SA death and disability insurance shortfall increases to R24 trillion in 2013

13 November 2013 Peter Dempsey, ASISA
Peter Dempsey, deputy CEO of ASISA.

Peter Dempsey, deputy CEO of ASISA.

South Africans remain critically underinsured for death and disability by as much as 60%. In 2013 the insurance gap, which is the difference between existing life and disability cover and the actual insurance need of South African earners, widened to a staggering R24 trillion.

Releasing the results from the 2013 Life and Disability Insurance Gap Study conducted on behalf of the Association for Savings and Investment South Africa (ASISA), Peter Dempsey, deputy CEO of ASISA, says it is distressing to see that the life insurance shortfall increased to R9.3 trillion over the past three years, while the gap in disability cover now stands at R14.7 trillion.

According to Dempsey this translates to an average life cover shortfall of R700 000 per average income earner and a disability cover shortfall of R1.1 million.

ASISA measures the life and disability insurance shortfall in South Africa every three years. The 2013 study was again conducted by True South Actuaries & Consultants in partnership with the UNISA Bureau of Market Research (BMR).

Dempsey says the first study in 2007 established that South African earners were underinsured by an estimated R10-trillion. Since this was the first study of its kind in South Africa, data limitations impacted on the accuracy of the findings. More detailed and refined data was available three years later and as a result the findings of the 2010 study showed an insurance gap of R18.4-trillion.

"The study shows that over the past three years the insurance gap widened by almost 10% a year, from R18.4 trillion in 2010 to R24 trillion in 2013,” says Dempsey.

Understanding the gap

Dempsey says a figure of R24 trillion, which would have 12 zeros if written out, is meaningless unless its implication is made relevant to the average earner and the members of the household that he or she supports financially.

Dempsey says the sad reality is that only a very small minority of South Africa’s 13 million earners between the ages of 18 and 65 is adequately covered for death and disability. "The majority of families will be forced to drastically cut their living expenses if an earner of the household dies or becomes disabled.”

Dempsey says the Gap Study proves as fundamentally flawed the thinking that low-income earners are likely to be impacted the most by the loss of an earner due to death or disability.

"The insurance gap increases steeply as income increases, because the higher an earner’s income bracket, the more life and disability cover is required to maintain living standards should the earner die or become disabled.”

Dempsey says this may come as a shock to many South Africans, but the group most critically underinsured is made up of those who earn more than R150 000 a year.

The current average insurance shortfall for this group means that households supported by these earners would need to source an additional income of R10 000 a month should one of the earners die and R20 000 a month to plug the gap should one of the earners become disabled. The alternative would be to cut household expenditure by 36% in the event of death or by 46% should the earner become disabled.

The study also shows that while earners in the lowest income bracket are likely to have a small life cover shortfall of R100 000, the reverse is true for disability insurance. This is because of the Government disability income grant is very effective at replacing lost income in the lower income brackets. Most South African earning less than R1 500 a month would not have a need for disability insurance.

Dempsey says according to the study the only group of people likely to have sufficient life and disability cover are high-income earners older than 55. This is because this group has generally benefited from group life and disability cover through years of membership of an employer’s pension fund.

Closing the gap

Dempsey says underinsured earners and their households are faced with three choices: closing the gap by buying sufficient life and disability cover, reducing household expenditure should one of the household’s earners die or become disabled, or increasing the monthly earnings of the household should something happen to one of the main earners.

Closing the life and disability insurance gap would require South African earners to spend on average an additional 2.9% a year of their personal income on life cover (R45-billion a year) and 1.8% a year on disability cover (R28-billion a year).

Alternatively, if additional insurance is not bought, the tables below show by how much households in each income bracket would have to cut their monthly expenditure or increase earnings should one of the households’ earners die or become disabled.

Average life insurance gap per income bracket

Average disability insurance gap per income bracket

About the Gap Study

Francois Hugo, Executive Director at True South Actuaries and Consultants, says the study only considered data relevant to South Africa’s 13-million citizens between the ages of 18 and 65 who were earning a regular income.

"The study assumed that an insurance need only exists up to a retirement age of between 60 and 65. From this point onwards it was assumed that retirement savings would fund the household’s expenditure, even in the event of an earner dying or becoming disabled.”

The primary source of information was the metadata from Statistic South Africa’s Income and Expenditure Survey (2010/2011). Personal information, personal income, household information and household income tables were used to derive the insurance need. The total level of income was adjusted to reflect 2013 estimated earnings as per prior work performed by the BMR. Additional information was sourced from life companies, which provided statistics of total payouts should all policyholders with life cover die and should all policyholders with disability cover become totally and permanently disabled.

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