South Africa is faced with the challenge of extending insurance products to low-income individuals. At the time of the research the insurance sector had started to act upon this realisation by re-examining the insurance needs of low-income households. This change in focus was triggered by a number of factors, including the access targets set in the Financial Sector Charter (FSC), non-insurer players’ entry into the low-income space for insurance and an increasingly contested high-income market. Although product development for this market can prove challenging, finding appropriate and efficient distribution mechanisms in serving the low-income market seems equally challenging.

This study was commissioned with the goal of identifying and reviewing the threats to and opportunities for the intermediation of insurance to low-income (LSM 1-5) households in South Africa. The terms of reference of the study included a specific focus on the broker as an intermediary category and an assessment of the broker’s ability to successfully sell insurance products to the low-income market.

The study concluded that were significant areas of opportunity where people are reached by other formal sector touch points and networks but are not yet served by insurance. In LSM 1-5 there are the following groups of people who do not have formal insurance:

• 4.2m people who have bank accounts;
• 3.3m people who have a pre-paid cell phone;
• 1.4m people who have store cards/accounts; and
• 2.2m people who are members of burial societies.

In addition, three trends were identified that will impact significantly on how the market will develop going forward:

• Trend 1: Opposing regulatory forces are increasing cost, bifurcating the market and risk closing down intermediation to low-income markets
• Trend 2: Controllers of client groups are entering into intermediary and insurance markets
• Trend 3: Brokers and advice-based models retreating to higher-income markets

Going forward the following criteria were identified for successful distribution in the low-income market:

• The ability to cost-effectively collect premiums, especially cash premiums, and pay benefits.
• Active selling through trusted personal interaction. Even more so than in the high-income market, insurance in the low-income market (with the possible exception of funeral insurance) has to be sold.
• An appropriate product. While perhaps beyond the definition of intermediation, the nature of the product cannot be completely removed from the debate about intermediation. In particular, three aspects of the product will impact on the ease and effectiveness of intermediation. Firstly, cover must reflect needs and, the value of the product and how it relates to risks faced by the poor, need to be effectively communicated as part of the intermediation process. Secondly, the risk has to be manageable. Some low-income risks cannot be insured simply because it is not possible for the insurer to manage within the low premium value. Finally, the product must be sufficiently commoditised and/or simplified.

This document presents research (conducted in 2006) on the opportunities and challenges faced by insurance intermediaries in the South African microinsurance market. Cenfri team members were part of the Genesis Analytics research team that conducted this research for the FinMark Trust.