PERL01-5: Personal Lines

Insurance

TOPIC 1
Module Outcomes

1. Apply insurance concepts and processes to Personal Lines insurance.

2. Relate the rules of Sasria to Personal Lines insurance.

3. Distinguish between different classes of short-term insurance.

4. Relate the process of risk management to the context of a natural person.

5. Analyse the different types of Personal Lines insurance products to advise a client on an
appropriate product.

6. Determine the short-term insurance needs of an individual through a needs analysis process.

7. Explain the various steps in the claims process.

Topic 1: Personal Lines insurance environment

Introduction

Module Outcome

1. Apply insurance concepts and processes to Personal Lines insurance.

2. Relate the rules of Sasria to Personal Lines insurance.

The function and purpose of insurance

Insurance is a risk-transfer mechanism whereby the insured can transfer their risk of financial loss to
the insurer, who accepts their premium in return for an undertaking to compensate them for potential
losses.

The purpose is to place the insured back in the same position as he was prior to the loss.

The concept of short-term insurance

Insurance works on the principle that many parties pay a relatively small portion towards a pool from
which any one or more parties who suffer losses can be compensated.

There are three major role-players involved in short-term insurance: the reinsurer, underwriter and
intermediary.
Basic principles of insurance

Short-term insurance is governed by a set of fundamental principles.

Insurable interest

This is the legally recognised relationship between the insured and the financial loss that is suffered

The extent of the insurable interest includes the limit of liability / sum insured. Insurance
cannot cover sentimental value.

When insurable interest must exist

▪ Marine =At the time of loss
▪ Life =At the time of purchase
▪ All classes of Short-term insurance =At the time of purchase AND the time of loss
Insurable interest continued

Without insurable interest, the insurance contract is void (of no legal effect) and
unenforceable.

There are four (4) features essential to insurable interest:

1. There must be some property, rights, interest, life, limb or potential liability capable of being
insured.

2. Such items must be the subject matter of insurance.

3. The insured must stand in a relationship with the subject matter where they benefit from its safety
and would be prejudiced by its damage.

4. The relationship must be recognised by law

Indemnity

The act of putting the insured back in the same financial position he was before the occurrence of a
loss. The insured is not to be put in a better or worse position. Although mostly the insured is better off
because most policies now is based on the principle of “new-for-old” and not depreciated values.

It can be achieved by:

1. A cash settlement (cash in lieu): the insurer pays the amount less the excess.

2. Replacement: the insured is given a replacement item of the same kind and quality.

3. Repair: items are repaired by a vendor, and the insurer pays them. The insured may be
required to pay the excess directly to the vendor.

4. Reinstatement: usually with regards to buildings but comes with many problems.
Average

When items are insured for less than their full replacement value, the insured is required to
bear a portion of any loss and is actually self insuring to a certain extent.

Average will reduce a claim in direct proportion to the amount of underinsurance.

Where property is totally destroyed the full sum insured will be paid.

Average does not exist to punish the insured, but to ensure that all insureds contribute the
correct and fair amount to the pool.
Subrogation

Handing over of rights to a third party.

It means that the insurer take over all proceedings during claims and the insured is not to lodge any claims against
a third party in their personal capacity.

This clause prevents the insured from being put in a better position after a claim, which is contrary to the principle
of indemnity.

The insured is entitled to indemnity and no more than that; he cannot be put in a better position than he was
before the loss.
Proximate cause

For a loss to be paid under a short-term insurance policy, it must have been caused by an insured event.

The proximate cause of loss is the most dominant cause in terms of bringing about the
damage or loss.

The insured is responsible for proving that the damage or loss was proximately caused by
an event that is insured on the policy.

If the insurer says it isn’t covered, then the insurer must prove it.
Good faith and the duty of disclosure

When a person proposes to take out insurance, he must give the insurer full details about the risk as he
knows more about the risk.

Both parties to the insurance contract must deal openly and honestly with each other without
withholding information.

The insured should disclose factors influencing the risk, so that the appropriate premium can be
calculated if the risk is deemed acceptable.

The insurer should communicate what is covered and what not, and what premium is charged and how
it is payable.

Non-disclosure of material facts can lead to a claim being repudiated or the insurance
contract being cancelled by the insured.
Contribution

The insured could have more than one insurance policy to cover the same item but because of the
principle of indemnity, the insured cannot be enriched, and contribution will apply.

Under Common Law, someone who has dual insurance can choose from which insurer they want to
claim, and then that insurer can claim contribution from the other insurer involved.

The conditions applicable for contribution to apply:

1. The two policies must cover the same insured and subject matter.

2. The same interest and both policies must be in force at the time of the loss.

3. Each insurer will pay their ratable portion of the loss relative to the amounts insured.
Compensation

In the case of disability or death, an insurer would pay compensation.

Indemnity can never be provided as insurers cannot give back life or the limb.

