A non-life insurer can insure its first-party risks

Patrick Bracher, Norton Rose Fulbright

A March 2023 decision of the Financial Services Tribunal found that there is no implied prohibition in the Insurance Act on ‘traditional’ insurers (not cell) underwriting risks for both its own first party risks and third party risks.

Abacus Insurance Limited (“Abacus”), a traditional insurer, holds a non-life insurance licence, permitting it to underwrite third party risks. The Pepkor Group no longer held an insurance licence. As a result, Pepkor Holdings wanted Abacus to underwrite the Pepkor Policy. Abacus applied to the Prudential Authority to vary the Abacus Insurance licence to add further classes and sub-classes to the licence conditions for third party policyholder benefits.

The Prudential Authority declined the application, on the grounds that the Insurance Act implicitly prohibits ‘traditional’ insurers (not captive or cell captive insurers) from underwriting both first-party and third-party risks. The Authority also argued that a traditional insurer should not be permitted to conduct both first-party and third-party business under the same licence because of potential conflicts of interest.

The tribunal disagreed with the Prudential Authority’s interpretation of the Insurance Act. It noted that there is no provision in the Act that expressly prohibits a traditional insurer from underwriting first-party risks. The tribunal stated, “In our view, it is relevant that the legislature has not expressly prohibited ‘traditional’ insurers from underwriting first party risks, nor from underwriting first-party and third-party risks under the same licence.”

The tribunal also disagreed with the Authority’s reliance on the definition of “first party risks” in section 1 of the Insurance Act to contend for an implied prohibition. The tribunal stated, “The definition section makes plain that the words would only bear the meaning ascribed to it by the legislature if the context so requires… The Authority elevates the definition of “first party risks” to a substantive statutory provision. The definition imposes neither obligations nor does it confer rights.” The interpretation advanced by the Authority would result in unbusinesslike results. For example, if only cell captive insurers could insure third party risks, traditional insurers would not be allowed to insure either first- or third-party risks, because they fall under neither definition.

Finally, the tribunal noted that the Authority has powers under the Insurance Act to mitigate any perceived risks in respect of a traditional insurer underwriting first-party and third-party risks. The tribunal stated, “Should the Authority have concerns in respect of the Licence Variation Application, it may impose suitable conditions.”

First published by: Financial Institutions Legal Snapshot