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Short-term Insurance

So, Mike bumps into Jack in the queue at King Shaka. They exchange pleasantries, and then:

Mike
You still in footwear, Jack?
Jack
Nah, you know we had a terrible fire at the Ladysmith factory – destroyed everything.
Mike
You insured?
Jack
Yeah, they paid out in full – so I said to Debbie, you know, we’re so close to retirement, why do we want to start all over again now? So we moved to La Lucia, you know what I’m saying … And your textiles factory?
Mike
You won’t believe it, we had this hellova flood and basically everything was ruined. Huge shutdown, I had to lay everyone off. Thank God I was also insured. So, last year Henriette and I moved to Sea Point.
Jack
Mike, how on earth d’you start a flood?

An old one, but still cute. Maybe not so funny, however, if you are a short-term insurer.1 Fraudulent claims cost South African insurance companies an estimated R4 billion each year.2

The Short-term Insurance Act 19983 provides for the registration of short-term insurers, and for the control of their activities and those intermediaries who work for them. It falls under the authority of the Minister of Finance, but for all intents and purposes is administered by the Registrar of Short-term Insurance, who is the Executive Officer of the Financial Services Board.4

A. Powers of the Registrar

  1. The Registrar can direct a short-term insurer5 to furnish him, within a specified period, with certain information or documents. If the insurer fails to comply with such a directive, it is guilty of an offence.6

  2. The Registrar can also issue a directive, which can apply generally, or to a particular person or class of persons, in order to ensure compliance with the Act, and it is an offence to contravene or fail to comply with the directive.7

  3. If any person is conducting short-term insurance business and is unregistered, or is (registered but is) not authorised to carry on that particular kind of business, the Registrar can issue a directive to that person to make necessary changes and arrangements so that he does not contravene those obligations. It is an offence to fail to comply with such a notice.8

  4. The Registrar can, if an insurer has contravened any provision of the Act (or a condition of registration, etc.) notify that insurer of his intention to prohibit it from carrying on business, from a specified date. If he does issue such a prohibition, the insurer commits an offence if he fails to comply therewith.9

  5. An insurer must furnish the Registrar with returns as prescribed by him and is guilty of an offence if it fails to do so.10

  6. The Registrar can call for further information and or documentation concerning a return, if he is satisfied that it is incomplete or incorrect. It is an offence to fail to comply with such a directive.11

  7. The Registrar can make rules aimed at policyholder protection. These get published in the Gazette, and can stipulate any contravention.12

B. Registration and prohibited activities

  1. It is a criminal offence to carry on any kind of short-term insurance business unless you are:13
    • registered as an insurer;14 and
    • authorised to carry on the particular kind of business.
  2. The Registrar may impose conditions for the registration of a short-term insurer. It is an offence to contravene any such conditions.15

  3. It is a crime to use any name or description in relation to your business which includes the words ‘insure’, ‘assure’ or ‘underwrite’ (or derivations of these words) unless you are a registered insurer or a member of Lloyds.16

  4. No person may perform any act which indicates that he carries on the business of short-term insurance, or is authorised to do so, unless he is registered, and is in fact authorised, or is a member of Lloyds. It is an offence to contravene this prohibition.17

  5. It is a crime to furnish false information in respect of an application for registration as a short-term insurer.18

  6. It is a crime to furnish false information in relation to any application for approval from the Minister for any purposes in terms of the Act.19

  7. If an insurer has stopped entering into policy contracts, or has notified the Registrar of its intention to do so, or the Registrar considers it appropriate to do so, he must direct that insurer not to enter into any more policies, and discharge its obligations under existing policies. (When the Registrar is satisfied that this has happened, he must cancel the insurer’s registration). If the insurer fails to comply with these directives, it commits an offence.20

  8. It is an offence to carry on business (other than the short-term insurance business authorised by the Registrar) as the Registrar may have prohibited, specifically or in general.21

  9. It is, moreover, an offence so to carry on business otherwise than in accordance with any conditions or limitations which the Registrar may have determined, for a particular insurer, or for insurers in general.22

  10. It is forbidden for an insurer to undertake to provide survival benefits.23 24

  11. It is an offence for a short-term insurer to conduct business as a long-term insurer, except under certain circumstances.25

C. Intermediaries

The Act does not define ‘intermediary’. In essence, it is someone who acts between two parties – an insurance broker, for example.

