A gap too wide for SA’s financial planners

Consumer education, distribution and product design have been identified as potential weapons in the ongoing war between South Africa’s life insurance industry and households’ underinsurance. On the distribution front, financial advisers and planners will have to redouble their efforts to encourage clients to purchase need-appropriate death, disability and severe illness covers.

The extent of the challenge is made clear in the latest research. The 2025 Insurance Gap Study, produced by the Association for Savings and Investment South Africa (ASISA) in partnership with True South Actuaries, suggests that the country’s death and disability insurance gap has widened by 12.5% per annum over the last three years, from R35.4 trillion at the end of December 2021 to R50.4 trillion at the end of December 2024. This means the total shortfall now stands at around seven times the country’s 2024 GDP of R7.3 trillion. 

An inconceivable shortfall

Your writer attended the Insurance Gap Study media launch to unpack the latest actuarial assessment of the domestic life insurance landscape and to try and get to grips with the inconceivable sum. The launch kicked off with an explainer of why the study, now in its seventh iteration, is only conducted every three years. Research lead and Actuarial Solutions Expert at True South Actuaries, WS Nel, said the study gave a consistent benchmark of household financial resilience by tracking progress in death and disability protection levels over time. 

More importantly, the study “allows the life insurance industry as a whole to focus its efforts on where the protection shortfalls are most acute,” he said. Nel shared three key observations about the changes since the research was last conducted. First, the uptake of death and disability cover is not matching growth in income; second, cover inequality persists and continues to worsen; and third, critical illness, included in the study for the first time, is emerging as a weak spot in the life insurance industry. 

“The main barriers to more equitable coverage across the ‘earning’ population remain income inequality, product access and affordability,” Nel said as he unpacked these themes in more detail. He noted that the coverage ratio for critical illness, expressed as a percentage of critical illness sums insured versus gross annual income across the South African earning population, was just 26%, with a mere 15% of earners having this cover. But to better understand the study findings, you need to be up to speed on some of its constraints. 

Defining the earning population

Notably, the study only measures the gap as it relates to the aforementioned earning population. This number is based on Statistics SA data, starting with a population of around 63 million people. Of these, 39 million make up the total working population, aged 18 to 65, and only four-in-10, or 16.1 million people, have a regular income. It is this 16.1 million-strong cohort that the study refers to as earners, or the earning population. Incidentally, the number of earners has grown by 1.8 million between the 2022 and 2025 studies, more than making up for the 1.3 million earners lost between 2019 and 2022. 

It also helps to know how the death and disability protection gaps are measured. “For death and disability, the protection gap is defined loosely as the insurance need versus actual cover,” Nel explained. The need is the amount of cover that a household should have to replace income after a death or disability event, assuming a similar living standard. The gap is only measured up until retirement at age 65 and excludes short-term pay-outs from funeral cover or medical insurance. 

As for the actual cover, “that is simply the amount of existing insurance cover of various kinds, including both retail and group cover policies, self-insurance and pension schemes … and, on the disability side, government disability grants,” Nel said. Critical illness is not included in the protection gap calculation, but is instead reported as a ratio, as already described. The reason is that critical illness sums insured are too subjective and situational, varying depending on the type and severity of illness, recovery times, medical scheme limits and lifestyle choices, to name a few. 

Crunching the numbers

The study relies on plenty of guesswork. For example, calculating the optimal cover requires best estimates of gross annual earnings across the earning population; a suitable average replacement ratio, being the percentage of current earnings required by a household following death or disability of the earner; and a capitalisation factor based on how many years of income would be needed from event until retirement. The death insurance need was calculated at R33.6 trillion based on R4.04 trillion gross annual earnings multiplied by a 56% replacement ratio for 14.8 years. For disability, the sum required is R48.6 trillion, being R4.04 trillion x 78% x 15.5 years. 

To determine the gap, the actuaries had to figure out the actual cover across the market. “Across the death and disability insurance segment, there is close to R32 trillion worth of cover in place, but for critical illness, there is only about R1 trillion worth,” Nel said. There was a useful source of cover included in the slide show, with death cover coming from retail (60%) and group (40%) policies and disability cover from retail (27%), group (46%) and state disability grants (27%). As for critical illness cover, the bulk comes from retail (85%). 

At the top level, these numbers dilute down to the R50.3 trillion protection gap introduced in the opening paragraphs. At an individual level, you can present the statistic as each of South Africa’s 16.1 million earners being underinsured to the tune of R3.1 million, of which R1.3 million is for death cover and R1.8 million for disability cover. These statistics can then be sliced and diced to reveal shortfalls by age, education, gender, income and region. It seems more useful, however, to reflect on what households can do to remedy the situation. 

How households might respond

To address the shortfall pre-event, households would have to divert another 8.2% of their earnings to death and disability cover, 5.2% being for the former. And after an underinsured earner dies or becomes disabled? Besa Ruele, a member of the ASISA Life and Risk Board Committee, said the average family had two options. Following a death event, they would have to cut household expenses by 34% or generate another R7400 in monthly income. And if an income earner suffers a total disability, the household will have to reduce expenses by 37% or find an additional R9800 in income. 

The enormity of South Africa’s life insurance protection gap underscores the value of financial planning in securing the long-term financial stability of households. One might argue that the easiest way to close the gap would be for a qualified financial adviser or planner to pay each household a visit, conduct a full financial needs analysis (FNA) and recommend financial products to keep the monthly income curve as smooth as possible. Unfortunately, most households do not have the financial means to make this ideal scenario a reality. 

Insurance plus social security

Closing the gap will require collaboration between insurers, intermediaries and regulators across the subset of households that have enough income to address the insurance shortfall, and intervention by the state through improved social security safety nets for poorer households. The next part of the challenge will be pushing more South African households out of unemployment and into the earning population. 

Writer’s thoughts:

The sheer scale of SA’s life insurance gap, and the rate at which it is widening, suggest that the challenge is insurmountable. Is there anything financial planners can do to close this gap, or is it time to rethink how we measure it? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].

Comment on this Post

Name*

Email Address*

Comment*

 

Submit Comment