Reinsurance arrangements: implications for the Funeral assurance sector
Clementine Chinyuku
One of the major reasons for taking out insurance of any kind is the risk transfer principle, a strategy of managing risk where one party assumes the potential liability of another. Purchasing insurance is one way of transferring those liabilities. Funeral assurance is a contract where the assurer guarantees to cover the funeral costs of the insured.
While we all have experienced bereavement at some point in our lives, not all of us adequately plan for this, and a funeral may fall on us when we least expect it.
Funerals range from a spectrum of very simple, quick, and humble burials to lavish ceremonies that can last days with all the trimmings, including professional caterers and even professional mourners. The expenditure for even a simple funeral may be huge and, for most, considerably above one’s monthly income. This may thus translate into substantially high financial risk for individuals.
Funeral assurance therefore serves to transfer the financial risk when a death happens to the funeral assurer, giving the bereaved family peace of mind that their loved one will receive a dignified burial.
Once the funeral assurance company assumes the financial risk transferred by the individual, they are now the bearers of that risk, and as they onboard more customers, the risk assumed accumulates. The potential consequence of the risk accumulation is that the funeral assurance companies become exposed to a concentrated financial risk. The accumulation of liabilities paid out may result in financial ruin for the funeral assurance companies due to the accumulation of losses and catastrophes and may have a negative impact on their capital and solvency levels.
The COVID-19 pandemic was unprecedented and exposed the funeral assurance companies to claims that reduced the sector’s solvency levels to near zero (IPEC, 2022), with the potential for ruin for several of the companies.
None of the funeral companies had any form of reinsurance, and this position has been prevalent for many years despite calls by IPEC to consider reinsurance.
It is anticipated that in the same manner that the individual realizes the burden of the funeral risk and elects to transfer it to the funeral assurer, the funeral assurer uses the facility of reinsurance to transfer the financial risk, and the reinsurer further transfers the same risk to the retrocessionaire.
Reinsurance is basically insurance for insurance companies, and it developed from the realization by the insurance companies that they were unable to bear the full financial risk on their own. Reinsurance, therefore, is a form of insurance similar in nature to insurance in that it aims to reduce the variability of financial loss. It is a traditional and efficient risk management tool.
The generic role of reinsurance includes risk spreading, smoothing of income, capacity provision, catastrophe protection, solvency enhancement, accumulation control, financial stability, and providing technical expertise.
Each insurer arranges reinsurance programs for specific reasons and benefits, and reinsurance solutions are tailored to address specific concerns of the insurer.
A new insurance company may, for example, arrange reinsurance for capacity provision since reinsurance enables the insurer to underwrite more policies of higher values due to a portion of their liabilities being transferred to the reinsurer.
Other insurers may opt for reinsurance because it provides additional capital since they can offset the risk of loss in their insurance liabilities and release their capital to be invested elsewhere to increase their revenues.
Some companies may be concerned by natural disasters such as the cyclones experienced over the past few years. Natural disasters have the potential to cause bankruptcy due to the accumulation of claims from these events, and shifting the insurance liabilities to the reinsurers gives financial relief to the insurer where such events occur.
Funeral assurers are insurers, and this implies that the concept of reinsurance may provide benefits to this insurance sector as in life insurance or short-term insurance.
Funeral assurers may not necessarily be concerned about increasing capacity given that the policy covers are prescribed and defined as benefits, while the issue of capital provision may not be a driving factor to purchase reinsurance since the funeral assurance model gravitates around providing a service.
However, benefits such as risk spreading, accumulation control, and solvency provision may accrue to the funeral assurers.
Funeral assurers will certainly benefit from the other roles of reinsurance; key to this is risk spreading, which will reduce the financial risk that the funeral assurers carry.
The COVID-19 experience gave a clear indication that accumulation risk can be potentially ruinous, and reinsurance through risk transfer allows that accumulation risk to be controlled by transferring a portion of the risk to the reinsurer.
This will smooth losses to a predefined amount and protect the funeral assurer’s capital and solvency position in the same vein. The solvency position of the funeral assurance sector is particularly important as it not only indicates financial stability but also indicates capacity to pay claims and meet financial obligations and gives stakeholders confidence.
Stakeholder confidence is particularly important as the key stakeholder in this instance is the insured person or the potential insured’s need to believe that the funeral assurers are sound enough to keep their promise when called upon to do so.
This confidence is extremely important because of the nature of the intangible product, which is a promise of service in 10, 20, or even 30 years.
Reinsurance programs that are properly structured will therefore have a positive impact on strengthening the performance of the funeral assurance sector, improving solvency positions, providing protection from accumulation shocks, and supporting the sector’s positioning for growth and profitability. (ICZ 2023 magazine)
