Insurance law is under reform in the United Kingdom – are there implications for South Africa?
Worldwide, insurance is a mechanism widely used by firms and other organisations to manage the risks they face in their operational activities. Because insurance involves contractual obligations, it is backed by a body of law commonly known as insurance law. Insurance law governs a wide range of issues that typify the relationship between buyers and suppliers of insurance.
Modern insurance law and practice is generally thought to have been developed in maritime England. As a consequence, insurance law development in that country generally attracts interest in countries such as South Africa, as our insurance common law contains considerable English law influences.
Over the past two years, the United Kingdom (UK) has introduced fundamental and wide-ranging insurance law reforms. The first major change saw the enactment of the Consumer Insurance (Disclosures and Representations) Act which received Royal Assent in 2012 and became law in 2013.
Currently the Insurance Bill is under consideration before the British Parliament and it seeks to extend some of the reforms, introduced in consumer insurance contracts by the Consumer Insurance (Disclosures and Representations) Act, to non-consumer insurance contracts.
Many people and legal scholars, who have followed the development of British insurance law over the years, will find these developments both surprising and welcome. They are surprising because the UK has a long history of unsuccessful attempts to introduce fundamental changes in the area of insurance law. In fact, some of the reforms being implemented, or proposed for implementation in the last two years, actually date as far back as 1957, when they were first proposed by the Law Reform Committee in England and Wales.
On the other hand, the reforms are likely to be welcomed by critics of British insurance law, who have long argued that it was out of step with modern realities and developments in other developed countries such as the United States, Canada and Australia. One can argue that reform was bound to happen, but what is perhaps even more surprising is the rate at which these reforms are being adopted.
What then are the changes which the UK has introduced, or proposes to introduce, in the area of insurance law? The first major reforms were introduced through the Consumer Insurance (Disclosures and Representations) Act 2012. The Act applies to consumer insurance contracts only, and does not apply to insurance contracts involving corporate and other juristic clients.
A primary target for reform under the Act is the common law duty of disclosure, which requires buyers of insurance to disclose material information, about the subject matter of insurance, to the insurers. In particular, the Act abolishes the need for consumers to volunteer information to the insurer by placing a specific obligation on insurance companies themselves to ask for the information they need to know, before issuing the policy. This marks a huge shift from the rules governing disclosure at common law.
At common law, the duty is on the buyer of insurance to disclose information to the insurer, even if it has not been specifically requested, as long as that information is material to the risk being assumed by the insurer.
Furthermore, the Act abolishes a common practice by insurance companies, in terms of which pre-contractual statements made by the insured could easily be converted into warranties. This was done through the “basis of the contract” declaration, which most insurers inserted in proposal forms and consumers would be required to sign.
Warranties, in the insurance context, are statements by the insured on the exact truth of which the liability of the insurer depends, regardless of whether or not they relate to a significant aspect of the contract. Interestingly, Australia adopted these and other reforms, being witnessed in the UK now, as far back as 1984 when it passed its Insurance Contracts Act.
Following the passing of the Consumer Insurance (Disclosure and Representations) Act, attention shifted to reforming insurance law in non-consumer insurance contracts. Earlier this year, the UK government introduced the Insurance Bill for consideration by Parliament. The bill, which is expected to become law sometime in 2015, seeks to introduce some fundamental changes to British insurance law for non-consumer clients so that it is in line with changes introduced in consumer insurance contracts.
Proposed changes will cover areas such the duty of disclosure, warranties and third parties’ rights against insurance companies, among others. Currently British insurance law for non-consumer policyholders requires the insured to disclose, to the insurer, every material circumstance that it knows (actual knowledge) or ought to know (constructive knowledge) in the normal course of business. The Insurance Bill proposes to replace this standard with a duty to make, to the insurer, a fair presentation of the risk.
Whether there is a material difference between the two standards is not yet clear, but a risk will be considered to be fairly presented if the insured discloses every material circumstance that it knows, or ought to know, to enable the insurer to make an accurate assessment of the risk and determine the price to charge, or to ask further questions. As to what the phrase “fair presentation of risk” actually means is a debatable question.
One can generally say, however, that fair presentation of risk means providing the insurer with sufficient information to enable it to make an informed decision on whether or not to insure, as well as on what price and terms. If the insured has fairly presented the risk to the insurer, it becomes the duty of the insurance company to ask further questions on areas that it requires additional information.
The insurance law reforms have a clear consumer protection dimension to them and will require insurance companies in England, Wales, Scotland and Northern Ireland to change their documentation, practices and procedures, to ensure that these are in line with the new legal regime. Naturally, this will come at some considerable cost to the British insurance industry. Adapting to a new legal environment always involves substantial compliance costs.
What, if any, are the implications of the British insurance law reforms for South Africa? At face value, one will be forgiven for failing to see any implications of these reforms for South Africa. After all, the reforms are legislative in nature and are, therefore, not binding in another country.
A closer look, at how insurance law and regulation has developed in South Africa over the years, however, makes it rather difficult to be simplistic in the assessment of possible implications of the British reforms for South Africa.
For instance, the British government recently overhauled its insurance regulatory framework by splitting the insurance regulatory functions of solvency monitoring (also known as prudential regulation) and market conduct of insurers.
These functions are now going to be performed by different institutions with solvency monitoring of insurers becoming the responsibility of the Bank of England and the market conduct monitoring function remaining with the Financial Services Authority.
How well equipped the Bank of England is to regulate the solvency of insurance companies, is a contested question. Of particular importance to the present discussion, however, is the fact that South Africa is considering adopting exactly the same insurance regulatory framework as that adopted by the UK.
If they are adopted, the reforms will see solvency regulation of insurance companies being taken away from the Financial Services Board (FSB) and moved to the South African Reserve Bank. The FSB will be left to focus on market conduct monitoring of insurance companies.
The problem with market conduct regulation of insurance companies, unlike solvency regulation, is that it is not clear what exactly it entails. One can argue, however, that the legal reforms, like those seen in the UK in recent years, are necessary, because they reinforce good market conduct by insurance companies. It is on this basis that it is quite feasible that similar legislative interventions could be adopted in South Africa as well.
If the current proposals to reform the regulatory institutional framework are implemented, there will be a fully fledged institution (the FSB), which would have the sole responsibility of monitoring how insurance companies conduct their business.
We should, therefore, expect increased legal reforms in the area of insurance law as regulators try to give effect and meaning to the term “market conduct”. Furthermore, if the regulatory framework follows the British model, one cannot discount the possibility that the legal framework will follow the same route.
Legally Speaking is a regular column by Albert Mushai from the school of Economics and Business Sciences, University of the Witwatersrand. Mushai holds a master’s degree from the City University, London, and was the head of the insurance department at the National University of Science and Technology in Zimbabwe before joining Wits University as a lecturer in insurance.