Analysing the herding behaviour in purchasing mortality-related insurance policies among lower-income households in South Africa

Abstract

The dawn of democracy in South Africa led to financial reforms that provided access to many financial products to the wider community. Among these financial products are funeral insurance policies and life insurance policies, known as mortality-related policies. However, little is known about the level of uptake and reasons behind the purchase of these mortality-related policies among the lower-income households in South Africa. Understanding the lower-income households’ mortality-related policies choices is important for two reasons. Firstly, the households have discernible financial constraints. Secondly, life insurance policy benefits the dependents left behind by the deceased policy holder whereas the funeral insurance policy covers funeral costs. Thus, the former protects the dependents’ livelihoods, whereas the latter caters for the one-time funeral event. Assuming rational beings therefore, life insurance policies should be preferred to funeral insurance policies. Drawing from behavioural finance theories, particularly the herding behaviour theory, and using survey primary data from a South African township, this study explores financial decision-makers behaviour from lower-income households on the mortality-related policies market. A mixed-method approach is used and descriptive and bivariate statistical analyses for quantitative data and thematic analysis for qualitative data, employed. The study finds that funeral insurance policy is preferred to life insurance policy. In fact, the whole sample had a funeral insurance policy and yet slightly over 12% of the sample had a life insurance policy. While financial knowledge plays a role in explaining these lower-income households’ mortality-related policy choices, societal culture and social pressure were also identified as key drivers of herding behaviour. A funeral is culturally regarded as very important and drawing a great number of attendees leading to high costs. Thus, households opt for funeral insurance policy to cater for these costs, and this is considered common practice in this community. Also, funeral processes are conducted at certain expected level plays, due to social pressure. There is thus herd mentality in mortality-related policies choices. In addition, funeral insurance policy is used as savings commitment and gives financial protection; makes the funeral process hassle-free and is regarded as smart planning. Thus, educating the lower-income people about mortality-related policies is of essence.