Santam also eager for legal certainty on Covid claims
● As SA’s short-term insurance industry waits for a court ruling on the Covid-related contingent business interruption (CBI) claims most insurers have so far declined to pay out, Santam says it wants legal certainty — so that if it has to pay out, its own reinsurers won’t repudiate its claims.
This comes as disputes continue worldwide between insurers, clients and regulators over how to interpret the CBI clauses and whether Covid claims must be paid.
On Tuesday, the Western Cape High Court reserved judgment in a watershed case in which Insurance Claims Africa joined forces with Ma-Afrika Hotels and restaurant company Stellenbosch Kitchen to put Santam in the dock. The case hinges on the interpretation of the policy wording — whether the insurer is liable for losses suffered as a result of a national lockdown prompted by a global pandemic, rather than just localised outbreaks of a notifiable disease.
Old Mutual Insurance, Hollard, AIG and Guardrisk are among the other insurers that have refused to pay out on CBI claims, with Guardrisk taking on appeal a CBI case it lost against Café Chameleon last month.
Santam has over the past four weeks paid out more than R950m in relief payments to 2,400 small and medium-sized hospitality, leisure and retail clients that had to shut during the lockdown — and whose policies included CBI. But Santam CEO Lize Lambrechts has emphasised that the insurer did this because it is the riPghRt thing to do — not because it is conceding the legal point that it is liable for claims under the CBI clauses in these policies.
On Thursday, Santam reported a 33% decline in headline earnings for the six months to June, after it set aside a R1.3bn provision to cover it in case the court ruling goes against it. But Lambrechts made it clear that the strict interpretation of the clause by its own reinsurers was a key constraint to paying out on the CBI claims.
“Our reinsurance programme will only respond to claims covered under the terms of our policies. In order to formulate a reinsurance claim under a different interpretation of the policy wording to our own, such interpretation would have to be definitively decided by the South African courts. We want to resolve the matter and get clarity as soon as possible,” Lambrechts said.
Santam chief financial officer Hennie Nel said Santam has a panel of more than 30 reinsurers, all A-rated international names.
In the UK, the industry is waiting for judgment on a test case, heard in July, in which the industry regulator, the Financial Conduct Authority, took eight insurers to court over billions of pounds’ worth of business interruption policies on which they refused to pay out. The Financial Times reports that a draft judgment is expected by mid-September, which could affect as many as 370,000 policyholders.
In the US, regulators have moved to force insurers to pay out on business interruption claims, in the face of resistance from the industry, while in SA the Financial Sector Conduct Authority has acknowledged that business interruption cover is a “complex issue” — but in July said it had reached an understanding with the insurers most affected by CBI claims that they would consider interim relief to their policyholders while legal certainty was being sought from the courts.
About 3%-5% of Santam’s commercial policy book includes CBI extensions and the insurer’s best estimate of its net exposure to the CBI claims is R250m, but it raised the much higher provision because of the legal uncertainty. If the case goes against it, the R1bn in relief it announced last month will be deducted from the claims of those who received the relief payments.
Rival Old Mutual Insure, whose interim results were reported this week as part of parent Old Mutual, made a provision of R1.1bn for CBI and business rescue support and disclosed that “business interruption and rescue” has cut R464m from its profits.
The Old Mutual group reported a 67% decline in its headline earnings. Rival Sanlam — which controls Santam — is due to report this week. A feature of Santam’s results that could also loom large in Sanlam’s was that the returns the group expected on its ambitious pan-African expansion strategy have been hit hard by Covid, with Santam writing down R700m of the value of its 10% holding in Moroccan financial services group Saham — which implies a likely R7bn writedown by Sanlam, which owns the rest of Saham.
Nel said Santam still believes that Saham is a very good business but its value is expected to take a lot longer to realise because of the impact of Covid. Saham also owns a big business in Lebanon that has been written down to zero following the destruction of large parts of Beirut in the recent ammonium nitrate explosion.