Last year’s High Court judgment involving Constantia Insurance Company’s Prime Living CoverGrow and Prime Living Legacy policies had a sequel before the Financial Services Tribunal in October, when it was asked to reconsider the decision by the Prudential Authority (PA) on how these policies should be dealt with.
The High Court’s ruling arose from Constantia converting from a short-term insurer to a non-life insurer. Its 5 427 Prime Living CoverGrow and Prime Living Legacy policies had life and non-life components but were regulated by the Short-term Insurance Act.
When Constantia converted to a non-life insurer under the Insurance Act, it could not offer these policies, and sought to cancel them.
But in June 2020, the High Court, in Nell and Others v Constantia Insurance Company Limited and Others, ruled that Constantia could not cancel the policies and had to follow the conversion route prescribed by the Insurance Act.
The court directed Constantia to include the policies as part of the conversion material to be submitted to the PA in terms of Schedule 3 Item 6 of the Insurance Act.
Item 6(5) gives the PA three options for dealing with policies that do not meet the requirements of the classes and sub-classes of policies set out in Table 2 of Schedule 2 of the Insurance Act. It decided on the second option: the orderly resolution of that insurance business.
The PA directed Constantia to offer each policyholder (a) a replacement policy with a personal accident death policy and (b) discounted individual funeral products.
Policies weren’t cancelled
In the matter that came before the tribunal, seven policyholders – whose application was supported by about 90 policyholders – applied for the reconsideration of the decision by the PA made in terms of item 6(5). Their main argument was that PA’s decision amounted to the cancellation of the policies, which, they said, the PA was not entitled to do.
But the tribunal said the “constant refrain” in the applicants’ case, that Judge Bashier Vally held that the PA could not cancel the policies, was “simply incorrect”. “He was not called upon to make such a decision and he did not.”
It said the policies had not been cancelled. “The policies lapsed because Constantia was no longer permitted to conduct that business.”
The tribunal said Judge Vally did not rule that the accident and health policies were life policies. “He said expressly that they were short-term policies. And he said that on conversion Constantia could no longer hold onto the policies in their present form.”
It said the PA had not directed Constantia to extend or provide each policyholder with health benefits, because it would be illegal for Constantia to continue underwriting health life benefits.
‘Run-off’ not an option
The applicants submitted that the PA should have instructed Constantia to conduct an orderly “run-off” of the policies and that the PA, although it considered the option, rejected it “because it took the view that placing these policies in run-off would severely negatively impact Constantia’s already precarious financial position”.
The tribunal said this submission failed to deal with the PA’s main reason for not allowing this. It quoted from the PA’s responding affidavit:
“To allow CICL [Constantia Insurance Company Limited] to continue to maintain its obligations and therefore continue with the affected policies would circumvent the specific requirements of the Insurance Act that required that a non-life insurer must not conduct life business.”
In addition, the PA said the risks posed in the affected policies being placed in run-off (for their full remaining duration) would have had a severely negative impact on CICL’s “already precarious solvency position”.
“Simply put, CICL would not have the capital reserves to sustain the risks posed by the affected policies. In the circumstances, the PA considered option (ii) to provide a middle ground in that it could direct CICL to offer replacement policies in line with the decision,” the PA said.
The tribunal said the High Court had held that allowing the policies to run their normal course was not a legally available option. Item 13 of Schedule to the Insurance Act does not allow the PA “to bypass the objects of the Act indefinitely”.
For these and other reasons, the tribunal dismissed the application.
