FSCA and PA to revamp funeral insurance regulations – call for stakeholder input

The FSCA and the Prudential Authority (PA) have invited stakeholders to participate in a project that will review the regulations governing the distribution of funeral insurance.

In a Joint Communication released yesterday, the Authorities said they have initiated a collaborative project that seeks to address the concerns relating to the distribution of funeral insurance.

The project includes a review of the existing regulatory framework to evaluate any potential issues, including the potential unintended consequences arising from, among other things, the change in the definition of “group” in the Insurance Act.

The Authorities said they are “committed to ensuring that the project is undertaken in a consultative and inclusive manner by considering inputs that meaningfully reflect the interests of key market participants and impacted consumers”.

To this end, they intend to hold stakeholder workshops during the first half of 2025. The “inputs provided during these workshops will be critical to ensure the formulation of a pragmatic and balanced approach for the future regulation and supervision of funeral insurance in South Africa”, says Joint Communication 7 of 2024.

The Joint Communication notes that the funeral insurance sector plays a pivotal role in South African society, particularly among underserved communities for whom burial costs can be prohibitive. Funeral insurance often provides a lifeline, ensuring that families can manage these expenses with dignity and within culturally significant timelines.

In 2011, National Treasury published the South African Microinsurance Regulatory Framework, setting out its policy position aimed at promoting better access for South Africans to affordable insurance products through the introduction of a Microinsurance (MI) Policy Framework. The framework aimed to formalise informal providers (for example, funeral parlours), reduce market entry barriers, and enhance consumer protection.

Following the publication of the document, National Treasury worked with the Authorities to reform the regulatory framework for funeral insurance, the Joint Communication says.

It says the regulation and supervision of funeral insurance distribution, including through funeral parlours, been the subject of “extensive consideration” by the Authorities over a number of years. Despite this, the funeral parlour market and the Authorities have significant concerns about the appropriateness and effectiveness of the current regulatory framework.

The Joint Communication outlines these concerns.

Concerns raised by the funeral parlour market

The funeral parlour market believes the current regulatory framework hampers their ability to achieve meaningful growth and effectively serve their underserved customer base. The three specific areas of concern are:

Challenges with the MI licensing framework

Introduced under the Insurance Act, the MI licensing framework was intended to help small and emerging funeral service providers transition smoothly into fully licensed insurers. However, funeral parlours report that this goal has not been fully realised. They feel that the licensing application process and capital requirements for market entry remain disproportionately high, particularly given the smaller scale and less complex nature of their operations. This makes it difficult for these smaller businesses to transition into licensed entities or expand their services.

Barriers to joint ventures and cell captive arrangements

Funeral parlours and small intermediaries face significant obstacles in forming partnerships with larger insurers or in establishing joint ventures and cell captive arrangements. These partnerships are reportedly hindered by stringent underwriting criteria, high pricing models, and restrictive sales thresholds imposed by larger insurers. These demands are often out of reach for smaller providers.

Ownership and control of client assets

Another key concern arises from recent amendments to the definition of “group” in the Insurance Act, along with changes to the Policyholder Protection Rules under the Long-term Insurance Act. These changes are perceived to shift ownership and control of client assets from funeral parlours to insurers. The new rules designate insurers as the entities ultimately responsible for underwriting policies, which has effectively stripped funeral parlours of control over their client relationships and policyholder assets.

Concerns raised by the Authorities

The Authorities have raised several significant concerns regarding the funeral insurance market, primarily surrounding the structure, compliance, and operational practices within the industry. The Authorities’ specific areas of concern include:

Redefinition of ‘group’ and its consequences

Prior to the regulatory amendments relating to “group” structures, funeral parlours acted as the primary policyholders of group funeral policies. Although their clients were members of these policies, they did not have direct access to, or a relationship with, the insurers themselves. This structure limited insurers’ access to critical underwriting and client data, which hampered insurers’ ability to effectively underwrite policies and manage risks. The lack of transparency and direct interaction between insurers and clients made it challenging for insurers to fulfil their obligations, particularly in ensuring fair customer outcomes.

Under the old group funeral policy structure, funeral parlours could transfer client “books of business” between insurers without the knowledge or consent of their clients. Such transfers were often against the best interests of the clients, because they were unaware of any change in their insurance coverage or the terms of their policy, which could lead to unfavourable outcomes.

To address these structural issues, the Authorities amended the definition of “group”. This change was intended to give insurers greater access to underwriting information and reduce the risks posed by inadequate transparency. However, the Authorities acknowledge that this redefinition may have unintended adverse consequences for funeral parlours, limiting their autonomy and ability to manage their client relationships directly. They remain open to discussions with industry stakeholders to identify alternative regulatory mechanisms that balance transparency with the operational needs of funeral parlours.