Insurance & Reinsurance 2021

Last Updated January 19, 2021

South Africa

Law and Practice


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The source of insurance and reinsurance law in South Africa is fundamentally rooted in the Roman-Dutch and English law origins that make up the construct of the South African common law. Core insurance law concepts such as "risk", "indemnity" and "premium" are rooted in the common law and have been judicially considered and interpreted by South African courts, taking into account the statutory provisions, where applicable. Many of the common law principles have since been codified and are regulated in terms of statutes in accordance with the legislative framework set out in this chapter.

The South African insurance and reinsurance industry is highly regulated from a prudential and market conduct perspective through primary and subordinate legislation.

The Prudential Authority and the Financial Sector Conduct Authority

An important starting point when considering the regulation of insurance in South Africa is the "Twin Peaks" model of regulation that was adopted during 2018 through the promulgation of the Financial Sector Regulation Act 9 of 2017 (the "FSR Act"). The Twin Peaks model provided a shift from the previous fragmented regulatory approach followed in South Africa through different regulatory bodies for different financial institutions, to a more collaborative model of regulation of financial institutions through two centralised authorities, which differentiates between prudential regulation and market conduct regulation. The two authorities established in terms of the FSR Act, and therefore the "Twin Peaks", are the Prudential Authority and the Financial Sector Conduct Authority (FSCA).

The FSR Act allocates a defined set of subject matters to the Prudential Authority and the FSCA, respectively, in that the Prudential Authority will regulate matters that affect the prudential regulation of financial institutions and the FSCA will regulate market conduct considerations of financial institutions.

The activities of insurers and reinsurers are furthermore regulated by various financial sector laws.

The following pieces of primary legislation form the basis of the insurance and reinsurance regulatory framework.

  • The Long-term Insurance Act 52 of 1998 (the "LTI Act"), which deals mainly with market conduct considerations applicable to long-term insurance companies (now called life insurance companies).
  • The Short-term Insurance Act 53 of 1998 (the "STI Act"), which deals mainly with market conduct considerations applicable to short-term insurance companies (now called non-life insurance companies).
  • The Financial Intelligence Centre Act 38 of 2001 (FICA), which deals with the combating of money laundering activities and the financing of terrorist and related activities in South Africa by accountable institutions, such as insurers.
  • The Insurance Act 18 of 2017 (the "Insurance Act"), which deals with prudential regulation and the governance of insurance companies and insurance groups.
  • The Financial Advisory and Intermediary Services Act 37 of 2002 (the "FAIS Act"), which aims to regulate the furnishing of advice and rendering of intermediary services in respect of financial products to clients. Insurance policies constitute such financial products whereby the furnishing of advice and/or rendering of intermediary services in respect of insurance policies are regulated in terms of the FAIS Act.
  • The FSR Act, which provides the regulatory framework applicable to all financial institutions, including insurers and reinsurers, and which provides for the regulation of financial conglomerates.
  • The Conduct of Financial Institutions Bill, 2018 (the "COFI Bill"), which will regulate the market conduct considerations of all financial institutions in a centralised manner once the COFI Bill is promulgated. It is intended that all primary and subordinate legislation that deals with market conduct regulation – such as the LTI Act, STI Act and FAIS Act – will be repealed in their entirety and be replaced by the COFI Bill. The intended date of promulgation of the COFI Bill had not been determined at the time of publication, although the second draft of the COFI Bill was published for comment during 2020. It is anticipated that the final COFI Bill will be published in 2021.

Subordinate Legislation Concerning Insurance and Reinsurance Law in South Africa

In addition to the primary legislation, companies that conduct insurance and reinsurance business must also comply with the regulatory instruments and subordinate legislation promulgated in terms of the aforementioned pieces of legislation, which includes the regulations issued in terms of the LTI Act and the STI Act, the Policyholder Protection Rules promulgated in terms of the LTI Act and the STI Act, the Financial Soundness Standards and the Governance and Operational Standards promulgated in terms of the Insurance Act, and the various codes of conduct and fit and proper requirements promulgated in terms of the FAIS Act.

The subordinate legislation codifies, to some extent, the principles of Treating Customers Fairly (TCF) as it is applied in South Africa. TCF is an outcomes-based regulatory and supervisory approach designed to ensure that regulated financial institutions deliver specific, clearly set-out fairness outcomes for financial customers.

Governance Framework

One of the goals described in the FSR Act is to align the governance framework applicable to financial institutions in South Africa to international standards. In this regard, the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) are considered and, where applicable, applied in South Africa.

All insurers and reinsurers must comply with the general statutory provisions applicable to companies in South Africa. In this regard, an important piece of legislation is the Protection of Personal Information Act 4 of 2013 (POPI), which finally came into force on 1 July 2020 (with a 12-month grace period for compliance) and regulates the way personal information may be processed.

In relation to precedent, South Africa follows the doctrine of "stare decisis", which means a system of judicial precedent. The same principle, however, does not apply to decisions of the Financial Services Tribunals and other regulatory bodies such as an ombudsman for insurance.

The FSR Act creates an empowering framework that allows for the regulation and supervision of financial conglomerates in South Africa and systemically important institutions.

The Insurance Act also allows for the designation, regulation and supervision of insurance groups. The designation of an insurance group may include an insurer, any juristic person that is part of the group of companies of which the insurer is a part, and any associate or related or inter-related person of any juristic person that is part of the group of companies. As part of the designation of an insurance group, the Prudential Authority will also designate a company or person as the controlling company of the insurance group. The controlling company must be similarly licensed and is also regulated by the authorities in accordance with the above legislation. Significant owners of insurance companies and/or insurance groups are also stringently regulated in South Africa.

Insurance regulation in South Africa is therefore determined and applied on three levels of supervision:

  • Level 1 – supervision of a licensed insurer on a standalone basis, known as solo supervision;
  • Level 2 – specialist supervision, where a group of companies operates primarily in one industry (eg, insurance groups); and
  • Level 3 – supervision of a financial conglomerate where a group of companies operates in one or more different industries, such as the banking and insurance sectors.