The sum insured is agreed upon at the time of the inception of the policy as indemnity can never be
provided and thus contribution does not apply.
Role-players in Personal Lines and their legal structure

The short-term insurance industry is governed by the Short-term Insurance Act (STIA ), 1998 (Act No.
93 of 1998) and the Insurance Act, 2017 (Act No. 18 of 2017 ).

The objective of Short-term Insurance Act (STIA) is to control the activities of short-term insurers and to
provide for the registration and deregistration, should an insurer not meet the solvency requirements of
the Companies Act, 2008 (Act No. 71 of 2008) and the legislation relating to Solvency Assessment
and Management (SAMS).

The Financial Advisory and Intermediary Services Act (FAIS Act), 2002 regulates the rendering of all
financial services.
Role-players in Personal Lines and their legal structure continued

The FAIS Act, 2002, introduced the concept of “fit and proper” requirements, which relate to certain
characteristics and competencies that are required including the regulatory exams (RE) and
educational requirements.

It requires that all Financial Services Providers (FSP’s) be registered and appoint at least one Key
Individual (KI) to manage and oversee with the help of a Compliance Officer the FSP and uphold the
principles of FAIS and other legislation.

The requirements of the Registrar of Financial Services are upheld through the custodianship of the
office of the FAIS and Short-term Insurance Ombuds,
Sasria SOC Ltd

The South African Special Risks Insurance Association (Sasria) was formed after the 1976 Soweto
riots. In 1999, Sasria converted to a limited company.

Functions very similar to other classes of business as far as insured is concerned.

Insurance companies issue the policy documentation or coupons, which provide Sasria cover, and are
agents for Sasria.

Types of coupons

1. Material damage: cover all risks other than those listed below.
2. Contract works/Construction plant: covers some of the engineering type risks.
3. Consequential loss: for the Business Interruption section.
4. Motor policy: for all types of motor vehicles.
5. Marine and inland transit: there are special arrangements as Marine insurance normally covers
strike, riot and civil commotion.
Underlying policy

In the case of all the covers, except for motor, there must be an underlying policy and the insurer who
issues the underlying policy must also issue the Sasria coupon.

Cover provided by Sasria

Damages arising from civil unrest, terrorism and labour action like strikes, lockouts etc.

With a Sasria policy, insurers are obliged to provide cover and may not refuse cover based on area, the
risk or even impending danger of a riot in the area. Once cover is given, Sasria may not cancel.

A Sasria policy covers direct as well as consequential loss.

Sasria – General Exclusion

1. “Indirect” means damage caused by other groups.

2. A stoppage or deliberate slowing down of work.
3. Property being disposed of or confiscated by any lawful authority.
4. Any lawful authority when dealing with riots, civil commotion or any other political, social or
economic act, war and warlike acts.

Looting is covered in the following circumstances:

1. Where the looting was itself the immediate objective.

2. Where it was an immediate, proximate, direct and foreseeable

result of he very opportunity for theft and looting.
Sasria rates
Sasria Personal Lines Risks Regulations

Additional cover extensions

The following examples of additional cover extensions must be identified and recorded on the
schedule:
• Capital additions clause: 15% of the sum insured of Houseowners
• Escalator clause: The percentage amount stated as a Rand amount

Rent

The free rental provision granted in terms of the underlying Personal Lines policies will be followed by
Sasria, irrespective of the percentage amount.

If the extension is not automatic, the Sasria must also be charged for accordingly.
Sasria accounting

Premiums must be paid over by insurers within 45 days of the month in which cover begins. Penalties
are charged where the agents fail to observe this requirement. Accounting returns must be submitted to
Sasria twice yearly. The members’ auditors must verify these returns.

Monthly premiums

Sasria premiums are normally annual premiums, but because of the volume of monthly policies today,
there is a facility for a monthly policy which is available to clearly identified group schemes and is only
available for true monthly policies and not for annual policies paid monthly.

A coupon is issued at the end of each month, providing details of the aggregate sum insured and total
number of policies.
Pro-rata premiums

A pro-rata premium applies the first time the insured takes out Sasria cover. Thereafter the full annual
premium is payable. Also, can be charged to enable the period of insurance to adjusted.

Cancellation of Sasria

May be cancelled for a variety of reason, but premiums may only be refunded under certain
circumstances:

• When the interest of the insured in the property ceases.

• Where the insurer cancels the underlying policy due to adverse claims.

• Where the member re-issues the underlying policy.

• In case of a final transfer in terms of a takeover certificate or similar legal transfer of risk.
Nasria (Namibian Special Risk Insurance Association)

Like Sasria operates only in South Africa a similar arrangement operates in Namibia.

To make things easier for holiday makers and others:

1. Vehicles registered in South Africa and insured with Sasria may travel in Namibia without the need
for separate cover.
2. Property in transit from South Africa to Namibia remains covered, including the return journey, but
cover ceases if it is permanently handed over to anyone in Namibia.
3. Cover for South African goods imported or exported through Namibia may be issued through
Sasria.

Proof

If the insurer does not pay a Sasria claim, the insured needs to proof that he was covered and that the
incident giving rise to the loss is an insured peril.