Familiar insurance terms on life support
South Africa’s long and short-term insurers face numerous challenges as the country’s financial services legislation evolves. The Insurance Laws Amendments Act of 2008 paved the way for the Financial Services Board (FSB) Binder Regulations – in effect fro
Aside from the insurance-specific regulatory interventions already mentioned, local insures will have to adapt business practices for a raft of consumer friendly legislation. The most significant of these is the Consumer Protection Act (CPA), signed into law on 24 April 2009. Both the Long Term and Short Term Insurance Acts have to be brought in line with the CPA by October this year. Any discrepancy between the insurance legislation and the CPA will result in Courts applying whichever provision is most favourable to the consumer. The FSB Treating Customers Fairly (TCF) initiative will also force a number of changes to product design, distribution, and complaints and claims handling procedures. A mutual requirement of the CPA and TCF is that plain and simple language is used… One of the immediate consequences is that the Law of Contracts is more vulnerable than ever before.
The CPA and insurance brokers
The bulk of South Africa’s short-term insurance business is conducted via the broker distribution channel. Setting aside the legal concerns introduced by the CPA we can shift our focus to what the legislation means for insurance brokers. “Insurance brokers are affected by the CPA, but the extent to which the legislation impacts their business depends on the functions they perform,” writes Amelia Costa, Director at Norton Rose South Africa. The first observation in this regard is that services that constitute advice or an intermediary service already subject to the Financial Advisory and Intermediary Services (FAIS) Act are exempt. “A broker’s advice or intermediary services rendered usually fall under the FAIS definitions and the CPA does not apply,” she said. But there are areas where broker services would fall under the Act. “A broker may, for instance, provide risk management services that do not amount to financial services under the FAIS Act – in which case the CPA would apply,” said Costa.
As already mentioned the CPA affords a limited exemption on services already regulated by the Long Term or Short Term Insurance Acts. Until October 2012, the relationship between insurer and insured and services regulated by the Insurance Acts will therefore not be governed by the CPA! But the CPA requires that the existing insurance legislation be brought in line with its consumer protections... Unfortunately there is not enough time to redraft the existing insurance legislation by the proposed deadline. Costa explains what is most likely to happen from October this year: “If either of the Insurance Acts is found not to be in line with the consumer protection measures introduced by the CPA, then the provisions of the CPA will apply!”
Caught between two Acts
Insurance brokers will have to tread carefully to avoid running foul of the law. “Just because your primary services are regulated by FAIS and not the CPA, and although the Insurance Acts are (for the time being) exempt, it does not mean that you escape all of the CPA obligations,” warned Costa. Fee-based advice on risk management, risk exposure and other non-FAIS services would have to comply with general provisions in the CPA. To further complicate matters you must have a sound knowledge of the CPA – as it applies to your client’s business – to properly advise on risk management, risk exposure and appropriate cover for these risks.
Costa provided the following check list for insurance brokers to consider. An insurance broker must:
* Understand the policyholder’s business (services and/or products) to ascertain to what extent the CPA may apply.
* Explain to and guide the policyholder that they may face an increased exposure to risk as a result of the CPA.
* Provide cover advice to the policyholder and establish whether they have adequate and suitable cover for their CPA related risks.
Insurance brokers should also be aware of the following specific requirements of the CPA, again provided by Costa:
* Documents, notices and representations such as disclaimers provided or displayed to a consumer must be in plain language.
* Contractual terms must be fair, just and reasonable. Terms and conditions must not be excessively one-sided in favour of the supplier, and may not be inequitable.
* Any risk limitation clauses must be in writing, in plain language, conspicuous and drawn to a consumer’s attention.
* If a policyholder produces, imports, retails or distributes goods, it may face liability for damage caused by goods that are unsafe, or which failed, or which are accompanied by inadequate instructions.
A thorough knowledge of the CPA creates opportunities for astute insurance brokers. And a good understanding of the Act is essential to provide comprehensive and reliable advice. “Brokers need to consider obtaining not only adequate public liability cover, but also product liability cover for policyholders,” said Costa. “A broker should also suggest to their clients to consider agreements with their suppliers, which provide an indemnity in favour of the client, depending on the relative negotiating strengths of the parties.” Another possible “sale” is the extension of an existing policy to incorporate the cost of a product recall.
“Although brokers are FAIS regulated, they have an important role to play in the CPA arena,” she concluded. “On the one hand they must reassess clients’ needs and exposures, taking the CPA’s provisions into account. On the other hand they need to compare insurers’ cover packages, to ensure that clients’ needs and exposures are best protected.”
Editor’s thoughts: Insurance brokers need to familiarise themselves with the indirect consequences of the Consumer Protection Act (CPA). Although your brokerage is not directly affected by most of its provisions, the CPA introduces many new insurable risks to your client. Are you familiar enough with the CPA to provide proper advice to new and existing commercial policyholders? And have the insurers done enough to inform you of CPA “selling” opportunities? Add your comment below, or send it to [email protected]
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