The Prudential Authority and the FSCA regulate insurance and reinsurance companies and activities.

The Prudential Authority was established with effect from 1 April 2018 and operates as a juristic person within the administration of the South African Reserve Bank (SARB) in terms of the FSR Act and is responsible to:

  • promote and enhance the safety and soundness of financial institutions;
  • promote and enhance the safety and soundness of market infrastructures;
  • protect financial customers against the risk that those financial institutions may fail to meet their obligations; and
  • assist in maintaining financial stability.

The FSCA was established with effect from 1 April 2018 and is the market conduct regulator of financial institutions that provide financial products and financial services, financial institutions that are licensed in terms of a financial sector law (including banks, insurers, retirement funds and administrators), and market infrastructures, and is responsible for enhancing and supporting the efficiency and integrity of financial markets, protecting financial customers and assisting in maintaining financial stability.

In terms of the FSR Act, the Prudential Authority, the FSCA and the SARB are empowered to issue regulatory instruments, such as directives, guidance notes, interpretation rulings and standards that deal with particular prudential or market conduct regulatory matters.

The powers of the Prudential Authority and the FSCA include:

  • requesting information or documents in writing from a supervised entity on an ad hoc basis, should there be suspicion of a contravention of a financial sector law;
  • requesting supervisory on-site inspections for the purposes of checking compliance with a financial sector law;
  • conducting an investigation if there is a suspicion that a financial sector law has been contravened;
  • issuing written directives to financial institutions or key persons compelling them to take specific action;
  • the ability to levy administrative penalties; and
  • entering enforceable undertakings with financial institutions that are committing contractually to rectify a contravention of a financial sector law.

The FSR Act also establishes the Financial Services Tribunal, which is an independent, impartial tribunal of record that is empowered to reconsider decisions of a decision-maker, such as the Prudential Authority, the FSCA or any other ombud.

The FSR Act further establishes an Ombud Council, the objective of which is to assist in ensuring that financial customers have access to affordable, effective, independent and fair ADR processes for complaints about financial institutions in relation to financial products, financial services and services provided by market infrastructures. The Ombud Council is a statutory body with a clear mandate and capability to harmonise and improve the ombud system, and with strong oversight powers over statutory and voluntary ombuds.

In order to conduct insurance business in South Africa, the entity must be:

  • in relation to a micro-insurer, a profit company or a non-profit company registered under the Companies Act 71 of 2008 (the "Companies Act"), or a co-operative registered under the Co-operatives Act 14 of 2005 (the "Co-operatives Act"); and
  • in relation to any other insurer, a public company (other than in respect of certain state-owned enterprises) or a co-operative registered under the Co-operatives Act, unless exempted in terms of the Insurance Act;
  • in relation to reinsurers, a public company or state-owned company, or a branch of a foreign reinsurer that is registered as such in South Africa; and
  • licensed in terms of the Insurance Act as a life insurer or non-life insurer. The conditions of licensing of an insurance company includes licensing to conduct the various classes of insurance business as set out in the licence conditions.

Market conduct considerations may differ depending on the status of the policyholder as an individual or juristic entity and the various TCF outcomes should be considered and applied by the insurer.

Furthermore, in respect of prudential regulation, the Insurance Act provides that the Prudential Authority may prescribe that certain types, kinds or categories of insurance business are subject to requirements and/or excluded from the application of the Insurance Act alternatively, certain types or categories of business constitute insurance business. Furthermore, the Prudential Authority can have regard to the nature, size and complexity or type of business when prescribing a particular standard.

Types of Entities Conducting Insurance Business in South Africa

No person may conduct insurance business in South Africa unless the person is licensed under the Insurance Act. A person is regarded as conducting insurance business if the person conducts business similar to insurance business outside South Africa and if, in relation to that business, that person or another person directly or indirectly acts in South Africa on behalf of the first-mentioned person, including by rendering a financial service within the meaning of the FAIS Act, in respect of that business. A person to whom an insurer has outsourced a function or activity is not regarded as conducting insurance business.

A micro-insurer is allowed to conduct life and non-life insurance business in the same entity as a composite insurer. However, traditional insurers are not allowed to do so and separate entities and licences are required for an insurer to conduct life or non-life insurance business.

Cell captive insurers must also be separately licensed to conduct cell captive business in South Africa. A person conducts cell captive insurance business through a cell structure, which is an arrangement where a person (the cell owner) holds an equity participation in an insurer through a specific class or type of shares (which is separate to all other classes or types of shares in that insurer). This will create a notional ring-fenced structure within the insurer where the cell owner will place insurance business with the insurer that is separate from the other insurance business of the insurer. The cell owner will then be entitled to share in the profits or be liable for the losses in respect of such business in line with the participatory equity interest and that will be ring-fenced from the other insurance business.

The Insurance Act further regulates foreign reinsurers that conduct business in South Africa through a branch of the foreign reinsurer, which must be licensed in terms of the Insurance Act, and establish a representative office in South Africa and a trust in accordance with the provisions of the Insurance Act.

Standards for Insurers and Reinsurers

In relation to particular "standards" that must be met, the prudential requirements provide that insurers and reinsurers must comply with the Solvency Assessment and Management regime (SAM), which is a risk-based supervisory framework that aims to improve policyholder protection and financial stability by aligning insurers' regulatory capital requirements with the underlying risk of the insurer and requiring insurers to adopt risk monitoring and risk management tools.

The principles applicable to the prudential regulation of insurers and reinsurers are set out in the Insurance Act, read with the Prudential Standards for Financial Soundness. In addition, insurers and reinsurers must also comply with the governance and operational requirements as imposed in terms of the Insurance Act, read with the applicable Governance and Operational Standards. These standards also impose stringent requirements in respect of governing bodies of insurers, the applicable fit and proper requirements for boards of directors, senior management and control functions, as well as the regulation of outsource arrangements, to name a few.

