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Large non-life insurers offer interim relief payments to struggling SME policyholders

29 July 2020 Gareth Stokes

South Africa’s largest non-life insurer, Santam, announced over the weekend that it would make COVID-19 relief payments to a subset of its policyholders. These payments will offer limited interim financial support to struggling small and medium enterprises (SMEs) that have specific commercial covers with the insured, until such time as the country’s courts rule on the performance of contingent business interruption (CBI) extensions and other policy wordings that might be triggered by pandemic or lockdown. Santam has indicated that these once-off payments will not constitute an indemnity under an insurance contract.

Surviving until legal certainty emerges

The insurer’s announcement followed a 24 July 2020 message from the Financial Sector Conduct Authority (FSCA) which opened: “The FSCA and the Prudential Authority (PA) have reached an understanding with non-life insurers that are most affected by business interruption (BI) cover claims that they will consider interim relief to their policyholders who have the appropriate contagious disease extension, while legal certainty on this matter is being sought from the courts”. Santam said that it had engaged independently with the regulators to propose its relief payment initiative. 

“We sought support [on our proposal] from both the Prudential Authority, from a solvency perspective, and the FSCA, to promote fair outcomes for our clients,” said Lizé Lambrechts, CEO at Santam Group, in a Microsoft Teams interview with FAnews. The authorities have not instructed insurers to make payments to policyholders, as suggested in certain mainstream media reports. “We have had many discussions with the regulator [with the most important outcome to date being] that stakeholders are in agreement on the need for establishing legal certainty as quickly as possible,” observed Lambrechts, before commenting that the different approaches taken by insurers in providing interim relief confirmed that there was no instruction from the regulator in this regard. 

A targeted relief initiative

In a media release issued 26 July, Lambrechts is quoted: “After careful consideration of the situation, especially the unforeseen length of the lockdown and the ongoing restrictions that are impacting businesses, we decided to assist with a substantial payment commitment to help sustain our policyholders in the most impacted industries”. Santam made it clear that the relief payment was a once-off that would not affect its efforts to obtain legal clarity on policy interpretation through the courts.  “We hold a firm view that our CBI policy wording is very specific and only covers businesses for interruptions as a result of the outbreak of a disease at a local level, or within a specified radius,” said Lambrechts. 

Santam has pledged R1 billion in funding to provide relief to its insureds in the hospitality, leisure, and non-essential retail services industries. The relief, which will be targeted at vulnerable commercial policyholders in the SME business segment, is conditional on the policyholder operating within an industry identified for relief; there being a Santam Commercial or Santam Hospitality & Leisure policy with a CBI extension in-force prior to 18 March 2020; and the insured having registered a claim. Other conditions include that the policy is still in place and that the business was unable to trade during level 5 and level 4 of the nationwide lockdown. “This R1 billion is offered purely as relief funding; we are not paying a claim and our insurance position remains unchanged,” said Lambrechts. 

Hollard also announced that it was offering interim relief to some of its policyholders, subject to conditions. In a communication to intermediaries it announced it would “provide financial relief to qualifying SMEs with contagious disease extensions to their BI covers”. The insurer did not provide an estimate of its financial commitment under this arrangement; but said that around 1 000 businesses in various industries were affected. Willie Lategan, CEO at  Hollard Insure, acknowledged the complexity of BI cover. He said that the insurer had recognised its responsibility to pay “all valid claims” while maintaining a sustainable, stable, and financially sound business. 

Massive pandemic-linked losses

An indication of the quantum of losses suffered due to pandemic and lockdown came courtesy Santam, which indicated that the R1 billion relief budget amounted to approximately 70% of its total sum insured, for just two months of exposure, and further limited to the short-listed industries. They will set relief payments at a minimum of R25 000 and a maximum of R1,5 million for individual CBI policyholders. “We had unanimous support from the Board who view this relief funding as a contribution to our clients and to the broader South African economy,” said Lambrechts. “The money spent will impact on Santam’s bottom line in the current financial year”. 

What about those insureds who had been advised by intermediaries not to put in a claim? “We have been working with our intermediaries over the last two weeks to encourage them to send us notifications of their clients’ potential claims,” said Lambrechts. This was necessary due to looming prescription periods and the absence of legal certainty insofar claims settlements. FAnews also wondered about the fairness of extending additional benefits to a small subset of policyholders. “We would hope that our policyholders and the broader South African public would have empathy for those businesses that have been severely impacted and would therefore support us in taking a human approach on this,” said Lambrechts. 

Insurers not budging on legal position

Santam remains of the view that the nationwide lockdown is not an insurable risk. And Hollard takes a similar position. “We are cognisant of the fact that this legal process is likely to take some time and are concerned that many smaller businesses will be unable to survive until legal certainty is established,” said Lategan. “We are thus making these payments now, irrespective of the outcome of the legal process”. The insurer will continue to engage with the regulators in dealing with the unprecedented situation and is confident that the process will strike a balance between providing policyholders with financial relief and establishing certainty through an urgent legal process. 

Santam has indicated that it will not attempt to recover any amounts paid under the relief payment scheme, even if the courts determine that lockdown is not an insured peril. If courts rule against Santam and determine that the lockdown is an insured peril, any relief payments will be treated as advance payments against the finally determined claim against Santam under its CBI extension. Our parting question to Santam was whether the blurring of the lines between a business’ corporate social responsibility and the principles of insurance would lead to confusion among policyholders and pro-consumer lobbyists. 

“All economic entities are dealing with this type of ambiguity at present,” concluded Lambrechts. “If every company contributes what they can, to help the people of South Africa, then we will be collectively better off; we have been clear that this relief payment constitutes a CSI initiative and not a claim pay-out”. Legal certainty around insurer liability for BI and CBI due to pandemic and lockdown will thus only emerge from the court processes currently underway. 

Writer’s thoughts:
Anyone who thought an insurance response to complex BI and CBI covers would somehow become easier under a pandemic and lockdown scenario, please stand up. My question is directed at those of you who remained seated. What are your thoughts about the latest initiative by insurers to make ‘no strings attached’ relief payments to their worst-affected qualifying policyholders? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Gareth, 29 Jul 2020
Thank you for your contribution Humphrey. You make some valid points, one being the observation that tourism businesses may have been severely impacted by other governments’ decisions.

It is also worth noting that the calculation of the pay-out following a BI or CBI event is far from simple. It is unlikely that a pay-out, determined in line with the policy wordings or insurance contract, will match the claim amounts that aggrieved parties are bringing to court.
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Added by Humphrey, 29 Jul 2020
Not detracting from the severe hardship being experienced by the tourism industry, it would be interesting to have a view of what investors (shareholders) in insurers think to a R 1 billion deduction off the bottom line (and any resulting dividend reduction) especially if the courts rule in the favour of insurers.

Settling a BI claim can be complex and if a ruling against insurers is made by the courts, claims settlements would have to take into account factors such as overseas tourists that were simply prevented from leaving their own countries due to their own lockdowns and lack of international flights as opposed to our own lockdown (bearing in mind the 50km radius issue). Certain policyholders (tourism clients) that focus on overseas tourism may see their claims settlements being smaller than envisaged due to this - with this in mind one wonders if the relief package would take this into account.


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