When financial inclusion becomes financial exclusion
As set out in my blog on financial inclusion on 6 May, financial inclusion is the adoption, usage and sustainability of financial services. Boston Consulting Group's report on financial inclusion covered the full suite of basic financial services, including transaction accounts, savings, credit and insurance. The report measures adoption, usage and sustainability of these basic financial services. With four products and three assessment criteria, there are 12 areas of measurement of financial inclusion. The only area where SA is considered to be inclusive is in the adoption of transaction accounts.
SA is considered to be somewhat inclusive most other areas of the research report, except in the following areas, where SA is not inclusive:
sustainability or transaction accounts - high account fees and lack of trust, especially for those in the low income segment
sustainability of insurance - high premiums make life insurance unaffordable
Savings - savings levels amongst the lowest in the world
Many South Africans devote a large and unsustainable share of their disposable income to life, funeral and burial policies.
I am by no means an expert in insurance, but based on discussions with two senior executives in the life insurance industry, it would seem as though there a few factors which contribute to the high premiums (one of the executives seemed to think SA had one of the highest costs of insurance in the world), which are set out hereunder.
One of the executives is at an insurer that provides life insurance to people with HIV. The discussions with this executive revealed the following factors which contribute to the high cost:
high cost of acquisition - they run expensive TV advertising campaigns to elicit calls from prospective customers.
high cost of onboarding - when the customer phones in, the onboarding call takes approximately 45 minutes
high lapse rates due largely to unaffordability - approximately 40% of the onboarded customers do not make the first payment. Of the remaining 60%, approximately 50% do not make the third payment, i.e. only 30% of the customers sustain beyond three months.
He indicated that only approximately 80% of the premium covered the above costs and that only 20% covered the actual risk.
Therefor, although this is indeed a very noble purpose and inclusive, the extremely high drop off rate adds credence to BCG's findings, that financial services in SA are not sustainable.
The cost of onboarding and high lapse rate could be circumvented by doing an affordability assessment in real time when the call center agent first engages with the customer. This assessment would determine whether the customer can afford life cover at all or whether he/she can afford a lesser amount based on his/her affordability.