Owners of Financial Institutions

In respect of ownership, Chapter 11 of the FSR Act deals with the regulation of significant owners of financial institutions. Section 157 of the FSR Act defines a significant owner of a financial institution as a person who directly or indirectly, alone or together with a related or inter-related person, has the ability to control or influence materially the business or strategy of the financial institution. The FSR Act provides that a person must also obtain prior approval and/or notify the Prudential Authority when a person becomes a significant owner of certain financial institutions (such as insurance companies and banks), when a person ceases to be a significant owner, or in the event that the extent to which such person can control or influence the business or strategy of the financial institution changes. A differential of 5% will be regarded as such a change. Any transactions without the requisite approval and/or notification will be void.

A significant owner, in generic terms, means any person who directly or indirectly, alone or with a related or inter-related person:

  • holds a qualifying stake in the insurer – a qualifying stake is defined in the FSR Act and in general terms refers to an interest and/or ability to control 15% of the shares in an insurer (directly or indirectly, alone or with related parties);
  • has the ability to materially influence the business or strategy of the insurer; or
  • has the power to appoint 15% of the members of the governing body of the insurer.

With effect from 1 December 2020, through the publication of Joint Standard 1 of 2020, the significant owners of all financial institutions (subject to certain exemptions) must comply with certain prescribed fit and proper requirements. Additional requirements are imposed on significant owners of entities that are designated as systemically important financial institutions.

The South African taxation system is "residence-based", wherein taxpayers residing in South Africa are taxed on their income irrespective of its source. Typically, non-residents are only subject to domestic taxes. The South African government derives its revenue primarily from income tax, value-added tax and corporate tax.

South African-resident companies are taxed on their worldwide income (including capital gains). Gross income, in the case of any resident, includes the total amount, in cash or otherwise, received by, accrued to, or in favour of such resident.

There are specific tax rules that address the implications for short-term and long-term insurers. Long-term insurers are required to establish five funds, with the funds subject to specific taxing provisions. The five funds are the untaxed policyholder fund (UPF), the individual policyholder fund (IPF), the company policyholder funds (CPF), the corporate fund and the risk policy fund (RPF), taxed at 0%, 30%, 28%, 28% and 28%, respectively.

The purpose of the RPF is to distinguish between the investment business and the risk business of the insurer. In practice, a "risk policy" will pay out a specified cash amount on the happening of an event regardless of the amount of investment income earned during the term of the policy. As such, this could result in a loss. Profit or loss arising in respect of risk business should therefore not form part of the tax calculation of the UPF, IPF and CPF ("the Policyholder Funds") since it is not part of the investment business that should be taxed on the "trustee basis". It is, therefore, taxed as a separate fund.

While the short-term insurance provisions require the establishment of separate funds, they have provisions that regulate the timing of accrual.

To be eligible for deduction, a person paying the premium must, amongst others, incur the expenditures in the production of income, for purposes of trade, and they must not be of a capital nature, or such expenditure must fall within a specific exclusion. In this regard, specific deductions are available for key-man risk policies but subject to several requirements being fulfilled.

In relation to VAT, a short-term insurer is typically registered for VAT (as a VAT vendor), whereas a long-term insurer is not ordinarily registered for VAT.

To the extent that an offshore insurer conducts insurance business in South Africa, Section 5(2) of the Insurance Act, read with Joint Guidance Note 1 of 2019 issued by the FSCA and the Prudential Authority (the "Joint Guidance Note"), provides that a person is regarded as conducting insurance business in the Republic if (i) the person conducts business similar to insurance business outside the Republic and (ii) that person or another person on behalf of the first-mentioned person directly or indirectly acts in the Republic on behalf of the first-mentioned person, including by rendering a financial service within the meaning of the FAIS Act.

The Joint Guidance Note provides, in paragraph 4.13, that where a "... foreign (re)insurer, for example, directly contacts or otherwise solicits a South African based customer (including a local insurer) with the purpose of enticing or swaying the customer to secure insurance from the foreign (re)insurer, such a foreign (re)insurer would, in the context of Section 5(2), be regarded as conducting insurance business in South Africa."

To the extent that a person falls within the ambit of Section 5 of the Insurance Act, such insurer must be licensed as an insurer in South Africa to continue to conduct such business in South Africa. The ambit of the application of Section 5 of the Insurance Act, read with the Joint Guidance Note, is exceptionally broad and must be carefully considered in each case where an offshore insurer wishes to conduct business in South Africa or with South African customers.

Furthermore, Section 8(2) of the STI Act also limits the services that an intermediary may render in respect of foreign insurance business. Directives 55A.i (LT, ST and LL) and 149.A.v (ST and LL) contain the Prudential Authority's policy on this issue.

Insurers Are Expected to Contribute to the Local Market before Looking Abroad

Directive 55.A.i, inter alia, states that by giving statutory recognition to facilities for placing primary insurance and reinsurance business abroad, the South African legislature never intended that such recognition should have the effect of depriving registered insurers of their rightful share of direct and reinsurance business that originates in South Africa. The Prudential Authority is of the view that registered insurers should be given the opportunity of providing the maximum cover compatible with the observance of sound insurance principles. The Prudential Authority, therefore, expects registered insurers to make their contribution towards the development of the local insurance market by exploiting its capacity to the full before turning to markets abroad.

In line with this policy, the Prudential Authority, in cases where insurance can be placed with registered insurers at rates and on other terms and conditions that are significantly less favourable than those offered by foreign insurers, will grant approvals in terms of Section 8(2) of the STI Act only if it is satisfied that insurers have been allocated such proportions of the risks concerned as they can normally accept in accordance with the principles outlined above. A differential of 25% or more in the premium rate will be viewed as significant.

