National Treasury has identified the promotion of appropriate, affordable, and quality insurance products for individuals and small, medium, and micro enterprises (SMMEs) as priorities for fostering financial inclusion.
Treasury this week published its financial inclusion policy framework for South Africa, titled “An Inclusive Financial Sector for All”, following Cabinet’s approval of the policy framework in August 2023.
It also published a document setting out Treasury’s responses to the comments received from stakeholders to the first draft of “An Inclusive Financial Sector”, which was issued in October 2020.
Treasury said it will work with stakeholders – such as the financial sector regulators, civil society, government departments, the private sector, and other agencies – to develop an implementation strategy and action plan and a financial inclusion monitoring and evaluation framework.
The policy document defines “financial inclusion” as a state in which all individuals and SMMEs have access to and can effectively use a range of quality products and services provided by the regulated financial sector. In the context of South Africa, this includes reaching those segments of society who are historically excluded from the formal financial sector, as well as those who underutilise financial products and services.
Access to bank accounts obscures low level of inclusion
The headline data on financial inclusion reflects positively on the country’s achievements in this area over the past decade. At least 91% of South African adults have access to formal financial products and services, with only about 3.6 million still excluded. Of those included, 81% have a bank account and 78% use other formal non-bank financial products and services, the document says.
But because of low economic growth and rising unemployment, many households are still restricted to using basic financial services. High levels of financial inclusion, driven by high access to bank accounts, have not adequately translated into improvements in the quality of life and economic environment of low-income South Africans and SMMEs, the document says.
Treasury says the underlying problems in the quality and use of financial services include:
- low savings rates in the traditional formal sector;
- the low take-up of non-banking products, such as savings and insurance products, except funeral, credit, and legal cover products;
- the inadequate or sub-optimal usage of bank accounts
- underdeveloped payment options;
- the high cost of remittances and other financial products; and
- SMMEs’ access to financial services remains constrained because of “information asymmetry” problems.
Three policy pillars
The document says the major challenges for effective financial inclusion are the lack of appropriate and affordable financial products and services and the lack of, or limited knowledge about, financial services and products among a significant portion of the population.
The challenges identified will have to be addressed through “a carefully designed holistic response”. In addition, steps must be taken to address structural deficiencies, particularly as they relate to the highly concentrated financial sector, within which black South Africans are under-represented.
The government intends to address these issues via two strategic core policy pillars and a supporting pillar:
Policy Pillar One – Deepen financial inclusion for individuals.
Policy Pillar Two – Extend access to financial services for SMMEs.
Policy Pillar Three – Improve the enabling foundations – leverage a more diversified provider and distribution base. Support competition and diversification of the supply base to strengthen the enabling foundation to support tangible progress in Pillar One and Pillar Two.
Each Policy Pillar consists of policy priorities designed to address the identified barriers to financial inclusion.
Pillar One has seven priorities:
- Promote the beneficial use of transactional accounts
- Position remittances as a springboard for further financial inclusion
- Support increased formal savings for low-income earners
- Promote appropriate credit for assets and investment over consumption
- Promote appropriate, affordable, and quality insurance
- Increase the financial inclusion impact of social grant distribution
- Improve efficiencies in the onboarding of financial services clients
The following policy priorities fall under Pillar Two:
- Broaden the range of financing instruments available to SMMEs
- Promote the use of transaction accounts and payment services by SMMEs
- Suitable insurance for SMMEs
There are six policy priorities under Pillar Three:
- Build appropriate payment options to drive usage
- Build a credit infrastructure to improve access to credit for SMMEs
- Enable and strengthen the capability of new and small financial institutions, with increased focus on strengthening the financial co-operatives and developmental microfinance sector.
- Explore the role of the state in supporting sustainable financial inclusion
- Enable a broad base of agents in the provision of financial services
- Leverage fintech disruptors to promote and support financial inclusion
Barriers to insurance in the low-income market
The percentage of the adult population who use an insurance product has increased from 48% in 2012 to 52% in 2022. Of those with an insurance product, only 39% had non-funeral insurance in 2022. Informal insurance remains a vibrant market for the average South African adult, with a 30% penetration rate. As consumer household income remains constrained, it is likely that the proportion of the insured population will remain low.
The policy document ascribes the low uptake of non-funeral insurance to:
- the strong correlation between disposable income and insurance uptake;
- lack of affordable and suitable products;
- the distribution (or delivery) model was historically aimed at supporting the middle and upper market segments;
- inadequate financial education on insurance; and
- poor business conduct, including inappropriate sales practices.
Treasury cited a study on micro-insurance by the Consultative Group to Assist the Poor, titled “Making insurance markets work for the poor: micro insurance policy, regulation and supervision”, which found that the uptake and use of insurance by low-income households is influenced by the following demand-side and supply-side factors:
- Perceived cost determined not only by the level of the premium, but also by what the person needs to sacrifice to buy insurance.
- Perceived value, impacted by disposable income, level of trust in the institution to deliver on claims, and the probability of the risk event occurring (with high frequency and/or probability risks such as health and life likely to receive priority in the minds of consumers).
- Business models and distribution channels that facilitate positive market discovery, where consumers are introduced to products in a way that allows them to understand its potential value and the ability to institute a claim successfully when required.
Treasury says that in countries such as India and Kenya, governments, NGOs, and private companies have partnered with self-help groups to reach a wider customer base and provide appropriate products to meet customer needs. But the distribution model for insurance products in South Africa still lags and provides an opportunity for the sector to relook its distribution model with the objective of meeting customer needs through appropriate and affordable products.
The policy document says a sustainable improvement in the accessibility and use of insurance products will require that:
- products address the needs of the targeted customer segment (that is, the products need to deal with risk management effectively and affordably in the low-income market);
- consumer perceptions are addressed through appropriate consumer financial education;
- accessible and appropriate delivery channels for the low-income market are developed; and
- the claims process is efficient and easy to administer.
Treasury said this will require an adaptable and nimble insurance market. New business and distribution models are needed, such as cell captives and fintech disruptors.
Lack of a knowledge a key barrier to insurance for SMMEs
The policy document cites a 2020 FinScope survey which indicates that only 33% of SMMEs have insurance products. These covers, however, are taken in the owner’s personal capacity, with the risks covered geared towards personal risk as opposed to business risk.
Business owners cited affordability and uncertainty over the value of having insurance cover as key reasons for not taking up insurance for their businesses.
“Lack of knowledge about the type of covers available for business risks is directly related to the perception of lack of value in having insurance. This points to poor or lack of appropriate education on the subject and highlights poor product design, ineffective disclosures, and marketing and sales practices that are not customised to SMMEs. For instance, if SMMEs feel that insurance offers little value, an investment or savings component added to the insurance’s core offering might change their perceptions and increase penetration rates,” the document says.
From a supplier perspective, lack of understanding on the needs of SMMEs, combined with the heterogeneity of the SMME sector, makes selling a generic low-cost product using the traditional distribution network unviable, Treasury says.
The document says Treasury and the Landbank have been working with the World Bank Group and the insurance industry to explore the case for weather index insurance for smallholder farmers, given the importance of land ownership and food security in South Africa.
