On 28 October 2020, National Treasury published the first draft of the Financial Inclusion Policy Paper (the “Draft Paper”). The purpose of the Draft Paper is primarily to establish guiding principles for financial inclusion and to outline Government’s plans to respond to the global pandemic from a financial inclusion perspective. The timing of the draft is apt considering Minister Tito Mboweni’s push to remove red tape from the start-up of small businesses, his mention of the continuing review of the Loan Guarantee Scheme and the shift of resources to the COVID-19 social relief package during the Medium-Term Budget Policy Statement.
Financial inclusion refers to the delivery of financial services at an affordable cost to the majority of the population who are historically excluded or under-served by the formal financial sector. Furthermore, financial services are a significant enabler for a society’s social and economic development.
The Draft Paper is important for two main reasons:
- It aims to establish the draft framework for financial inclusion in South Africa to ensure that financial services are easily accessible, convenient and adequately provided for.
- It outlines Government’s draft policy for shaping regulatory approaches to ensure financial inclusion as a mechanism to target disadvantaged individuals and businesses that have a real need for financial services.
To complement the Draft Paper, the tasks of the Financial Sector Conduct Authority (“FSCA”) are expected to improve the use of financial services. In this regard, the FSCA is required to develop a strong national focus on financial literacy and market conduct. The Twin Peaks regulatory regime model has strengthened the regulatory framework and should further improve appropriate access to and usage of financial services by the low-income market, in support of the Draft Paper’s objectives.
The Draft Paper sets out sixteen priorities in support of the Draft Paper objectives. Priority six aims to promote appropriate, affordable and quality insurance while Priority 12 explores the need for suitable insurance for small, medium and micro-enterprises (“SMMEs”). These Priorities align with the main challenge identified by the Draft Paper in respect of the insurance industry - the over-reliance of individuals on funeral plans and a general lack of appropriate asset-insurance products for the low-income market.
In this bulletin, we look at the Priorities which relate to financial inclusion in insurance.
Priority 6: Promote appropriate, affordable and quality insurance
Most vulnerable people are not adequately protected against day-to-day financial threats. This is due to a relatively low-level of use of asset insurance and basic life insurance in low income markets. The Draft Paper further highlights that there has been a decline in the use of formal insurance products due to an increase in financial stress. This indicates issues of inadequate financial education and possibly the inappropriate sale of insurance products by providers. The key hurdle identified in the Draft Paper is the lack of affordability of insurance products.
In order to improve the usage of insurance products in low-income markets, the following activities are proposed:
- Conducting demand-side research to understand blockages and impediments to the uptake and use of insurance. Research may relate to factors such as product suitability, distribution channels and overall affordability;
- Developing minimum product standards for a simplified product which meets the needs of low-income South Africans; and
- Assessing the conduct of the insurance market. Assessments may cover issues such as excessive pricing, lower claim ratios and claims procedures.
Priority 12: Develop suitable insurance for SMMEs
A study by National Treasury indicated that the main sources of risks to SMMEs are floods, fire or natural disasters, the illness or death of owner, and theft. However, the study found that a large portion of SMMEs do not have insurance cover for these risks. SMMEs indicated that the main reasons for not having this type of insurance cover were affordability and uncertainty over the value of having insurance cover.
The Draft Paper noted that products currently offered do not meet the needs of the SMME market, indicating poor product design. In order to improve the use of insurance products and product design, the following activities are proposed:
- Conducting demand-side research to understand SMMEs’ needs and use the findings to develop minimum product standards that can inform a review of the targets in the Financial Sector Code; and
- Exploring the need and potential for specific agricultural insurance in South Africa, including weather index insurance.
All stakeholders are encouraged to comment on the Draft Paper to strengthen the priorities outlined in the Draft Paper and ensure the development of a comprehensive national financial inclusion strategy.
Comments may be sent to inclusion.policy@treasury.gov.za by close of business on 4 December 2020.
We can be reached for insurance related queries at the contact details below.
This bulletin was prepared by associate Catherine Stark and candidate attorney Emma Alimohammadi.