As the only exceptions to this general rule, the Registrar will be prepared to give consideration to allowing the placement with foreign insurers: "of such minor percentages of extra-ordinary large risks as are considered necessary to enable the insureds concerned to maintain contact with nonregistered insurers for commercial or strategic reasons; in special cases of long-term insurance risks of insureds who reside abroad; and of short-term insurance that is arranged by an offshore holding company which requires the participation of the local subsidiary company. The so-called 'global policies' will only be allowed on receipt of written confirmation from the holding company. The written confirmation referred to relates to a written confirmation to be furnished by the offshore holding company that it requires the local holding company to be insured under its global policy issued by a foreign insurer."

Procedure for Placing Insurance Abroad

Directive 149.A.v (ST and LL) describes the process and procedure to follow when placing insurance abroad through an intermediary as well as the circumstances in which South African policyholders may place insurance business directly abroad.

An application to place insurance abroad through an intermediary must be submitted to the Prudential Authority under Section 8(2) of the STI Act and must be simultaneously submitted to the South African Insurance Association (SAIA) via the Offshore Insurance Placement System. Favourable consideration to the application will only be given if no local insurer offers the insurance sought or offers it at competitive terms and conditions, and/or the potential policyholders provide reasonable grounds for wanting to place the business abroad. Also, note that SAIA is involved purely to protect the local insurance market by ensuring that South African-based insurers are given an opportunity to offer the insurance locally.

The direct placement of insurance (other than through an intermediary) with an offshore insurer is subject to approval by the SARB under the Exchange Control Regulations.

If a foreign reinsurer wishes to conduct reinsurance business in South Africa through a branch, such foreign reinsurer must:

  • be licensed as such in South Africa;
  • establish a representative office in South Africa and must, at all times, appoint a representative and a deputy representative that is a natural person permanently residing in South Africa, which representative must comply with certain qualifying requirements; and
  • establish a trust in South Africa wherein it must hold and maintain security in respect of its insurance business conducted in South Africa in the form of assets valued in accordance with the prescribed requirements that are at least equal to the technical provisions for the insurance business calculated in accordance with the Insurance Act. The funds held in the trust may not, without the approval of the Prudential Authority, be withdrawn or accessed by a foreign reinsurer other than in prescribed circumstances. The trustee is a key person for the purposes of the Insurance Act and must therefore comply with certain fit and proper, and qualifying requirements.

Prudential Standard GOI 3.3 provides that an insurer may not engage in a fronting arrangement.

However, Prudential Standard GOI 3.3 provides that whether a fronting arrangement exists will be assessed through a supervisory approach since the intention of the authorities is not to disallow 100% outward reinsurance arrangements where the risk is uninsurable in the South African market and/or local insurance cannot be obtained. However, in all cases, an insurer must not directly or indirectly reinsure more than 75% of the premiums it has underwritten to one reinsurer, which applies on an aggregate basis across all the insurer’s business lines as such arrangements will automatically qualify as fronting arrangements. The limit of 75% may be increased to 85% if the counterparty is an insurer within the same group of companies.

The restriction on fronting arrangements does not apply to global insurance programmes; ie, insurance programmes with a coverage territory encompassing at least four jurisdictions (including the country in which the insured is domiciled) that are arranged for multinational businesses.

Merger activities and foreign investments are welcomed in South Africa. M&A activities relating to insurance companies are allowed in South Africa subject to compliance with, inter alia, the Insurance Act, the FSR Act, the Competition Act 89 of 1998 and the Companies Act 71 of 2008. The level and type of activity must be assessed within the regulatory framework.

The Companies Act, 2008 regulates "fundamental transactions", which include schemes of arrangement (commonly used for implementing a "takeover"), amalgamation, and mergers and disposals of all or the greater part of the assets or undertaking of a company. The significance of a transaction that is classified as a "fundamental transaction" is the corporate approvals required to implement the type of transaction; for example, typically a fundamental transaction requires the approval of shareholders supported by at least 75% of the voting rights that can be exercised on the resolution.

In the insurance industry, to the extent there is a "transfer" of business between insurers (other than a foreign reinsurer, Lloyd's underwriter or Lloyd's), an insurer may not, without the approval of the Prudential Authority, transfer all or any part of its assets and liabilities relating to its insurance business to another insurer.

Additionally, an insurance company must obtain prior written approval of the Prudential Authority to make a material acquisition or disposal in accordance with the Insurance Act.

Additionally, please refer to 2.2 The Writing of Insurance and Reinsurance for the approvals required for a person to become a significant owner of an insurer, to cease to be a significant owner of an insurer, or to increase or decrease the extent or ability to be a significant owner of an insurer.

The approval of a merger or acquisition would also, in certain instances, be subject to the approval of the competition authorities. If the prescribed thresholds are met, certain merger notifications are required by the parties involved (the acquirer and the target). A threshold relates to a company's asset value and/or annual turnover as well as both companies' combined asset value and/or annual turnover.

The distribution of insurance products is regulated in terms of the LTI Act, the STI Act and the FAIS Act, which have seen significant amendments in the past couple of years further to the principles laid down in a document titled "Retail Distribution Review" (RDR). It is anticipated that further changes will be introduced to finalise the RDR reforms.

In general terms, the rendering of financial services in respect of a financial product (such as an insurance product) is regulated by the FAIS Act and requires a person to be licensed as a financial services provider in terms of the FAIS Act, or to act as a representative of a licensed financial services provider.

Financial services in terms of the FAIS Act include advice and intermediary services, both terms that are broadly defined in the FAIS Act.

Therefore, if a person furnishes advice and/or renders intermediary services falling within the aforesaid definitions, such conduct will be subject to regulation under the FAIS Act. This is a factual assessment to be performed on a case-by-case basis, after due consideration of the objects of the FAIS Act.

The FAIS Act does not extend to certain executors, administrators, liquidators and/or trustees of an inter vivos trust if a financial service is rendered unless such financial service is rendered in the ordinary course of business of such person.

