Insurers in limbo after court loss
It’s an anxious wait for both insurers and their cash-strapped customers after Café Chameleon’s victory in the courts
The walls are closing in on short-term insurers, as both the courts and their regulator, the Financial Sector Conduct Authority (FSCA), rule against them.
Many had expected clarity only in September when the case between market leader Santam and a consortium of aggrieved policyholders is heard in the high court in Cape Town.
But on July 6 the same court found in favour of Café Chameleon CC, a restaurant in Plattekloof in Cape Town’s northern suburbs and, ironically, a stone’s throw from Santam’s head office.
The loser of this battle was Guardrisk, a unit of Momentum Metropolitan, which has a high market share in the hospitality industry through specialist underwriting manager HIC. But it is aiming for a replay in the appeal courts.
The judgment coincided with the date of the Santam AGM. Shareholder activist Just Share took the opportunity to put Santam on the spot. To date, Just Share CEO Tracey Davies has focused on environmental issues, particularly Sasol’s high carbon footprint and the bank’s lending to fossil fuel projects. "But we can see an increasing disconnect between corporate PR and corporate action. Santam’s action is a clear example of a big gap."
She says Santam calls itself a caring SA corporate, but it is not playing its part in alleviating the suffering caused by Covid-19.
Just Share, Davies says, has a role to play so long as fund managers and even the JSE itself, which regulates listed companies, turn a blind eye to bad corporate behaviour.
So much for all those firms that have signed the code for responsible investing in SA.
In the Café Chameleon case, the court compelled Guardrisk to honour its commitments to pay the restaurant its business interruption claim.
Ryan Woolley, CEO of Insurance Claims Africa, a loss adjuster which is leading the consortium of 500 businesses against Santam, says it is significant that high court judge Andre le Grange rejected Guardrisk’s argument that losses suffered by the claimants were due to the lockdown and not Covid-19.
"It is clear that without the virus there would be no lockdown, so to attempt to separate the two is nothing short of disingenuous," he says.
Woolley says he is still aiming for a sensible compromise settlement, in which businesses will take between 40% and 60% of what is owed to them, so long as they have enough working capital to tide them over for a few months.
Richard Eales, head of nonlife insurance at Guardrisk, says the insurer has been exploring avenues to provide support to businesses in the tourism and hospitality sector.
Still, it’s set to appeal the judgment.
"It is important that we do so in order to obtain certainty for the industry, our business and our policyholders."
Denker Capital portfolio manager Jan Meintjes says the judgment is out of step with courts in the rest of the world which have not considered lockdown to be a specific trigger for claims.
Reinsurers take on a large part of the business interruption risk and they are refusing to stump up their share of the bulk of Covid-19 business interruption cases.
Eales concedes that this appeal process is likely to be lengthy and says Guardrisk and HIC are committed, along with their brokers, to implement relief measures that will help policyholders to weather this storm.
Café Chameleon’s attorney, Ren Dunster, says: "I think everyone is presuming that leave to appeal will be granted because of its significance, but the reality is that it is a solid judgment. If leave should be granted we are confident that the Supreme Court of Appeal would uphold the judgment."
Santam, meanwhile, maintains that the Guardrisk ruling does not necessarily apply to its own business as its policy wording is different.
Hollard’s head of group marketing, Warwick Bloom, says the Parktown-based insurer has paid out millions from business insurance policies out of the R5.5bn in claims it has paid this year.
"In our view government regulations are not, and can never be, an insurable risk, a view recognised in insurance jurisdictions around the world. We believe that obtaining a clear legal view regarding this issue is both urgent and essential."
Bloom says there needs to be a balance between the desperate needs of claimants with the responsibility to all other policyholders and the need to ensure the continued financial stability of the sector.
But hiding behind legal technicalities will not be enough for the FSCA.
The cornerstone of its market conduct regulations is treating customers fairly, and using the letter of the law not to pay claims would often be considered unfair.
The FSCA’s Makgompi Raphasha says the national lockdown cannot be used by any insurer as grounds to reject a claim.
But it does not mean that insurers have to honour all claims immediately. There will be extensive discussions between the FSCA and the insurers, and each policy wording will be examined on a case-by-case basis.
Meintjes says that given the far lower claims on Santam’s core motor book, which accounts for half of premium income, he is surprised to see in the company guidance that its underwriting margin will fall from 7.7% to about 5%, which might not even include a full provision for business interruption.
Event cancellation and travel insurance would have hit in the first quarter, and in the second half trade credit or debtors’ insurance claims are likely to mushroom as companies go under — though Santam is a small player in this category, which is dominated by Old Mutual’s Credit Guarantee.
He says investors expect good and bad years from short-term insurers, as claims will always be uncertain, but Santam has been one of the best investments among financials on the JSE for decades.
Avior Capital Markets head of research Warwick Bam says insurers manage risk by spreading their specific known risks.
But a pandemic is systemic and cannot be diversified.
"The survival of the tourism and hospitality sector is not entirely dependent on insurance cover over the lockdown period, as trading will remain weak for as long as the virus remains a high risk to society."
Bam says it will be a poor year for Santam not only because of higher claims but also because lower cash rates, and weak equity and bond markets, will hit its return on long-term shareholders’ funds and its free-float short-term cash holdings.
But he says there is little danger of Santam’s balance sheet eroding to the extent that it needs to raise capital through a rights issue — but it could be prudent and withhold the 2020 dividend.
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