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The 2007 challenge embracing the low income market

19 January 2007 Gareth Stokes

As each New Year dawns, we discard the disappointments of the old year, and make a fresh list of goals and objectives for the year ahead. The corporate world is no different. A new calendar year offers the perfect opportunity to outline the challenges

There's a significant overlap in the challenges faced by companies operating in different sectors of the financial services industry. Issues such as technology, regulation and rising costs feature on nearly every list. It seems, however that one challenge is viewed as a priority by nearly every sector. The big challenge for 2007 is to extend financial services to the low income earner.

This view is shared by Santam CE, Steffen Gilbert. Santam's press release titled "Short-term insurance industry facing numerous challenges in 2007" suggest one of the foremost challenges facing the short-term insurance industry this year is education and [the] affordability of insurance products for entry-level consumers.

A focus on access to financial products for all

Financial service providers need to create innovative products and sales channels to reach this previously neglected market. More importantly, they have to achieve this objective without sacrificing too much profit.

We've witnessed a number of interesting initiatives across all sections of the financial services industry in the last few years. Some of the solutions have already been implemented.

The banking sector introduced the Mzansi account in a bid to 'bank the un-banked'.

The life industry is working on launching CAT (fair Charges, easy Access, and decent Terms) products to low income earners in the LSM 1-5 market. We should see the result of this product development and branding early in 2007.

Gilbert has this to say about Santams (a short-term insurer) recent activities:  "We aim to provide products that fit the varied requirements of all South Africans; the challenge is their development and ongoing viability. Santam's low cost home and household insurance is being piloted in Soweto and we plan to extend it to other areas in the coming months."

And finally, private healthcare initiatives are being introduced by the government by way of a variety of regulations. Circular 8 is a new proposal which is likely to follow the already implemented Prescribed Minimum Benefits (PMB) and the Risk Equalisation Fund (REF). Governments goal appears to be the creation of a Social Health Insurance system similar to the NHS in the UK.

Towing the line

Major players in the financial services industry have identified challenges in line with the intended outcomes of governments regulatory environment, most notably the FAIS Act.

We can identify two policy goals from this Act:

1.  To empower and protect the consumers of financial products while upholding the integrity of the financial services industry

2.  To extend access to financial products to the low and mid-income market

Industry participants will have to be extremely creative to satisfy both policy goals. High costs incurred in complying with the first section of this policy goal prevent the second policy goal from being achieved. You can empower the consumer and incur additional compliance costs, OR you can extend lower priced products to the poor. Achieving both would be the real prize!

The way forward

"Brokering change in the low-income market" is the title of a recent report compiled for Finmark Trust and the Ford Foundation.

The report advocates that providers to the low income market distinguish between advice and disclosure. The financial reward associated with selling to the low income market might not warrant the effort of supplying financial advice. A better solution would be to focus on disclosure as required by law.

In conclusion, the report suggests that to successfully engage the low income market, insurers (and other financial service providers) will have to combine cost-effective premium collection with an effective sales channel and appropriate product.

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