Additionally, exemptions may be issued according to the FAIS Act on a case-by-case basis by way of application to the relevant authority.

For a person to be licensed in terms of the FAIS Act, such person must satisfy at least the following requirements as prescribed per class of business.

  • Personal character qualities of honesty and integrity.
  • Competence, including:
    1. experience;
    2. qualifications; and
    3. knowledge tested through examinations.
  • Operational ability.
  • Financial soundness.
  • Continuous professional development.

The COFI Bill proposes – in terms of Schedule 1, which deals with the categories and subcategories of activities requiring licensing – new licensing requirements when a person provides a facility or performs a service or any other activity as a result of which a person may enter into, offers to enter into or enters into any transaction in respect of a financial product.

A financial product is defined with reference to the FSR Act and includes an insurance policy in. The COFI Bill proposes to repeal the FAIS Act with the exception of Sections 1(1) and 20 to 30. Furthermore, the COFI Bill proposes to repeal the LTI Act and the STI Act in their entirety.

The Policyholder Protection Rules, promulgated in terms of the LTI Act and the STI Act (PPR), regulate the disclosure of information by an insurer and an insured. The PPR does not apply to certain commercial lines policies and is, in the main, applicable only to personal lines policies.

In terms of a personal policy, the PPR provides that a policy may not be invalidated; the obligation of the insurer under the policy must not be excluded or limited; and the obligations of the policyholder must not be increased, on account of any representation made to the insurer that is not true, or a failure to disclose information, whether or not the representation or disclosure has been warranted to be true and correct, unless a reasonable, prudent person would consider that representation or non-disclosure as being likely to have materially affected the insurer's ability to assess the risk under the policy concerned at the time of issue or time of any variation thereof.

The PPR provides that the representation or non-disclosure shall be regarded as material if a reasonable, prudent person would consider that the particular information constituting the representation or that was not disclosed, as the case may be, should have been correctly disclosed to the insurer so that the insurer could form its own view as to the effect of such information on the assessment of the relevant risk.

Accordingly, the insured has an obligation to truthfully and correctly disclose known circumstances or facts that are material to the insurer's assessment of the risk under the policy concerned. The insurer has no duty to proactively seek information. The insurer seeks information necessary to assess the risk, such as information concerning the applicant insured, the nature of the risk and the risk experience in the proposal.

An insurer has an obligation to disclose factually correct information relevant to the prospective insurance contract in a clear, comprehensible and unambiguous manner, so as to allow a prospective insured to assess its rights and duties in a way that is not misleading, is fair and clear, and adequate and appropriate for the circumstances in question.

A failure by the insurer or the insured to truthfully and correctly disclose material information renders the contract voidable at the election of the prejudiced party. The contract may be avoided from inception, in which case the contract is deemed not to have come into effect and the innocent party may be entitled to restitution. The innocent insurer or insured may decide not to invalidate the contract and claim damages for harm suffered as a result of the failure.

Typically, an intermediary takes instructions from a client (insured) and acts on behalf of a client (insured) rather than on behalf of an insurer and its obligations would include acting in the interest of the client and avoiding a conflict of interest.

It is, however, possible for an intermediary to also act on behalf of an insurer, acting as an agent in the strict sense, allowed to bind the insurer in an agreement in the context of so-called binder agreements, which are highly regulated in terms of the LTI Act and the STI Act.

Accordingly, an intermediary may act on behalf of the insured or the insurer. As agent for the insured, its obligation is to act with reasonable diligence and skill in obtaining adequate and suitable insurance cover for its client in accordance with its client's instructions. In doing so, it must take reasonable steps to elicit all material information from the insured and to convey that to the insurer. It must also convey to the insured information about terms of the policy that, if contravened, might leave the insured without cover. As a representative of the insurer, it must act in accordance with the insurer's obligation of disclosure to a prospective insured.

An insurance contract is, at common law, a contract between an insurer and an insured, whereby the insurer undertakes, in return for payment of a premium, to pay the insured an amount on the happening of a specified uncertain event in which the insured has some interest.

No special form is required. A contract comes into existence as soon as the parties agree, orally or in writing, on its essential terms, which are:

  • the person, property or interest to be insured;
  • the risk insured against;
  • the period of insurance;
  • the amount payable by the insurer on the happening of an insured event; and
  • the amount of premium payable.

The insured must have a legally recognised insurable interest in the subject of the insurance. Simply put, the purpose of indemnity insurance is to indemnify an insured against actual loss, and there can be no loss without an interest. However, this is not a standalone requirement. It is rather an element in determining whether a contract of insurance is a gambling transaction, the latter not being enforceable.

The Insurance Act deals not only with common law insurance products but also with products that in common law would not amount to insurance, such as life annuity and other investment insurance products.

The Insurance Act defines a non-life policy (which collectively constitutes insurance business) as "any arrangement under which a person, in return for provision being made for the rendering of a premium to that person, undertakes to meet insurance obligations that fully or partially indemnifies loss on the happening of an unplanned or uncertain event, other than a life event, or a death event or disability event not resulting from an accident and includes a renewal or variation of that arrangement".

A life policy, in turn, is defined in the Insurance Act as "any arrangement under which a person, in return for provision being made for the rendering of a premium to that person, undertakes to meet insurance obligations on the happening of a life event, health event, disability event or death event..."

It should be noted from the aforementioned definition that the common law elements have, to a large extent, been codified in the Insurance Act. The Insurance Act is also silent on the existence of an insurable interest and the doubtful position under common law – whether such interest is, in fact, required – persists in terms of the Insurance Act.

The position is similar where there are multiple insureds or potential beneficiaries. The obligation of disclosure, insurable interest and contract terms apply individually in respect of each insured as they are insured for their respective rights and interests. Concerning finance houses or lenders whose interests are to be covered under the contract, the insurer must be provided with their details and material information pertaining to their insurable interest that must be noted on the contract of insurance. Beneficiaries under life insurance policies need not have insurable interest.

