Hougaard, C. & Smit, H., 2010. “Microinsurance in Brazil: towards a
strategy for market development.” Report by the Centre for Financial Regulation and Inclusion
(Cenfri). February.
Case, A., Garrib, A., Menendez, A. & Olgiati, A., 2008. “Paying the Piper: The high costs of funerals in
South Africa.” NBER Working Paper No. 14456. October.
Collins, D., 2006 “Financial decisions and Funeral Costs.” Southern Africa Labour and Development
Research Unit (SALDRU) Working Paper. University of Cape Town: Cape Town.
Collins, D. & Leibbrant, M., 2007. The financial impact of HIV/AIDS on poor households in South
Africa. AIDS 2007. 21 (Suppl 7): S75-S81.
Dercon, S., De Weerdt, J., Bold, T. & Pankhurst, A., 2006. Group-based funeral insurance in Ethiopia
and Tanzania. World Development. 34(4). 685-703.
Kanbur, R., 2009. “Conceptualising Informality: Regulation and Enforcement.” IZA Discussion Paper
No. 4186. Available at SSRN: http://ssrn.com/abstract=1412264 (accessed March 2012).
Ncube, S., de Vos, M., Hougaard, C. & Smith, A, 2012. “Opportunities for insurance inclusion in South
Africa: Exploring the potential in the South African insurance market based on insights from the
FinScope survey.” Unpublished report prepared by the Centre for Financial Regulation and Inclusion
(Cenfri) for the FinMark Trust.
17
Republic of South Africa, 1977. Health Act of 1977, Act 63 of 1977. Pretoria: Government Printer.
[Laws].
Republic of South Africa, 1985. Regulations relating to funeral undertakers’ premises. Pretoria:
Government Printer. [Laws].
Republic of South Africa, 1991. Regulations relating to inspections and investigations. Pretoria:
Government Printer. [Laws].
Republic of South Africa, 2002. Financial Advisory and Intermediary Services Act, Act 37 of
2002. Pretoria: Government Printer. [Laws].
Roth, J., 1999.”Informal micro-finance schemes: The case of funeral insurance in South Africa.” Social
Finance Unit Working Paper No. 22. International Labour Office, International Labour Organization:
Geneva.
South
African
Revenue
Services,
2012.
What
is
VAT?
[Online].
Available:
http://www.sars.gov.za/home.asp?pid=194 [27 March 2012].
18
Appendix A
Funeral
Undertaker
Province
Average
number
of
funerals
per year
Number
of cash
funerals
per year
208
Proportion
of funerals
paid for in
cash (vs.
with
insurance)
0.75
Total annual
revenue from
cash funerals
Number of
insurance
clients
Average
cost of
premium
Total annual
revenue from
insurance
premiums
Total
annual
revenue
% of total
annual
revenue
from cash
funerals
% of total
annual revenue
from premiums
156
Cost of
most
popular
cash
funeral
package
R18 000
1
Western Cape
R2 808 000
550
R105
R693 000
80.2
19.8
0.25
33
R5 500
R178 750
400
R103
R496 000
R 3501
000
R674 750
2
Limpopo
130
26.5
73.5
3
Limpopo
/
/
/
R5 000
/
/
R50
/
/
/
/
4
Limpopo
520
/
/
R10 000
/
/
/
/
/
/
/
5
Limpopo
286
0.25
72
R9 500
R679 250
4000
R125
R6 000 000
10.2
89.8
6
Limpopo
104
/
/
R5 000
/
2000
R100
R2 400 000
R6 679
250
/
/
/
7
Limpopo
78
0.50
39
R12 500
R487 500
197
R50
R118 200
R605 700
80.5
19.5
8
Limpopo
52
0.25
13
R15 000
R195 000
/
R60
/
R195 000
/
/
9
Limpopo
208
0.25
52
R5 000
R260 000
/
R87
/
R260 000
/
/
10
Limpopo
234
0.25
59
R7 000
R409 500
300
R73
R264 000
R673 500
60.8
39.2
11
Limpopo
26
/
/
R6 500
/
200
R70
R168 000
/
/
/
12
Limpopo
78
0.25
20
R7 000
R136 500
100
/
R136 500
/
/
13
Limpopo
26
/
/
R12 500
/
26
R60
R18 720
/
/
/
14
Limpopo
12
/
/
R4 500
/
/
R80
/
/
/
/
15
Limpopo
312
/
/
R16 500
/
4000
R63.3
R 3040 000
/
/
/
16
Eastern Cape
104
0.75
78
R3 500
R273 000
60
R100
R72 000
R345 000
79.1
20.9
17
Eastern Cape
156
0.75
117
R6 000
R702 000
133
R87
R138 320
R840 320
83.5
16.5
18
KwaZulu Natal
78
0.75
59
R7 000
R409 500
/
R73
/
/
/
/
19
KwaZulu Natal
390
0.25
98
R6 000
R585 000
3000
R70
R2 520 000
18.8
81.2
20
KwaZulu Natal
52
0.25
13
R6 000
R78 000
443
R100
R531 600
R3 105
000
R609 600
12.8
87.2
21
KwaZulu Natal
130
0.75
98
R2 000
R195 000
100
R75
R90 000
R285 000
68.4
31.6
22
KwaZulu Natal
208
0.25
52
R 4 500
R 234 000
800
R73
R 704 000
R 938 000
24.9
75.1
23
KwaZulu Natal
52
0.50
26
R 6 000
R 156 000
100
R60
R 72 000
R 228 000
68.4
31.6
19