Regulatory update - The concept of insurance and insurance regulation


In this article Patrick Bracher shares insight on the concept of insurance and insurance regulation.

Perhaps my first article should have placed the regulation of insurance in relation to the concept of insurance. Insurance is pre-eminently a method of spreading risk among a number of people who are exposed to similar or comparable losses arising from uncertain events or perils. Insurance companies pool the risks to enable those persons to make a relatively small contribution towards mitigating the adverse financial effects of a risk which may materialise for some of them. Because an insurer pools not only the risks but also the money of the insured persons, prudential regulations are required to ensure that the insurers carefully manage their assets so that funds are preserved and losses can be paid. This explains all the prudential regulations regarding the many forms of risk-spreading such as insurance, medical schemes, pension funds and investment products.

Insurance in the legal sense is implemented through an insurance contract. A contract of insurance was defined by the high court in 1967 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".

That rather vague definition needs to be unpacked. Under our common law a consideration is not required in return for undertaking an obligation. However, the Insurance Act of 2017 now explicitly refers to meeting non-life insurance obligations in return for a premium, which is any direct or indirect consideration. The reference to rendering insurance benefits in the definition as "a sum of money or its equivalent" is referred to in the Insurance Act as an "insurance obligation". It is an obligation to pay money, render services or meet other obligations under the policy. That is why non-life policies indemnify policyholders by payment, replacement, reinstatement or repair, and the basis of compensation may even be broader than that.

The reference in the definition to a "specified uncertain event in which the insured has some interest" is an inadequate description of insurable interest. The concept and functions of insurable interest have developed materially since 1967. The Insurance Act does not refer to insurable interest. For non-life insurers, it refers to meeting insurance obligations that fully or partially indemnify loss. Insurable interest is the interest in the non-occurrence of an event that causes financial prejudice. The non-life insurer undertakes to indemnify the insured against the financial losses resulting from the occurrence of an uncertain event. Insurance is not only concerned with losses relating to corporeal objects and ownership. Any lawful interest of a financial nature may be insured. Liability insurance, for instance, does not necessarily relate to any physical object.

The risk have to be uncertain. The uncertainty may relate to whether the risk materialises or not, or when it materialises, or the extent of change which the event brings about. The concept of damage (not damages) is crucial. Indemnity insurance looks at the before and the after of the event to see whether the insured persons asset value has diminished or the insured's debts have increased as a result of the event. The Insurance Act places limitations on the extent of non-life insurance. For instance, non-accidental death may only be insured by a life insurer even if it results in an indemnifiable loss.

The beauty of our Roman-Dutch common law is that decisions taken regarding the facts of a particular matter are made easier by bearing the basic legal principles in mind when doing so. Principle-based law is flexible and efficient.

Patrick Bracher
Norton Rose Fulbright South Africa