The position is the same regarding consumer contracts and reinsurance contracts. Concerning reinsurance that is a form of liability insurance, the insurer and reinsurer have the same obligation of disclosure and must show the same good faith as if they were an insured and an insurer negotiating an insurance contract. Reinsurers rely on the original insurer to provide them with a risk analysis for the portfolio to be reinsured and any emerging risks that might arise so that they can properly assess their potential risk exposure. The insurable interest is the original insurer's risk under the original insurance contract.

This is not applicable in this jurisdiction.

This is not applicable in this jurisdiction.

Interpretation of insurance contracts is dealt with in the same manner as other commercial contracts, provided that enhanced consumer-centric statutory protections change the landscape compared to arm's-length commercial arrangements.

Otherwise, the ordinary rules relating to the interpretation of contracts apply to both consumer and commercial contracts of insurance. Where the language of the contract is clear and unambiguous, the court must give effect to the intention of the parties as expressed. The words used must be given their plain, ordinary and popular meaning, having regard to the context in which they appear and in which the contract was concluded. A party is prevented from producing and relying on extrinsic evidence to alter the recorded terms of a contract in an attempt to rely on an amended contract. Evidence of the intention of the parties or of their prior negotiations is admissible in the face of enduring ambiguity, in which case evidence of the surrounding circumstances may be considered to ascertain the meaning of the terms.

A warranty is a contractual term in which one contracting party gives an undertaking or assurance to another party that specific facts or conditions are true or will happen. It can be expressly included in the contract or implied by law. The giver of the warranty does not promise to do anything other than make good any loss suffered arising from the warranted fact not existing. Hence, a breach of warranty entitles the innocent party to claim damages and does not permit cancellation or avoidance of the contract unless the contract expressly permits it.

If a contractual term is regarded by the parties as a vital or essential term that goes to the root of the contract, it is a condition precedent to the contract and not a warranty. Conditions precedent should expressly and correctly be described as such to avoid debate. A breach of a condition precedent entitles the innocent party to cancel or avoid the contract.

Commercial coverage disputes are typically addressed through a civil lawsuit in court, whether they relate to consumer or reinsurance contracts, if negotiations between the parties break down.

Disputes in the context of consumer contracts may also be dealt with by an ombudsman, where complainants may elect to bring their complaint, as this is quicker and more cost-effective. South Africa has an Ombudsman for Short-Term Insurance, as well as an Ombudsman for Long-Term Insurance.

Ordinarily, the limitation period for starting proceedings in any civil claim is three years. In terms of the Prescription Act 68 of 1969, a civil debt prescribes three years after the debtor has become aware of the facts making up a claim. However, most standard form insurance contracts contain notification and time bar clauses that shorten this period. Clauses such as these have been upheld as valid by the Constitutional Court (Barkhuizen v Napier 2007 (5) SA 323 (CC)), as long as the period is reasonable and fair.

A complaint to an ombud has the effect of suspending statutory prescription or a contractual time bar period.

Unnamed beneficiaries or other third parties generally have no rights to enforce an insurance contract. That right is usually conferred only to the policyholder. However, an exception exists where a policyholder, who is liable to a third party, is sequestrated; then the third party is entitled to recover from the insurer the amount of the insured's liability towards them, but not exceeding the limit of liability under the policy (Section 156 of the Insolvency Act 24 of 1936).

The jurisdiction and choice of law governing an insurance contract is usually set out in the written agreement. However, where no choice of law is expressly provided for, a South African court will try to determine whether the parties incorporated a tacit choice of law into their contract. This may be inferred from other aspects of the contract, or the surrounding circumstances.

If no choice of law, whether express or implied, can be determined, the court determines which law to apply, being the legal system to which the contract has the closest and most real connection, also known as the "proper law" of the contract.

The litigation process begins with a plaintiff issuing summons against the defendant, in the High Court or Magistrates' Court. The summons commencing action is served by the Sheriff. The summons may attach particulars of claim, in which the plaintiff sets out the basis of its claim against the defendant. The defendant must then enter an appearance to defend, and may serve pre-plea notices, raising technical objections to the particulars of claim, and requesting documents in order to plead. The defendant must then serve a plea, setting out its version, and may also raise a counterclaim against the plaintiff. The plaintiff then pleads to the counterclaim.

Once pleadings close, the parties engage in discovery, in terms of which documents are exchanged, hold a pre-trial conference in order to agree on dates for service of further documents and narrow the issues as far as possible, and serve expert notices and summaries, if applicable.

If the matter proceeds to trial, the attorneys appointed by each party usually brief advocates, who are specialist litigators. The trial proceeds before a single judge (or magistrate) and is an adversarial process: there is no jury. The burden of proof is usually on the plaintiff, to prove its case on a balance of probabilities.

Each party, through its advocate, can present evidence. The plaintiff begins and calls each of its witnesses and expert witnesses. Each witness is examined in chief by the advocate for the party calling that witness and is then cross-examined by the advocate for the opponent, followed by re-examination by the first advocate. Once the plaintiff's case is closed, the defendant may apply for absolution from the instance, if it believes that the plaintiff has failed to discharge the burden of proof to establish its case. If the application is successful, the matter comes to an end. If it is not (or if the defendant does not apply for absolution), the defendant's case proceeds in the same manner. Once evidence has been led, the advocate for each party submits a closing argument.

Once judgment has been handed down by the judge, the unsuccessful party may apply for leave to appeal the judgment. The costs of the litigation usually follow the result, and the successful party may recover their costs from the unsuccessful party.