  1. It is an offence to render services as an intermediary, in relation to a policy for short-term insurance, unless a registered short-term insurer is the only underwriter for the policy;26 or, collectively, short-term insurers and Lloyds underwriters.27

  2. If the intermediary is an agent for a Lloyds broker or Lloyds underwriter (i.e. he is a ‘Lloyds correspondent’) he commits an offence if his intermediary services are not in respect of a policy where Lloyds is the only underwriter.28

  3. At all times the intermediary must be approved by the Registrar, and it is an offence if he renders services without being approved.29

  4. It is an offence to offer, provide or accept any remuneration in respect of an intermediary’s services other than as contemplated by the regulations.3031

D. Auditors, actuaries and officers

  1. A short-term insurer which fails to have, at all times, an auditor (appointed in accordance with the provisions of the Companies Act particularly applicable to a public company) is guilty of an offence.32

  2. Insurers must also have an actuary in their employ. This actuary is obliged to report to the board, without delay, any matter relating to the insurer’s business which in his opinion contravenes any provision of the Act relating to his duties, or affects his ability to comply therewith. He commits a criminal offence if he fails to make such a report.33

  3. The Registrar can notify an insurer to terminate the appointment of any director, managing executive, public officer, auditor or statutory actuary who is not fit and proper to hold the office. Upon such notice, the insurer shall comply and the person (or firm) concerned must cease the functions concerned, and commits an offence if it fails to do so.34

  4. The board of directors of an insurer must appoint an audit committee. The insurer commits an offence if they fail to do this.35

  5. The insurer also commits an offence if the audit committee has a majority of members, including its chairperson, who are its employees.36

E. Shareholding

  1. An insurer commits a crime if it issues shares to, or registers shares in the name of, or registers transfer of any of its shares to a person other than the beneficial shareholder.37

  2. No person shall (directly or indirectly) hold any interest in an insurer which results in him exercising control over it, without the approval of the Registrar, and it is an offence to do otherwise.38

  3. It is a crime (directly or indirectly) to acquire or hold shares in a short-term insurer, without the approval of the Registrar, if the total value of the shares would be equal to or exceed 25% of the total value of all issued shares. It is an offence to do otherwise.39

  4. So that the insurer knows to, or for whom it may be issuing or registering shares, it can require existing or likely shareholders to furnish certain information. The person in question is guilty of an offence if he fails to comply with a request in this regard.40

  5. When required to do so, an insurer must furnish to the Registrar a return containing such information as he determines in respect of its shareholders and other persons with controlling power. The insurer is guilty of an offence if it fails to comply with this obligation.41

  6. An insurer commits an offence if, without the approval of the Registrar, it:42
    • issues any securities;
    • changes the capital structure of the company;
    • reduces its share capital;
    • allows a subsidiary to acquire shares in it;43
    • provides financial assistance for the subscription of securities.44
  7. It is an offence to cast a vote attached to a share issued to a person, or registered in his name, in conflict with the provisions of the Act.45

  8. It is an offence to receive a dividend in respect of such a share.46

F. Financial health

  1. An insurer commits an offence if, at any time, it conducts the business in a financially unsound condition by not having assets, or by not providing for its liabilities and capital adequacy requirement, or by the general conduct of its business, so that is unable to meet its liabilities and capital adequacy requirement.47

  2. If at any time an insurer is unable to meet those obligations, it also commits an offence by failing to notify the Registrar immediately, and furnishing the reasons.48

  3. Upon such notification the Registrar may authorise the insurer to adopt a specified course of action (or he may initiate business rescue or winding up proceedings). The insurer commits an offence if it fails to comply with that authorisation.49

  4. An insurer is guilty of a criminal offence if, while it is in a financially unsound position as contemplated in F.1 (or is likely to be) it either declares, or pays out a dividend to its shareholders.50

  5. An offence is also committed if, as a result of declaring or paying out a dividend, the insurer would enter (or be likely to enter) into that financially unsound position.51

  6. A short-term insurer shall not:52
    • encumber its assets;
    • allow its assets to be held by another person on its behalf;
    • directly or indirectly borrow any asset;
    • by means of suretyship (or any other personal security) give security in relation to obligations between other persons;53
    • include in its assets, shares directly or indirectly held in its holding company,
    • without the approval of the Registrar, and commits an offence if it does.
  7. The insurer also commits an offence if it breaches any of the conditions upon which the Registrar may have granted such approval.54

G. Policy holder protection

  1. If a person is required to make a short-term policy (or its benefits) available and use it for security in respect of a contract for the loan of money (or the leasing of goods, or where credit is granted) the person so requiring that security is guilty of an offence if:55
    • he does not give the other person the free choice as to whether to enter into a new policy56 for that purpose;57 and
    • he does not give prior written notification of the free choice.
  2. It is a crime to provide (or offer to provide) directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel a short-term policy.58

  3. No independent intermediary may receive, hold or deal with premiums unless authorised by the insurer concerned, and then in accordance with regulations. He is guilty of an offence if he does otherwise.59

  4. The short-term insurer is guilty of an offence if it permits an independent intermediary to receive, hold or deal with premiums other than as it has authorised, in accordance with the regulations.60

  5. The insurer and/or intermediary commits an offence if it/he does not issue a receipt (stating the name, address, policy number and insurer) when premiums are paid to it/him in cash.61

