Insurance

‘Insurance’ is a system of financial protection which is brought about by one person paying money to a company called an insurer. These money payments are called ‘premiums’ and, in return, the insurance company undertakes to compensate the ‘insured’ if some specific event happens – it could be theft from his home, car accident damage, the house burning down. Insurance for theft, damage, fire and such losses is called ‘short term’ insurance. ‘Life insurance’ is not insurance for life, but the contract is for a pay-out if you die. Life insurance and other long term policies (such as disability insurance) is called ‘long term’ insurance.

The insurance industry in South Africa has, until the introduction of the Insurance Act 2017, been governed by the Short-term Insurance Act 1998 and the Long-term Insurance Act 1998. The idea is that the 2017 Act replaces certain aspects of those statutes, so that there will be the umbrella legislation and those two more sector-specific statutes.

The Insurance Act came into force on 1 July 2018. It is administered by the Prudential Authority, which is a body established in terms of the Financial Sector Regulation Act 2017 and operates within the administration of the Reserve Bank. The interests of the Prudential Authority cover more than just the insurance industry, for its objective is to:

1. promote and enhance the safety and soundness of financial institutions that provide financial products and securities services;

2. promote and enhance the safety and soundness of market infrastructures;

3. protect financial customers against the risk that those financial institutions may fail to meet their obligations; and

4. assist in maintaining financial stability.

A. Licence to conduct business

1. It is a crime to conduct insurance business in the Republic if you are not licensed by the Prudential Authority.¹

2. One of the points about being licensed to do something is that you must put the licence into effect. The Prudential Authority can, on several different grounds, withdraw a licence to conduct business as an insurer. One such ground is that the business is not being conducted. There is an obligation on the person in control of the affairs of an insurer to notify the Prudential Authority of facts which may have a bearing in this regard, such as not commencing business within 12 months of the licence being granted; no longer conducting business due to restructuring; and, simply, no longer issuing policies to the extent that justifies it being licensed. If that person (or the insurer itself) fails to inform the Prudential Authority of such circumstances, it is guilty of an offence.²

3. There is also an obligation to inform the Prudential Authority if business rescue, winding up, or similar proceedings have been concluded, and it is an offence to fail to do so.³

4. If the Prudential Authority does withdraw a licence, it will direct the insurer:

   • not to dispose of or encumber any assets or liabilities;
   • not to incur any additional liability, without the approval of the Prudential Authority;
   • not to enter into any new policies (from a date specified);
   • to make arrangements:
     • to discharge its obligations under all policies;
     • to ensure the orderly resolution of its business; or
     • to transfer that business to another insurer by a specified date.

   Any insurer who fails to comply with any such directive commits a criminal offence.⁴

B. Controlling companies

1. The Prudential Authority can, for the purpose of facilitating the prudential supervision of insurance companies, designate an insurer (or any juristic person that is part of the group of companies of which the insurer is a part) and any associated entity, as an ‘Insurance Group’.

   The Prudential Authority will also designate the holding company that must apply to be licensed as a controlling company of that insurance group.

   Once this happens, the designated corporate has 30 days within which to apply to be licensed. If it does not do so, it commits a criminal offence.⁵

2. The person in control of the affairs of a controlling company must inform the Prudential Authority if business rescue, winding up, or similar proceedings have been concluded, and it is an offence to fail to do so.⁶

C. Reporting

1. The Prudential Authority can require any insurer and/or its controlling company to provide information regarding shareholders and shareholder rights in the company. In order to comply with this obligation, the insurer and/or controlling company, as the case may be, can call upon any person (or someone on behalf of that person) who has shares registered in his name, or wishes to have shares registered, allotted or issued in his name, to provide certain information.

   It is an offence to fail to comply with such a request from an insurer or controlling company.⁷

D. Key persons

1. A ‘key person’ is what it says: a director, senior manager, head of control function – and also an external auditor, and a trustee in the case of foreign insurers and Lloyds.

   Excluding the external auditor and trustees, if a key person has resigned, or his appointment has been terminated, he must notify the Prudential Authority (if it requests) of any information which came to his knowledge during the performance of his duties that may prejudice the ability of the insurer (or controlling company, as the case may be) to comply with the Act. It is a crime not to do so.⁸

E. Auditors

1. Auditors have several obligations when it comes to the exercise of their duties and functions.⁹ In particular, in addition to performing all duties and functions assigned under this Act, the Companies Act and the Auditing Profession Act, they must, in the manner prescribed:
   • audit the financial soundness of the insurer or controlling company;
   • audit the security held in the trust of a foreign insurer or of Lloyds;
   • perform any other duties or functions if and when prescribed by Regulation.