South African judgments can be executed by a successful party in the event of non-compliance by the losing party. The most common form of execution is a writ, which enables the Sheriff to seize and attach property belonging to the defaulting party and sell it in execution in order to satisfy the debt. Garnishee and emoluments attachment orders are also possible, which redirect funds in the defaulting party's bank account to the successful party,

Foreign judgments may also be enforced in South Africa, but the process is more complicated. In terms of the Enforcement of Foreign Civil Judgments Act (32 of 1998), foreign judgments from Namibia may be enforced using a simpler process, where the Namibian judgment is simply registered. The judgments of other foreign countries are not automatically enforceable, but rather have the same effect as a cause of action and will be enforced by South African courts under certain circumstances. The requirements are as follows (Jones v Krok 1995(1) SA 677(A)):

  • the foreign court that made the judgment must have had jurisdiction to entertain the case, as determined by the South African law on the jurisdiction of foreign courts;
  • the judgment must be final and conclusive in its effect, and must not have become superannuated;
  • the recognition and enforcement of the judgment must not be contrary to public policy;
  • the judgment must not have been obtained by fraudulent means;
  • the judgment must not involve the enforcement of a penal or revenue law of a foreign state; and
  • enforcement of the judgment must not be precluded by the provisions of the Protection of Businesses Act 99 of 1978.

A party seeking to enforce a foreign judgment in South Africa may approach the court through action or application proceedings.

Contractual arbitration clauses can be enforced and this is a common method of resolving commercial disputes in South Africa. Although arbitration can be more expensive, it often allows parties a faster resolution of their dispute, which is attractive to commercial litigants.

South Africa is a signatory to the New York Convention and has implemented legislation in order to give effect to the Convention. In order to enforce the award, the successful party is required to apply on notice to the High Court.

There is no requirement that parties submit to any form of ADR, but they may choose to include arbitration clauses in their contracts. Parties may always agree to resolve a dispute through mediation, but this is not commonly done by commercial parties.

Consumers with complaints often elect to approach the Ombudsman for Short-Term Insurance or the Ombudsman for Long-Term Insurance, each of which will attempt to resolve disputes between individual insureds and their insurers through a less formal inquisitorial process, which may include mediation. Insurers who are subscribed to the respective ombudsman are contractually obliged to abide by the decisions of the ombudsman.

The requirements in respect of the settling of claims are dealt with in the Policyholder Protection Rules published under the LTI Act and the STI Act respectively.

An insurer must establish, maintain and operate an adequate and effective claims management framework, which must ensure fair treatment of policyholders and claimants, and must (amongst others) be:

  • proportionate to the nature of an insurer's business or risk;
  • appropriate for the business model, policies and policyholders of the insurer; and
  • not impose unreasonable barriers to claimants.

An insurer must accept, repudiate or dispute a claim or the quantum of the benefit within a reasonable period, and notify the claimant of its decision in writing within ten days. Such notification must be in plain language and provide information in respect of the decision, as well as remedies for the claimant should it be dissatisfied with the decision (including the right to internally escalate a claim and/or make representations to the insurer within 90 days and/or approach an ombud). Where representations are made, the insurer must notify the claimant within 45 days of its decision to accept, repudiate or dispute the claim or the quantum of benefits pursuant to such representations.

Claimants must also be properly updated in respect of documents required and progress made in respect of the settling process.

In addition to the requirements of Rule 17, Rule 2A of the LT PPRs and the ST PPRs provides additional requirements that will apply in respect of the settling of claims by a micro-insurer as follows: an insurer must access and make a decision in respect of a micro-insurance (or funeral) policy within two business days after receipt of all required documents. If such decision is disputed, the insurer must, within 14 days' further investigation, make another decision or pay/repudiate the claim.

In order to determine the sanction to be imposed on an insurer for failure to comply with the applicable policyholder protection rules, decisions must be made with regard to the FSR Act, which enables the FSCA to impose administrative penalties (punitive penalties) in respect of non-compliance with the LTI Act or the STI Act.

Insurers' rights of subrogation, which allow an insurer to institute recovery proceedings or to defend liability proceedings in the insured's name, are recognised in South African law. Rights of subrogation operate as a matter of law, without any formalities, and are not ceded or assigned to the insurer by the insured.

The general rule is that the insurer will be entitled to the rights of subrogation only once the insured has been indemnified in full for its loss in terms of the insurance contract.

A significant portion of the South African economic population is currently “unbanked”, in that this portion of the population does not participate in the financial services sector (ie, does not have an insurance policy or bank account) or only participates in the informal financial services sector.

As a result of an increasing need for the unbanked population to be able to participate in the financial services sector, technological advents such as insurtech and peer-to-peer insurance models have emerged, disrupting the historically incumbent financial services and insurance industry.

Disruptive technologies have a significant impact on an insurance policy product cycle in the following ways:

  • increased adoption of digital distribution models;
  • insurance business being conducted by telecommunication-focused companies/non-traditional insurance companies;
  • robo-advice;
  • the testing of blockchain and smart contract technologies, and their applicability to the conclusions and administration of insurance obligations, claims submission and settlement;
  • the increasing need for “on-demand” insurance products; and
  • the development of alternative underwriting assessment processes.

Furthermore, due to the current legacy systems and incumbent nature of the dominant players in the insurance market, the adoption of technology-driven insurance business models has become a proven challenge to such dominant insurers. As such, there has been significant investment and uptake by incumbent insurers in the insurtech market so as to secure their competitive positions.

In 2018, various regulators within South Africa (including the PA and FSCA) formed the Intergovernmental Fintech Working Group, with the primary objective of observing the fintech industry in South Africa and determining the extent to which regulation is warranted.

One of the focus points of the working group is insurtech, smart insurance contracts and the digitalisation of insurance distribution and financial advice models. While the regulator has expressed that its regulatory intent aligns with the need for financial inclusion in South Africa through the implementation of technology, the regulators (the PA and the SARB in particular) have expressed similar concerns regarding the potential for such technology to introduce risk into the insurance industry or result in the unfair treatment of policyholders.

