No insurance premium, no cover

Last week I wrote an article titled “Insurance Policy on Credit”. In that article I looked at Statutory Instrument 81 of 2023 known as Insurance (Amendment) Regulations, 2023 (No.26), which was gazetted in May 2023.

This Statutory Instrument (SI) was gazetted in May 2023 in terms of Section 89 of the Insurance Act (Chapter 24:07). The effect of the SI was to amend the Insurance Regulations, 1989, published in SI 49 of 1989, by inserting a new section 5AA after section 5A.

No premium no cover

I explained that according to section 5AA (1) the receipt of an insurance premium shall be a condition for a valid contract of insurance and there shall be no cover in respect of an insurance risk unless the premium is paid in advance.

I now add that in simple terms it means “no premium no cover”.

I further explained that the implications of this new section are very clear. The insured has to have the funds to pay for the cover upfront. I opined that I can foresee this IS being used widely when policyholders in default of payment attempt or seek to make a claim in the event of a misfortune or loss.

Crop insurance

I also explained that in terms of section 5AA(2) the above condition or requirement does not apply to the insurance of crops in terms of the Farmers Stop Order Act (Chapter 18:11).

Clarification on insurance policy on credit

In my article, I explained that according to section 5AA(3), every insurer (insurance company) that issues insurance on credit must record on the policy document that the policy is on credit.

The interpretation I assigned to the possibility of insurance on credit was not limited to crop insurance in section 5AA(2), but broad in that notwithstanding the restriction in section 5AA(1), credit insurance was still possible, but required the insurer to record and show that it was insurance on credit.

As is typical with new laws or laws in general, interpretations may be different. A colleague of mine who is quite senior in the insurance industry got in touch and advised that the “no premium no cover” position I wrote on was correct except that there was a different interpretation of credit insurance as their interpretation was that it applies to crop insurance only.

I requested that we reconcile our interpretations and important literature was then gladly sent to me.

The interpretation based on the literature shared is to the effect that credit insurance is only available to farmers for crops that fall under the governance of the Farmers Stop Order Act.

I am inclined to agree with that interpretation after gaining an appreciation of the “mischief” or the problem the SI intends to address or cure. I urge readers to adopt that interpretation.

The mischief the SI intends to address

Through reading the literature that was shared I got to understand the following important issues which I paraphrase hereunder:

Prior to the promulgation of the SI 81 of 2023 insurers could legally provide insurance cover on credit. They could settle claims even before they received a premium from the insured.

In the event of no claims, some policyholders may be tempted not to pay the premium. That has the effect of increasing premium debtors. In fact, credit insurance has the risk of resulting in bad premium debtors.

Premium debtors affect the liquidity of insurance companies and this may consequently affect settlement of claims.

Essentially, credit policies and the resulting debtors and liquidity challenges have the effect of diminishing confidence in insurance policies. Companies will struggle to settle claims and liquidity challenges may affect company operations and the viability of the industry as a whole.

From the above, it is agreed that the intention of the SI is to restrict credit insurance.

I, therefore, reconcile with and concur with the narrow application of credit insurance that it is only available to crop insurance.

Conclusion

SI 81 of 2023 has the effect of restricting and curtailing credit insurance as a way of protecting the insurance. No premium, no cover.

Disclaimer: This simplified article is for general information purposes only and does not constitute the writer’s professional advice.

Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. /He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity./He can be contacted on +263 772 246 900 or gohofisi@gmail.com

-herald