1. WHAT IS INSURANCE AND HOW DOES IT WORK?

A stokvel is set up with different objectives in mind, spanning from grocery sharing, funeral contributions, property, and savings. Each of these objectives may not all require or be improved by means of getting some insurance cover or financial product, but some can, particularly those centered around funeral and savings related activities. Before we explore an example that touches on how insurance can be used as a risk management tool in a stokvel, let me start with a short introduction on the concept of insurance.

Insurance is a promise, offered through a contract (‘a policy’) between an individual or group (‘the policyholder/policy owner’) and an insurance company (‘the underwriter’). The policy sets out an agreement between the two parties, whereby in exchange for a regular or single premium from the policyholder, the underwriter promises to pay an agreed amount (‘sum assured or sum insureds or cover amount’) to either the Policyholder or their Beneficiaries’ if a certain defined event (‘the risk’) occurs in line with the contract rules (‘terms and conditions’).

SO, IS INSURANCE COVER RELEVANT FOR STOKVEL ACTIVITIES?

The benefits of insurance in a stokvel can best be explained by means of a practical illustration.
The illustration attempts to show the financial impact of self-insuring through a stokvel using a savings account vs. using the same monthly contributions to purchase a funeral insurance policy.
Please note that the examples are very simplified and are for illustrative purposes only. They do not reflect the actual interest rate that could be earned through a savings product or the premium that is payable for a R 5000 funeral insurance product

1.1. INSURANCE ILLUSTRATION

Consider a Stokvel that has 10 members, each committing to pay a monthly contribution of R 100 for a R5 000 pay-out in the unfortunate event of their passing.

Example 1: Savings account monthly contribution based on existing Stokvel structures.

Let us assume a monthly interest rate 3.5% of the total savings balance is earned.

Month..	STOKVEL INSURANCE MATTERS Total Member Monthly Contribution (R100 x 10 members)	STOKVEL INSURANCE MATTERS Total contribution deposited	STOKVEL INSURANCE MATTERS Interest earned from savings account	STOKVEL INSURANCE MATTERS Total Savings Balance + Interest	STOKVEL INSURANCE MATTERS Funeral benefit payment per member
JAN	R1000	R1000	R35	R1035	R5000
FEB	R1000	R2000	R71	R2106,23	R5000
MAR	R1000	R3000	R109	R3 214,94	R5000
APR	R1000	R4000	R148	R4 362,47	R5000
MAY	R1000	R5000	R188	R5 550,15	R5000
JUN	R1000	R6000	R298	R6 779,41	R5000
JUL	R1000	R7000	R272	R8 051,69	R5000
AUG	R1000	R8000	R317	R9 368,50	R5000
SEP	R1000	R9000	R363	R10 731,39	R5000
OCT	R1000	R10000	R411	R12 141,99	R5000
NOV	R1000	R11000	R460	R13 601.96	R5000
DEC	R1000	R12000	R511	R15 113,03	R5000

The stokvel members have been diligently contributing every month and by the end of December have accumulated R 15 113.03 including interest.

They decide to withdraw R2 000 to go away as part of their year-end function, leaving a balance of R 13 113.03. They carpool to the destination and enjoy the festivities.

On their way back, an unexpected and unfortunate event occurs. One of the cars carrying 4 members is involved in a car accident and tragically all the occupants pass away.

Following this very tragic event, the other stokvel members are left with the formalities of having to pay the R 5000 contribution that they agreed would be payable and that the families of the deceased members are now expecting. They need R 20 000, R 5000 for each member, but they only have R 13 113.0 left in their savings account.

What do they do? They can always explain the circumstances to the family members of the deceased and pay less or they can subsidise the difference. Regardless of what they choose, they will end up out of pocket and in a worse off position than they were in. To make the situation more stressful, they will have to start contributing to their account from scratch and possibly increase their contribution amount as there will be fewer members to contribute.

Nothing guarantees that a similar tragedy may not happen again and this time, they may have no money to contribute to the family of the deceased.

Example 2: Insurance monthly premium contribution

Now let’s look at the example where the stokvel decides that each member must buy a funeral policy

instead of putting the money in a savings account. The Funeral policy will have a sum 5000 and each member will pay a premium of R 100 each month to the Insurer.

Let’s say the members have been diligently paying their premiums to the insurance company and to reward themselves, they plan a year end function – they need R 2000 as in the first example.

They would in this instance have to pay for the function by contributing an additional R 200 each at the end of the year as they will have no savings account to dip into. They decide to do this because it’s been a long year and they deserve to celebrate.

On the way back, the same tragic event as described in example 1 occurs. This time however, the stokvel members make the families of the deceased aware of the funeral insurance policy and advise them on how to claim. The insurance company will then pay each of the beneficiaries listed under the policy R 5 000.

The stokvel members can then continue in the next year, knowing that if another death were to occur, they would be able to contribute to the deceased members family.

The purpose of this illustration is by no means to pit one financial product against the other. Both products are designed to meet a specific need and when used together can create a balanced stokvel structure that benefits its members.

Now that we’ve touched on why insurance is relevant and how it could be used in a stokvel providing funeral assistance, let’s unpack the concept of insurance further.

STOKVEL INSURANCE MATTERS BY SINAH MABEBA