Accordingly, while the regulator has not imposed any strict regulations around insurtech, it is important to note that:

  • certain aspects of insurtech models are governed by existing regulation, such as digital distribution models, which are still subject to the regulatory ambit of the FAIS Act; and
  • the COFI Bill envisages the implementation of a market conduct regulatory regime that will govern innovation in the financial services sector.

See 10 Insurtech.

See 10 Insurtech.

COVID-19's Impact on the Insurance Sector in South Africa

The greatest impact felt by insurers during 2020 has been from the COVID-19 pandemic, and, in particular, from claims for business interruption losses due to the outbreak of the disease.

South African insurance law recognises two categories of business interruption insurance; namely, insurance that traditionally requires, as a trigger, an underlying physical damage to, or loss of, property; and insurance that provides cover for business interruption losses without the requirement of underlying physical damage or loss. The latter is usually incorporated into a property policy as an extension. South African insurers have taken the view that COVID-19 does not cause physical damage to, or loss of, property and claims under this category of insurance have been rejected. Although a different approach has been taken in other countries – such as the USA, where COVID-19 has been found to render property exposed to the disease as unsafe and unfit for their intended use, thereby amounting to "physical property damage or loss" – this approach has not been followed by South African insurers and is unlikely to be the position held by South African courts.

The second category of business interruption extensions that do not require physical damage to, or loss of, property has been the subject of immense debate for much of the year, resulting in various court cases intended to provide legal certainty on the interpretation of these extensions and the cover they provide. The debate has centred around issues of whether the government's response to the pandemic constitutes an insured peril, with insurers contending that what is required is a causal link between the localised outbreak of the disease (within a specified radius of the insured premises) and the interruption of the business, and insureds arguing that once it is accepted that there were occurrences of COVID-19 within the specified radius of a premises, the government's response to the disease through the imposition of a national lockdown was part of the insured peril covered by the extension in question.

The legal debate has culminated in a judgment of the Supreme Court of Appeal, on 17 December 2020, in the matter of Guardrisk Insurance Company Limited v Café Chameleon CC (Case no 632/20) [2020] ZASCA 173 (17 December 2020), in which the Court, in interpreting a non-damage business interruption extension, stated that a notifiable disease (such as COVID-19) "almost always carries the risk of a government response, making it part and parcel of the insured peril".

Accordingly, the position currently held by South African courts is that the insured peril in these extensions is the combined outbreak of COVID-19 in South Africa together with the government's response to it, and provided the disease has come into the specified radius within the insured's premises, claims for business interruption will be covered.

Disclosure Requirements and Fair Treatment of Customers

There have also been significant consumer-related reforms through the PPR that affect disclosure requirements, as well as significant reforms regarding the duties on insurers through the entire life cycle of a policy to ensure that customers are treated fairly. Additionally, the Insurance Act imposes significant duties on directors and key persons of insurance companies and controlling companies (see 1.1 Sources of Insurance and Reinsurance Law) to ensure compliance with the applicable laws but from a prudential perspective and a market conduct perspective.

Some of the most significant customer-centric changes in the PPR are the enhanced disclosure requirements imposed on insurers. In this regard, the provisions of Rule 11 of the PPR are noteworthy.

The disclosure to be made is dependent on the type of documents provided to the potential policyholder, and the different stage applicable to the policy since different disclosures must be made prior to entering into a policy, upon entering into a policy and throughout the life cycle of the policy.

The disclosures must, at the very least, include the following:

  • concise detail on any charges, fees to be levied against the policy or the premium;
  • any commission or remuneration payable to any intermediary or binder holder in relation to the policy;
  • any excesses that may become payable by the policyholder;
  • the premium that is payable under the policy;
  • the frequency at which the premium is payable;
  • the implications of a failure to pay a premium at the frequency;
  • details of any premium increases, including the frequency and basis thereof;
  • whether an increase will be linked to any commensurate increase in policy benefits and any options relating to premium increases that the policyholder may select; and
  • in the case of policies where the premium (with or without contractual escalations) is not guaranteed for the full term of the policy, the period for which the premium is guaranteed, including the frequency at which, or the circumstances in which, a review will take place.

Note that disclosure requirements apply irrespective of whether it is a consumer contract or commercial contract.

As already mentioned, a significant development is the COFI Bill that was published in December 2018 for public comment.

The COFI Bill deals with market conduct regulation of all financial institutions in South Africa and will see the repeal of significant parts of existing pieces of financial services legislation dealing with market conduct regulation. The Department of National Treasury is currently considering the significant amount of public comments received and is engaging with the commentators on a one-on-one basis in respect of its comments.

The object of the COFI Bill is to establish a consolidated, comprehensive and consistent regulatory framework for the conduct of financial institutions that will, inter alia:

  • protect financial customers;
  • promote the fair treatment and protection of financial customers by financial institutions;
  • support fair, transparent and efficient financial markets;
  • promote innovation and the development of, and investment in, innovative technologies, processes and practices;
  • promote trust and confidence in the financial sector;
  • promote sustainable competition in the provision of financial products and financial services;
  • promote financial inclusion;
  • promote transformation in the financial sector; and
  • assist the SARB in maintaining financial stability.
Webber Wentzel

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Webber Wentzel is one of the leading full-service law firms in Africa. The firm, using collective knowledge and experience, provides clients with seamless, tailored and commercially minded business solutions within record times. Webber Wentzel tailors its services to meet clients' needs, which is achieved through working independently or with a leading global law firm, Linklaters, and a network of alliance and key relationship firms across Africa, ensuring a seamless client experience. The firm's insurance lawyers are renowned for assisting clients with the largest and most complex claims and recoveries (local and cross-border) and yet are also able to effectively manage smaller and commoditised claims in ways that are highly efficient, utilising innovative legal technologies, process management, paralegal support and appropriate pricing methodologies – all under one roof. The team’s expertise not only relates to contentious matters, but also to many non-contentious matters, with expertise in drafting and reviewing of all policy documents and contracts, and advising directors and officers of companies and their insurers regarding the applicability of D&O policies.

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