A December 2024 tax court judgment recognises that risk transfer, including the major role played by insurers, takes many forms. Courts in South Africa frequently refer to a 1967 court definition of a contract of insurance as a "contract between an insurer and an insured, whereby the insurer undertakes in return for the payment of a price or premium to render to the insured a sum of money, or its equivalent, on the happening of a specified uncertain event in which the insured has some interest". The definition has been criticised as rather vague and not suitable for all purposes. It is okay as a starting point but not as a limitation. It was written well before cell captives were established, first-in-the-world, in South Africa. Cell captives recognise that the bonuses previously paid on insurance policies were not the only way of rewarding good risk management or the good luck of the insured during the insurance year. There are many ways in which the insured can now share in the profits of a good insurance year. In cell captive arrangements, the profits are shared by way of dividends paid to the shareholder. Captive insurance of first party operational risks of a group of companies within the group is becoming popular worldwide. The recent tax court judgment found that contingency insurance, although not usual or conventional insurance, is insurance nonetheless where the particular policy considered had a risk transfer limit of the premium plus 20%.

More recently, the demand for parametric insurance and catastrophe bonds has significantly expanded the scope of insurance solutions. Parametric insurance pays out a specific sum immediately without question when a specifically described threat, exposure or peril occurs, without the insured having to prove its loss. Governments are looking at these solutions to provide cover for widespread events such as droughts, or major floods and fires.

These new concepts of transferring or keeping risk and sharing in the upside stem from two things. The first is the dynamic and entrepreneurial nature of the insurance industry as a major player in risk-spreading and in the financial health of the economy. Secondly, as a consequence of the prudential requirements for insurers, there are many risks which are becoming uninsurable or insurable only at premiums that some find unacceptable. In some areas it has become increasingly difficult to find affordable insurance for war risks, weather-related risks, cyber risks, and others. This drives businesses to seek other solutions. Because those kinds of risks are increasing in impact and frequency, the dynamic ability of insurers to provide solutions should not be undermined by conservative thinking. The Insurance Act allows for the very opposite approach and should be used as a tool for innovation.

Patrick Bracher
Norton Rose Fulbright South Africa
February 2025