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Can loyalty schemes fall foul of insurance legislation

23 March 2010 Christine Rodrigues, Associate, Deneys Reitz
Christine Rodrigues, Associate, Deneys Reitz

Christine Rodrigues, Associate, Deneys Reitz

In the ever competitive insurance industry insurers have realised that in order to maintain and attract new policyholders or members, they need to offer a package of benefits that no other competitor offers, to make their policy more attractive.

These “benefits” do not necessarily form part of the policy but are benefits that reward loyalty and are usually commercial in value such as specified retailer discounts.

In many instances the member or policyholder receives the discount directly. This is usually considered an inducement. However, what happens if an administrator of a scheme is paid the discount, deducts an administration fee and applies the balance to obtain additional benefits for the member? Does this contravene insurance legislation, in particular, the anti-inducement section45 of the Long-term Insurance Act, 1998 (the “LTIA”) and section44 of the Short-term Insurance Act, 1998 (“STIA”)?

Section 45 of the LTIA states that “no person shall provide, or offer to provide, directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel a long-term policy, other than a reinsurance policy”. The wording of the STIA is similar.

Thus, in certain instances the Registrar of Long-term Insurance may regard these “benefits” as an inducement to enter into or continue a policy, if the source of the benefits is extraneous to the policy.

The court in Momentum Group Ltd v Registrar, Long-term Insurance 2009 (5) SA 336 (T) was approached by Momentum to declare that the benefits offered by a particular unlawful scheme. Although the benefits induced existing and prospective policyholders to take out a policy or maintain that existing policy, they indirectly also enhanced the policy benefits and promoted savings because the member of the scheme made indirect investments to their policy. It was contended that the benefits were linked to the policy and thus did not contravene section 45 of the LTIA.

The court found that section 45 of the LTIA is very wide and that the legislature intends to cast the net as wide as possible. It found that although Momentum’s scheme was efficiently and effectively managed and policyholders were provided with good benefits and returns, the fact that the major portion of the discount was paid into the assets forming part of the foundations of the policy, did not make the benefits part of the policy. The benefits were extraneous as they were not part of the actual policy and this was an inducement in terms of the LTIA and STIA even though the benefits were paid back into the foundations of the policy.

So do all loyalty schemes and added benefits contravene the Insurance Act? Not necessarily. Insurers need to investigate if benefits payable form part of the foundation of a policy or are extraneous to the policy. If the benefits upon evaluation are considered part of the policy, they do not fall foul of section45 of the LTIA and section44 of the STIA. If they are extraneous they will fall within the prohibition and will be considered an unlawful inducement.

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