  6. The insurer must provide a policy holder with a copy of the policy within 30 days, if the insurance is personal (home, or car insurance, for example) as opposed to commercial, and otherwise upon request. The insurer commits an offence if it fails to do so.62

H. General

  1. A short-term insurer commits an offence if:63
    • it does not have its head office in the Republic;
    • it fails to appoint a natural person who is permanently resident in the Republic as its public officer;
    • it does not notify the Registrar of the address of that head office and of the name of that public officer; and
    • the address of that head office changes, or if that public officer or the name of that public officer changes, it does not notify the Registrar thereof within 30 days.
  2. The public officer is guilty of an offence if he fails to ensure that the short-term insurer complies with the Act.64

  3. A short-term insurer commits an offence if it changes:65
    • its financial year; or
    • its name (or a translation, shortened form or derivative thereof),

    without the approval of the Registrar.

  4. A short-term insurer must notify the Registrar in respect of every director or managing executive appointed by it, or whose appointment has been terminated by it, or who has resigned, within 30 days, together with the reasons. It is a crime not to do so.66

  5. Any such director or managing executive who resigns or whose appointment has been terminated, must inform the Registrar (if requested) of any matter relating to the affairs of that insurer of which he became aware in the performance of his duties and which may prejudice its ability to comply with the Act. Any such person who is requested to do so, and fails to inform the Registrar accordingly, is guilty of an offence.67

  6. It is an offence for an insurer to allow another person to perform certain functions, other than by way of an agreement in writing and in accordance with any requirements, limitations or prohibitions prescribed by regulations.68
  1. Long-term’ insurance is, basically, life insurance. ‘Short-term’ insurance is where you insure your car, jewellery, factory, etc. 

  2. See the report by Bekezela Phakathi titled Short-term insurance fraud costs industry R4 billion a year dated 7 November 2013. It is published on www.bdlive.co.za

  3. As amended; the latest amendment was by way of Act 45 of 2013, effective 28 February 2014. 

  4. The offices of the Registrar (the Financial Services Board) are at 41 Matroosberg Road, Pretoria (tel: 012 428 8000). 

  5. Referred to from now on as an ‘insurer’. 

  6. Section 4(2). 

  7. Section 4(a) and (b). 

  8. Section 4(5)(a). 

  9. Section 12(2)(c). 

  10. Section 35(1). 

  11. Section 35(2). 

  12. Section 55(2)(f), section 64(1)(c) and section 65(1)(c). 

  13. Section 7(1)(a) and (b). 

  14. Members of Lloyds do not have to be registered. There are also other exceptions – medical schemes, pension funds, etc. See section 7(2) of the Act. 

  15. Section 9(2)(a). 

  16. Section 8(1)(a). 

  17. Section 8(1)(b). 

  18. Section 64(1)(d). 

  19. Section 64(1)(d). 

  20. Section 13(2). 

  21. Section 15(1). 

  22. Section 15(2). 

  23. This means a policy benefit which is to be provided in the event of the life of a person, or an unborn, continuing or having continued for a period. 

  24. Section 15(4). 

  25. Section 15(5) and section 65(2). 

  26. There may be more than one underwriter. 

  27. Section 8(2)(a). 

  28. Section 8(2)(b). 

  29. Section 8(2)(d). 

  30. Additional remuneration may be charged if disclosed separately and expressly to the policy holder. Section 8(5) of the Act. 

  31. Section 48. 

  32. Section 19(1). 

  33. Section 19A(5)(b). 

  34. Section 21(1) and (2). 

  35. Section 22(1). 

  36. Section 22(2). 

  37. Section 24(1)(a) and (b). 

  38. Section 25(1). 

  39. Section 25(2). 

  40. Section 26(2). 

  41. Section 16(1). 

  42. Section 23. 

  43. As contemplated by section 48 of the Companies Act 2008. 

  44. As contemplated by section 44 of the Companies Act 2008. 

  45. Section 27(1)(a). 

  46. Section 27(1)(b). 

  47. Section 28(1). 

  48. Section 28(3). 

  49. Section 34(2)(a). 

  50. Section28(4)(a). 

  51. Section 28(4)(b). 

  52. Section 33. 

  53. Unless the short-term insurer is registered to provide policy benefits in terms of a guarantee policy and does so in terms of a guarantee policy. 

  54. Section 33(1). 

  55. Section 43(1). 

  56. And, if so, with which insurer – and there are certain other free choice options. 

  57. If the existing policy is to be used, there are also certain other free choice options. 

  58. Section 44. 

  59. Section 45. 

  60. Section 45. 

  61. Section 46(1) and (2). 

  62. Section 47(1) and (2). 

  63. Section 16(1). 

  64. Section 16(2). 

  65. Section 17(a) and (b). 

  66. Section 18(1). 

  67. Section 18(2). 

  68. Section 48A.