South Africa must mind the R50.4 trillion gap

The shortfall between the insurance cover South Africans need to maintain their standard of living in the event of death, disability, or critical illness and what they currently have stands at R50.4 trillion. 

This is commonly referred to as the ‘insurance gap’ and poses a significant risk to South Africa’s financial stability, with the Reserve Bank routinely warning that it needs to be closed. 

Liberty revealed this data in a recent media roundtable, which showed that South Africans lack an understanding of the importance of long-term insurance. 

The latest study by the Association for Savings and Investment South Africa showed that more households than ever are at risk of losing income security. 

This study was the first of its kind to include the impact of critical illness on income, with previous editions focusing on death or disability only. 

It showed that the shortfall between the insurance cover South Africans need to maintain their standard of living and what they actually have stands at R50.4 trillion.

This gap has compounded at an annual rate of 12.5% since 2021, and shows that South Africa lacks a culture of protection. 

Liberty’s head of insurance, Schalk Malan, explained that much of this gap stems from a lack of education about the importance of long-term insurance. 

“For many South African families, the loss of a breadwinner is not just a tragedy. It is a financial breaking point,” Malan said. 

“The research shows that most South Africans insure only 20% to 50% of their future income, yet the ability to earn is our greatest asset.” 

The largest gap is in cases where people must live with illness, as most understand the loss of income associated with death, but not lifelong illness.

This presents a double blow to South Africans, with a loss of income being compounded by rising medical costs that many cannot afford. 

The issue is difficult to solve, as it fundamentally lies in individual behaviour rather than a product set or better pricing.

Why there is a gap and how to close it

Malan explained that while the gap is immense, the barriers that cause it are often simple and lie in individual perceptions of insurance. 

Insurance in South Africa, as in most emerging markets, is viewed as too expensive and complex for an ordinary person to have. 

In this way, it is seen as the preserve of the rich, who have assets and an income to protect, as well as the means to protect it. 

Another major factor in the lack of protection in South Africa is individuals’ experience with insurers. 

When claims are made, decisions are often delayed or avoided, while outcomes are often not what people want. This is largely because many individuals do not understand the coverage they need versus what they purchase. 

“The biggest enemy is not cost. It is inertia. People default to doing nothing,” Standard Bank insurance head of behavioural science Shalia Naidoo explained. 

“Insurance also suffers from present bias, because every rand today feels more urgent and valuable than a rand in the future.” 

South Africans are unwilling to invest to cover their future income because they view it as a sacrifice of a slice of their present income.

This also makes it relatively difficult to close the insurance gap, as it requires a fundamental change in behaviour and perception. 

However, Malan explained that the gap also presents a significant opportunity for insurers to grow their business and tap into a new market. 

“The insurance gap is a significant, addressable opportunity. Clients can afford solutions, but the industry must remove barriers such as affordability and cost pressures,” Malan said. 

“With the right solutions, pricing, and distribution models, the gap becomes a highly addressable market for advisers, insurers, and shareholders alike.”

Integrated, bank-linked offerings extend reach into broader client segments, while banks’ scale and infrastructure enable the delivery of more affordable products, especially at the entry level.

Banks can also improve access and affordability by leveraging existing client relationships and lending touchpoints to seamlessly embed insurance into everyday financial journeys.

This is something Liberty is looking to capitalise on, as it was reintegrated into the Standard Bank Group in 2022. 

Liberty is now completely integrated into Standard Bank’s offering, with its systems sharing with the bank’s insurance offering and effectively being another operating unit of the group. 

“What we did was to take all the insurance businesses and all the asset management businesses which were scattered throughout the group and put them under one umbrella,” Group CEO Sim Tshabalala explained to Daily Investor.

“What we did after that was to focus insurance and asset management on two vectors. The one is the external market, and the other is the Standard Bank client base.”

The ability to cross-sell insurance products gives the bank an incredibly profitable source of earnings through insurance premiums and fees from investment products. 

These earnings are relatively capital-light compared to traditional banking activities, such as lending, which consume significant capital.