Reputation of insurance industry is on the line
“We’re paying the highest tribute you can pay a man. We trust him to do right. It’s that simple.” – Harper Lee, To Kill A Mockingbird
ALTHOUGH laws and regulations are essential for the smooth running of the financial system, it is on trust that it stands or falls.
We trust banks, for example, to be the custodians of our money. If all banks were to behave like VBS and simply steal our savings, there would be no banks; we’d all be stuffing our cash under the mattress.
Insurance companies are in a more delicate situation.
You pay a regular premium in return for a promise: that if you suffer a financial loss under a given set of circumstances, you will be compensated.
If those circumstances do not arise (for example, you never have a break-in), the insurance company does not owe you anything, despite you having paid premiums possibly over many years.
What insurers have to manage is this: they must reasonably be seen to be upholding their side of the agreement. They cannot be perceived by most of their customers – or the public at large – as being reluctant to pay claims. If most people felt that way about a particular insurer, the insurer would go out of business.
Generally, a bank cannot separate you from your money unless, as in the case of VBS, it clearly acts outside the law. But an insurance company can avoid paying you out and stay within the bounds of law, by finding a legal excuse to decline your claim.
Take, for example, a Kwazulunatal case I am following.
An insurer has not paid out the beneficiary on the life of a man who was electrocuted in the course of his work. The insurer has given no reasons for not paying the claim, except that it is investigating the circumstances of the death.
The man died three years ago, and a police report found that the death was accidental, but the insurer is still investigating...
Statistics show that insurance companies pay out most claims. It’s the cases in which the rejection of a claim is perceived to be unfair, and which get wide media coverage, such as the notorious Momentumganas case of 2018, that dent their reputation and erode public trust.
Which brings us to the current business interruption saga brought on by the pandemic.
Despite a landmark judgment going against the insurer Guardrisk this week, Santam, among others, hasa dug in its heels on compensating small businesses whose cover included notifiable diseases, essentially arguing that the policies were never intended to cover the economic collapse brought on by the lockdown.
This is very different from the odd isolated cases that have hit the headlines in the past. This is a whole class of cases that has the potential to irrevocably damage any trust South Africans have in the industry.
The industry is afraid it will not be able to cope financially with the flood of claims.
However, anticipating being overwhelmed by claims cannot in itself be a reason for declining them (as was nonsensically argued in the court case). This would be like hospitals refusing to treat Covid-19 patients, for fear of being overwhelmed. You’ve got to do what you’ve got to do, or at least as much as you can do.
In fact, Santam has indicated that its balance sheet is robust enough to withstand anticipated claims, although that may not be true of all insurers.
The Financial Sector Conduct Authority has now stepped in on the side of the policyholders and will likely force the hand of the insurers. But it shouldn’t have come to this.
Only one insurance company as far as I know, Outsurance, has voluntarily decided to honour these claims.
It puts the rest of the industry to shame.