   It is an offence not to comply with these obligations.¹⁰

2. The auditor must submit a detailed report to the Prudential Authority (and also to the Board of Directors of the insurer, and its controlling company if applicable) on any matter of which he becomes aware and which in his opinion:
   • may be contrary to the governance framework requirements of the Act;
   • amounts to inadequate maintenance of internal controls;
   • in relation to a significant owner,¹¹ constitutes a contravention of any provision of the Act.

   If the auditor fails to do so, he commits an offence.¹²

3. Such a report must also be filed if the auditor comes across information relating to a branch of a foreign insurer, or of Lloyds, which in his opinion is likely to prejudice the ability of the foreign insurer, or Lloyds, to hold the required amount of security in trust.

   Again, it is an offence to fail to make such a report.¹³

F. Significant owners

1. A ‘significant owner’ is someone who, either alone or together with a related person, has the ability, directly or indirectly, materially to influence or control the business or strategy of a financial institution.¹⁴

   If the Prudential Authority is satisfied that the interest of a significant owner could be prejudicial to the insurer or to its policy holders, it can direct the insurer, controlling company or the particular significant owner, to submit a plan as to how that influence (in broad terms) will be rectified: and, upon its approval of the plan, to implement it.

   Failure by the significant owner to comply with either of these directives will lead to it committing a criminal offence.¹⁵

G. Specifically for long-term insurance

1. An ‘intermediary’ is someone inbetween. In the case of a romance, this is a ‘matchmaker’ but in the case of insurance they are generally referred to as ‘brokers’.

   It is a criminal offence for anyone to act as an intermediary in relation to a policy for long-term insurance except:

   • if he does so with the approval of the Authority; or
   • if long-term insurance companies are the only underwriters¹⁶ in terms of the policy in question.¹⁷

2. As has been seen, the approval of the Authority is required for various aspects of the insurance process. If you provide false information in making an application for such approval, you commit a criminal offence.¹⁸

3. If any insured person is required to make his policy available as security for any loan,¹⁹ lease or credit arrangement, it is a criminal offence not to give him written notification, beforehand, that he is entitled to enter into a new policy for that purpose, and with various options available to him in that regard.²⁰

4. It is an offence to offer, or provide any compensation as an inducement for someone to enter into, change, continue or cancel a long-term policy.²¹

5. It is an offence for a long-term insurer to offer, or provide any compensation to anyone for rendering services as an intermediary – other than the commission or remuneration prescribed by regulation.²²

6. It is an offence to accept such compensation.²³

7. Where the policy holder pays his premiums in cash, the recipient must give a written receipt showing the name, address and telephone number of the person issuing the receipt, the policy number, and the name of the long-term insurance company for which the premiums are paid. It is a crime not to do this.²⁴

H. Specifically for short-term insurance

The provisions of the Short-term Insurance Act mirror those set out above in relation to the Long-term Insurance Act.

It is a criminal offence for anyone to act as an intermediary in relation to a policy for short-term insurance except:

• if he does so with the approval of the Authority; or
• tf short-term insurance companies (but not Lloyds and Lloyds underwriters) are the only underwriters in terms of the policy in question; or
• that person has entered into a written agreement with Lloyds in relation to the policy.²⁵

1. As has been seen, the approval of the Authority is required for various aspects of the insurance process. If you provide false information in making an application for such approval, you commit a criminal offence.²⁶

2. If any insured person is required to make his policy available as security for any loan,²⁷ lease or credit arrangement, it is a criminal offence not to give him written notification, beforehand, that he is entitled to enter into a new policy for that purpose, and with various options available to him in that regard.²⁸

3. It is an offence to offer, or provide any compensation as an inducement for someone to enter into, change, continue or cancel a short-term policy unless it is done in accordance with the prescribed rules.²⁹

4. It is an offence for a short-term insurer to offer, or provide any compensation to anyone for rendering services as an intermediary – other than the commission or remuneration prescribed by regulation.³⁰

5. It is an offence to accept such compensation.³¹

6. Where the policy holder pays his premiums in cash, the recipient must give a written receipt showing the name, address and telephone number of the person issuing the receipt, the policy number, and the name of the short-term insurance company for which the premiums are paid. It is a crime not to do this.³²