State capture and the business of death

The insurance industry’s top dogs are making billions from impoverished people’s funeral policies – and the government is doing little to introduce relatively simple regulations.

In the ten years that Bosasa wrote its own contracts with the government, it took in about R2.8 billion in revenue. Some of that money still had to buy food, even if very bad, for prisoners, and pay staff, even if very little. Assume the contracts were so fattened that half the revenue was pure profit, and that’s about R1.5 billion over 10 years, or R150 million per year.

That is more money than any of us will ever see in a lifetime. But it is a lot less than, say, the profits Old Mutual makes in a single year from funeral plans. In 2017 and 2018, it earned roughly R2.4 billion from them (plus another R600 million or so from consumer lending).

Since Old Mutual has around three million clients in that division, it extracted profits of roughly R800 to R900 per year from each of them, many of them poor. That is already after claims have been paid and provision made for future payouts. The division was one of the two biggest contributors to Old Mutual’s profits last year, when it made a “return on equity” of over 18%. Goldman Sachs, the famed “vampire squid on the face of humanity”, averages an 11% return on equity.

Of course, Old Mutual is not alone. Even Kaizer Chiefs offer a funeral plan, though just as a marketing badge for Hollard – and Hollard’s return on equity is 21%. Then just remember that these are only profits for the insurers, and the whole industry is fat on costs. The agent who sold the policy needs to get paid, the advertising agency needs to get paid, the burial company eventually gets paid. The chain stretches on, all of it sucking billions and billions out of the poor every year.

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How are such returns possible? Don’t funeral plans seem like a good deal – after all, if you pay R160 now, and drop dead in a year, your family instantly gets R50 000. Surely that works for the consumer?

The profits are made in the fine print. For example, the fine print says any cent untouched is swept up as profit. Let’s say you contribute for 50 years, but your relatives don’t know about the plan. If they don’t claim, those decades of contributions are pure profit for the provider.

The funeral plan companies could query the Home Affairs database every day and, when they pick up that someone has passed away, automatically notify their relatives and pay out. But why would they, if they’re not forced to do so? They could be forced to by the Financial Sector Conduct Authority (FSCA), which previously was the Financial Services Board (FSB). But they aren’t.

The funeral plan companies also keep the money the minute someone stops paying. That happens all the time when the plan is provided by someone’s employer. It happens all the time when people move or forget to pay or sign up and six months later realise they’ve been conned. Those six months are pure, straight profit. Why would someone sign up and cancel? Maybe because the agent did a hard sell – we’ve all had those calls – and they mumbled “yes” and, hey presto, that’s a contract, and next thing you know there’s a debit order.

The insurers themselves do all they can to make it impossible to compare options, not just for employees but for the companies that often sign them up. Providers offer everything from homework hotlines to occasional cash-back rewards, just as the phone companies do with phone bundles. The goal is the same: make it impossible for consumers to compare plans, so they can’t switch to lower-price providers easily.

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All these tricks can be eliminated with relatively simple regulation. The Consumer Financial Protection Bureau in the US, created by Elizabeth Warren, has shown the way to require simple information, easy comparisons and to remove or punish the abuses of mis-selling. In the UK, the Financial Conduct Authority (FCA) clamped down on abusive insurance sales for what is known as “the payment protection insurance” (PPI). Over the past 10 years, the FCA has fined the big UK banks over 40 billion pounds.

And that’s where state capture rears its head. Can anyone imagine, in the most outlandish future, any part of the South African state ever fining Old Mutual and Hollard R20 billion, let alone pounds? The very reverse. The state has aided and abetted the profiteers. Sassa, for example, has disallowed all deductions from social grants – except for funeral plans. In return, it has imposed no obligations on transparency of pricing, obligations to notify, portability of benefits or constraints on selling.

Were it not so awful in its consequences, even the idea of the FSCA doing anything would be a joke. The FSCA is the successor to the selfsame FSB that turned a blind eye to the pension and insurance industry keeping billions in unpaid benefits that were supposed to be paid to the working poor.

The same FSB that routinely ignored pension fund trustees, whether union or company appointed, treating the funds under their care as vehicles for funding fancy dinners and golf retreats. In 2010 PriceWaterhouseCoopers did a survey of trustees, who were found to be paid on average R7 641 per meeting (of a couple hours), with a third of them admitting to receiving gifts or entertainment from service providers. An entire industry is extracting billions if not tens of billions of rands a year from the poorest members of our society, through practices simple to regulate – and not a thing is done.

Why? The proximate cause is old-fashioned indirect corruption. The financial services industry hires all the regulators, the most senior of them getting nice CEO jobs. The FSB board had as its head the former president of the industry lobbying body, Retirement Funds South Africa, its deputy chair boasted of “an extensive career in the insurance industry”, and its representative from the Reserve Bank, Francois Groepe, openly admitted last year that “we have neglected market conduct”. Groepe retired from the Reserve Bank in February, amid rumors he will soon land a senior private sector role (he is among the candidates often listed for Absa’s new CEO).

The industry is largely immune from media scrutiny, because it does not fit into the national soap operas. It makes more profit from the poor than private power stations ever will, but does not fit a simple narrative, so attracts far less attention.

It is long past time all that changed. The National Treasury has published a draft of a new Conduct of Financial Institutions Bill. It deals with matters far beyond funeral plans but will do nothing to move us closer to correcting them or other abuses. In the four months since it was published, Google can find no more than a handful of articles. The only one of substance is an interview with an Australian.

Whatever happens at or after the Zondo Commission, a society – and a media – that cannot be bothered even to notice, let alone discuss, legislation of such consequence is not going to fix itself soon. In the meantime, soccer fans can keep paying for R200 million mansions in Australia, and no one will raise a sound.

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