Media Release
Life Offices’ Association (LOA)
14 February 2008
LOA study reveals South African life insurance gap of more than R10-trillion
South African families are grossly underinsured by an estimated R10-trillion, according to a recent independent study commissioned by the Life Offices’ Association (LOA) aimed at measuring the life and disability insurance shortfall for South African households.
Referred to as the Insurance Gap Study, the research was conducted by True South Actuaries & Consultants. The insurance gap was calculated separately for death and disability and is defined as the difference between the “ideal cover” and the “actual cover”.
Releasing the results at a media conference in Johannesburg today, Gerhard Joubert, CEO of the LOA, says the findings of the Gap Study are of grave concern.
“We knew that South Africans are underinsured when it comes to death and disability cover, but until we were presented with the final outcome of this study, we did not realize the extent of the insurance gap in this country.”
Joubert says the current reality is that if the main earner of a household dies or becomes disabled, the average family would have little choice but to cut their living expenses by half.
“Unfortunately, this often involves selling the family home, because bond repayments can no longer be met. And children often have to give up on their hopes for a decent tertiary education.”
Joubert says for the average earner the cost of closing the life and disability insurance gap would require between R1 330 and R2 322 a year.
Low income earners
The Gap Study shows that the death insurance gap is highest for households earning less than R3 800 a month. However, the reverse is true for disability insurance, but only because of the Government disability income grant which, due to its fixed amount nature, is much more effective at replacing lost income in the lower income brackets.
Joubert says for this reason the LOA has focused strongly over the past two years on putting in place the Financial Sector Charter (FSC) Council approved Zimele product standards.
“The approval last week of the LOA’s new set of Zimele product standards for credit life insurance, life cover and physical impairment cover by the FSC Council, will ensure that low income earners will soon have access to a comprehensive range of affordable and appropriate long-term insurance products.”
The LOA launched the Zimele standards for funeral products a year ago. Zimele as a brand represents life insurance products that are accessible, appropriate, simple, affordable and offer good value for money.
Life and disability shortfalls
In order to maintain their standards of living after the death of a breadwinner, South African families across the board would require total life insurance cover of around R7.9- trillion. But the Gap Study shows that South Africans households had life cover amounting to only R3.5- trillion last year, leaving a shortfall of more than R4- trillion.
And similar levels of underinsurance are true for disability cover. Households would require around R12.3- trillion to maintain their standards of living should one of the breadwinners become disabled. In reality, however, actual cover only amounts to around R6.5- trillion, leaving a disability insurance gap of around R6- trillion.
Joubert explains that the figures above are conservative estimates of how much cover would be required to enable families to maintain their current standards of living after a breadwinner can no longer contribute as a result of death or disability.
He says in order to close this significant insurance gap, households would need to spend around R34.4-billion (3.9% of annual household expenditure) a year.
“The only group of people who have sufficient life cover are high income earners older than 55. Generally this group has saved sufficient money and has also benefited from group life and disability cover through years of membership of an employer’s pension fund. On the disability side, however, this group also remains underinsured.”
How much per average earner?
Joubert says the Gap Study shows that an average earner (earning around R60 000 a year) should provide life cover of between R431 000 (in a belt-tightening scenario where all extras would have to be dropped) and R531 000 (to preserve current standards of living), should the earner die.
“These are the lump sum amounts that would be required to generate a monthly income to sustain the household. But in reality the average earner is only covered for around R239 000.”
He points out that the higher an earner’s income bracket, the more life cover is required to maintain living standards. The average required life cover for earners in households relying on a monthly income of R8 200 and higher is R2.1-million.
According to the Gap Study, in order to have sufficient life insurance to maintain current standard of living, the average breadwinner should be spending about 3.9% more (in addition to current life insurance spend) of monthly living expenses on life insurance premiums.
Joubert says the situation is even more dire when it comes to disability insurance. The average amount by which South African households should be insured against disability is between R645 000 (in a belt-tightening scenario) and R833 000 (to preserve current standards of living). The Gap Study shows, however, that actual disability cover amounts to only around R430 000.
Individual shortfalls
While not part of the scope of the study, True South Actuaries & Consultants used the statistics gathered for the study to extract figures on estimated shortfalls per individual earners.
Below follows a snap shot of the life and disability insurance gap for individuals between the ages of 31 and 45 years, segmented per household income group. (A more comprehensive analysis for other segments is available.)
· Life cover gap
Combined household income / Ideal level per earner / Actual level per earner / Shortfall per earnerLess than R3.8k / R262 920 / R31 219 / R231 701
R3.8k – R8.2k / R781 138 / R264 659 / R516 479
R8.2l plus / R2.1-million / R1.3-million / R831 623
· Disability cover gap
Combined household income / Ideal level per earner / Actual level per earner / Shortfall per earnerLess than R3.8k / R350 603 / R287 958 / R 62 454
R3.8k – R8.2k / R1.1-million / R579 924 / R553 533
R8.2l plus / R3.6-million / R1.8-million / R1.8-million
About the Gap Study
Francois Hugo, Executive Director at True South Actuaries and Consultants, explains that the study focused on the financial impact on household units if an earner in that household should die or become disabled.
“A household unit is defined as consisting of one or more private individuals living together, and where food and other household expenses are managed jointly.”
Hugo says the study used total expenditure by households as a point of departure to quantify the ideal levels of cover against the death or disability of an earner in that household.
He points out that the study took a conservative approach, taking into consideration only the levels of life and disability cover required to maintain ongoing household spending after the death or disability of an earner and then only for the period up to the earner’s 65th birthday. One-off costs such as funeral costs, executor fees, estate duty and capital gains tax were therefore excluded, as were post-retirement living expenses.
The two main sources of information for this study were LOA member life companies and Unisa’s Bureau of Market Research (BMR) study entitled “Total Household expenditure in South Africa by income group, life plane, life stage and product, 2004”.
Life companies were requested to provide statistics of total payouts should all policyholders with life cover die simultaneously and should all policyholders with disability cover become totally and permanently disabled.
Ends