Brokers, insurers powerless to solve contract uncertainty

Uncertainty over the treatment of exclusions across South Africa’s non-life underwriting sector is a major concern for the country’s commercial insurance brokers. The issue has caused so much consternation that it featured strongly in the latest Stokes Media Broker Perception Survey, published as part of the fourth edition of Everything you need to know about non-life insurance in South Africa. 

Seeking an agreed exclusion wording

Commenting for the survey, one of the country’s largest brokers said that “most insurers have exactly the same wording from their reinsurers; it would have been beneficial to the market if insurers had been allowed to sit down and agree an exclusion wording, specifically around grid failures, to allow for a consistent understanding of it.” Readers should remember that the sums insured on commercial short-term insurance contracts are often shared by multiple underwriters; a consistent approach to terms and conditions is therefore beneficial, if not essential. 

The issue is so topical that it featured on the top of the one-day-long programme at the recent Financial Intermediaries Association of Southern Africa (FIA) 2024 Advice Sumit. Makgompi Raphasha, Department Head: Insurance Supervision at the Financial Sector Conduct Authority (FSCA) took to the stage to unpack the challenges under the heading ‘cover subjectivities’. The presenter introduced his topic as an exploration of uncertainty in the non-life insurance sector alongside some reflections on the legal constraints on collaboration. 

“One of the issues that we have identified as the FSCA, in close collaboration with relevant industry bodies such as the FIA, is the issue of contract uncertainty,” Raphasha said. He explained that more and more insurers and reinsurers were distancing themselves from certain risks, most notably by excluding or restricting coverage for loss or damage due to grid failure or natural catastrophe related perils. He added that the FSCA has already communicated its concerns about the way insurers introduce these exclusions and the resulting uncertainty. 

Experts ‘up in arms’ over policy terms

The issue is on naked display during interactions between brokers and insurers’ underwriting departments. “If the underwriting department at an insurer and the brokers advising on cover are not sure about the meaning of a particular policy wording, then you can only imagine where that leaves the customer,” Raphasha said. He noted that the FSCA was keen to take a more proactive approach on potential problem areas to avoid the back-and-forth between industry and the regulator that occurred in the aftermath of the COVID-19 pandemic. The question is: Can the industry come up with common wording, and do so legally? 

It turns out the major obstacle to ensuring fair treatment of corporate insureds is a piece of legislation aimed at ensuring exactly that outcome, namely the Competition Act, 1998. The legislation established a Competition Commission; Competition Tribunal; and Competition Appeal Court to oversee and enforce the Act in the public interest. Raphasha echoed the South African Insurance Association (SAIA) view that a collaborative style solution to policy wording uncertainty could well trip up over the competition legislation. This should not preclude further action. “There should be a solution where you remove the subjectivities that insurers are perpetuating,” he said. 

To resolve the impasse, the FSCA has sought legal opinion and engaged extensively with industry stakeholders. It has also scrutinised the policy wordings of 14 licenced insurers. This investigation revealed some of the main issues surrounding contract uncertainty including the risk of underwriting at claim stage; an inconsistency of approach by insurers; and the potential for mis-selling by intermediaries. “Insurers having different exclusions and terminology makes it difficult for policy holders [and brokers] to make comparisons,” Raphasha said. 

Solving for contract uncertainty

The FSCA reckons that solving for contract uncertainty would address all three of the aforementioned ills, and more. “The back and forth between brokers and insurers trying to get clarity on a policy wording impacts customers in the long run,” the presenter said, before restating the challenge. The regulator is trying to mitigate policy holder risks relating to contract uncertainty in a collaborative, efficient, responsible and sustainable manner. It is hoped the eventual solution will apply to other emerging risks, not just the grid failure matter. 

Alas, the Competition Act looms. Per the FSCA’s legal counsel, section four of the Act prohibits any practices by firms on a horizontal level, meaning that insurers cannot talk to one another about policy wordings. The only area where firms can collaborate is where an anti-competitive effect outweighs any pro-competitive gain, subject to the Act’s ‘rule of test’. Discussions amongst insurers about the scope of cover will certainly raise competition concerns; but the FSCA believes there could be room to discuss policy wordings towards finding a local equivalent to the London Market Agreement. 

The legal opinion obtained by the FSCA offered four possible solutions, summarised from the presentation as follows. The first solution sits in the regulatory space, involving high level principles drawn up by the FSCA and applied to the industry. A second possible approach would be for the regulator to seek independent views from the industry participants in much the same way as when drafting new legislation. “We do not believe that this approach will work for the contract subjectivity problem,” Raphasha said. “We want to avoid solutions where we become prescriptive.” 

Discussions to beget further discussions

A third solution would involve the FSCA approaching the Competition Commission with a view to obtaining an industry exemption under section 10 of the Act. The presenter noted that such exemption would require extensive inter-departmental discussions spanning the ministries of Finance and Trade and Industry. And that introduces solution four, being for the industry to work together. Under this approach, the FSCA would engage the Competition Commission to convince it that discussions around contract uncertainty would not involve any practices prohibited by the legislation. 

“We need to speak to the Competition Commission and convince them that there is a problem of contract uncertainty that can only be addressed by the industry players coming together and finding a solution, and that this interaction will not involve any prohibited practises under the competition legislation,” Raphasha said. “That is the approach we believe will work best.” Such approach will result in a common wording determined by industry participants, giving brokers peace-of-mind when advising insureds. 

The presentation concluded with three further issues that would have to be decided to finalise a common wording, namely whether the wording should apply to both coinsurance and individual policies; the agreed definitions of excluded perils such as grid failure; and interpreting contract certainty. As for the next steps, the FSCA has already written to the Competition Commission to secure a meeting, set down for November 2024. You will have to watch this space for further developments. 

Writer’s thoughts:

Contract uncertainty is a persistent issue for brokers navigating complex non-life insurance exclusions. Is it time for insurers to unify policy wording, or should brokers manage this complexity on a case-by-case basis? What is your take? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].

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