Insurance policy writers have to keep it simple from now on
South African insurers have a hard time keeping up with new laws, rules and regulations. It is estimated there were 454 new Acts, bills, regulations, codes, circulars, directives and standards which impacted the sector in 2010 alone. Legislative changes that the insurance industry must address include the Consumer Protection Act (CPA) 2008 and the pending Treating Customers Fairly (TCF) regulation. The CPA was singed into law on 24 April 2009 and came into effect from October last year. Fortunately parliament granted the insurance industry an 18 month reprieve during which time the Long and Short-Term Insurance Acts had to be brought in line with the CPA. What is the industry doing to meet the deadline?
One initiative is that the Financial Services Board TCF Steering Committee is hard at work to pinpoint any mismatches between the consumer protections afforded to consumers under CPA and existing insurance legislation. Their aim is to complete a holistic coordinated legislative framework across all financial sector categories by 2013 and drive the TCF implementation by January 2014. At a company level each insurer should have made sweeping changes to their policy wordings and other consumer documents by now. What should insurers do to stay on the right side of the regulators and industry ombudsmen? Advocate Karen van Zyl, Legal Counsel at RGA South Africa provided some of the answers at the group’s final technical seminar for 2011, held in Johannesburg recently.
Pay close attention to policy wordings
One of the requirements of the CPA is that contracts with consumers are presented in plain and understandable language. “There is significant emphasis on plain language in the Act,” said Van Zyl. The CPA applies the following test: An ordinary consumer within the class of persons for whom the good or service is intended, with average literacy skills and minimal experience relating to the good or service in question, must be able to understand the content, significance and importance of the wording! “This test is significantly more onerous than the current plain language test which is set out in the Financial Advisory and Intermediary Services (FAIS) Act and Code,” she said.
Broad definitions such as the one provide for simple language present a number of difficulties. Insurers now have to decide what constitutes an ordinary consumer and determine an appropriate average literacy level for the group most likely to purchase their products. However, insurers cannot simply assume that a consumer of a sophisticated product would be well educated and make use of an adviser. The Financial Services Authority (FSA) in the UK is on record that product needs to be readily understandable regardless of the distribution channel: “In our view all consumers are entitled to succinct and readily understandable documents whether they are using an adviser or not.”
The international organisation UNESCO defines functional literacy as the reading and writing skills of a nine year old. It is accepted that literacy levels vary widely from country to country. It stands to reason therefore, that simple language requirements in the UK might be positioned at a higher level than in South Africa. Van Zyl observes that UK policy wording is addressed at 13 to 15 years olds… In South Africa, it is accepted that matriculation candidates can at least read and write at a nine year old level.
The basics of simple language
The FSA offers a number of suggestions that financial services companies can use to simplify their contract and policy wording. They recommend that Latin, jargon and lengthy definitions be removed entirely. Documents should be presented in a logical structure with clear headings. Wherever possible, simple question and answer formats and illustrations should be used. As far as style is concerned, Van Zyl said insurers would have to switch from passive to active voice. Instead of saying: “benefits under this policy shall not be payable should a claim for such benefits arise as a result of …” the insurer might simply use: “We do not pay for losses that result from…”
Policies must remain relevant and strip out excess and unnecessary information. It is critical that insurers use everyday language, short active sentences and legible design. “Marketing and legal departments will need to work closely together to ensure that policy wordings comply with the legislation… Policy documents in simple language will hopefully reduced call centre queries and operational costs to the underlying insurer too,” said Van Zyl.
Eliminating Unfair, Unjust or Unreasonable Terms
The CPA requirement to eliminate unfair, unjust or unreasonable terms is at the heart of the TCF program too. Turning to the UK: “The FSA views unfair contract terms as strong, very visible indicator of failure by firm to treat its customers fairly!” Van Zyl explained that existing contract law established the principles to ensure the integrity of commerce and markets, and that all serious or genuine contracts must be honoured! A serious contract is one where there is a meeting of minds or intention – parties intend on entering into an agreement – which is usually entered into in writing… “There has been an eroding of the sanctity of contract in South Africa,” she said.
Prior to the CPA contracts could be challenged in terms of protections introduced through the Companies Act 2008 Business Rescue Provisions. The CPA changes this dynamic again, and allows for unfair provisions to be set aside and the contract voided. What makes a contract unfair, unjust or unreasonable? The basic test is whether the arrangement is excessively one-side, whether any of the contract terms are inequitable, and if the contract relies on misleading information or false representation to the party’s detriment. The limitation of risk or liability is also considered unfair in the changes can be made without informing the consumer.
Insurers will have to consider the following contract flaws in future. The unilateral variation of terms, obliging consumer to perform but not the supplier, excluding or hindering consumer rights to take legal action, side-stepping an obligation to pay consequential loss and deeming declarations. Exclusion clauses will also come under the spotlight. Insurers will have to make sure their exclusions are fair, clearly pointed out (in terms of limitation of liability clauses) and easy to understand. “Policy wording is your priority, so you should make sure you have adequately skilled writers to sign off on your wording,” concluded Van Zyl. “You need to look at all your systems, controls and processes to ensure you are ready for the CPA by April 2012 and for TCF two years later.”
Editor’s thoughts: Financial services professionals spend a fair amount of time poring over contracts and policy documents. Do you think local insurers have made progress toward simple language and fair policy wordings in recent years? Please add your comment below, or send it to gareth@fanews.co.za
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