The International Who’s Who of Insurance & Reinsurance Lawyers has brought together three of the leading practitioners in the world to discuss key issues facing lawyers today.
Locke Lord Bissell & Liddell LLP
Legislative and Regulatory Developments
Who’s Who Legal: What recent legislative or regulatory developments have there been in your jurisdiction, and what effect are they having/will they have on the insurance industry?
Donald Dinnie: South Africa awaits finalisation of new binder regulations for both the short and long-term insurance markets. The draft regulations in their current form will regulate a variety of binder holders and independent intermediaries in the market. It introduces for the first time the concept of the underwriting manager in the long-term market. Accident and health insurance will be more tightly regulated.
The coming into operation on 1 April 2011 of the Consumer Protection Act will affect insurers one way or the other. Insureds are consumers as defined in that Act, for example individuals or corporate entities with an annual turnover or asset value of below 2 million rand. Insurance legislation needs to be brought in line with the consumer protection measures of the Act within 18 months of its coming into operation. Plain language requirements of the Act and the ability to challenge policy terms and conditions on the basis that they are unfair, unreasonable or unjust, and the need to highlight and explain exceptions and other clauses will also then affect insurers.
The Consumer Protection Act introduces no-fault product liability and expands the scope for product recall. That will significantly increase product liability insurers’ exposure.
Consideration of product liability and product recall policy wording is recommended.
Michael Mendelowitz: In the UK, the question is not so much what has happened recently, as what is about to happen. Thus, for example, the insurance industry is gearing up for two fundamental changes in regulation, which are scheduled to take effect at the beginning of 2013. One of these is substantive and transcends jurisdictional boundaries - namely the introduction of Solvency II; the other is structural and national - namely the dissolution of the Financial Services Authority and its replacement by three new regulatory bodies.
Solvency II may not have much effect on the way in which UK insurers conduct business vis-à-vis their clients, since a similar system of risk-based capital has been effect in the UK for some years already, but the increase in the regulatory burden imposed on the insurance industry has been considerable, with reports of many millions of pounds having been spent on additional personnel and systems needed to cope with the new modelling and reporting requirements. The impending break up of the FSA has not been welcomed by the insurance industry, which sees itself as being punished for a financial crisis for which it was not responsible. In particular, insurers are unhappy at the prospect of having to deal not with a single regulator, but at least two, who might both assert authority over the same aspects of an insurer’s business and give conflicting directions to the insurer.
In addition, the Law Commissions of England and Scotland have made significant progress with their insurance contract law reform project, which commenced in 2006. Following a number of issues papers and consultation papers, the first piece of draft legislation to emerge from the project - namely the Consumer Insurance (Disclosure and Representations) Bill is currently awaiting consideration by parliament. If enacted, it will sweep away a consumer’s duty to volunteer material information to an insurer prior to the underwriter’s acceptance of the risk, and replace that duty by a requirement to answer an insurer’s questions honestly and to take reasonable care that the answers are accurate and complete.
On 29 March 2011, the Ministry of Justice published the UK government’s response to Lord Justice Jackson’s recommendations on Reforming Civil Litigation Funding and Costs. Probably the most significant aspect of the response is the government’s stated intention to abolish the recoverability from the losing party of success fees in conditional fee agreements (CFAs) as well as after the event (ATE) insurance premiums in most cases. In future, any success fee will have to be paid by the CFA-funded party, which will give that party a financial incentive to control the costs being incurred on its behalf. The insurance industry has complained that inflated success fees and the recoverability of ATE premiums impose a significant - and often unfair - burden on defendants and their liability insurers. The government’s response to the Jackson recommendations will therefore be welcomed by liability insurers, even if the ATE legal expenses market is less happy: the effect is likely to be downwards pressure on ATE prices, since the premium may actually have to be paid upfront by the insured, rather than (as happens at present) the insurer funds the premium and receives payment only if it is recovered from the losing party.
Perhaps the most significant development actually to have materialised (as opposed to being anticipated) is the publication by the Ministry of Justice of guidance regarding the procedures that commercial organisations will need to put in place in order to avoid or successfully defend a prosecution for failing to prevent bribery under the Bribery Act 2010. The Act is, of course, of much wider application than to the insurance sector alone, but insurers and brokers will need to consider how they should be conducting themselves in future in relation to matters such as corporate hospitality and the commissions (contingent or otherwise) which insurers pay to brokers for the production of business.
Who’s Who Legal: There has been a trend towards an increase in D&O insurance and litigation as a result of the financial collapse. What steps have your clients taken to minimise the impact of another crisis, and how does your firm help them do this?
Donald Dinnie: With regard to the impact of another crisis and how the firm helps to minimise the risk, there has been much talk of increased D&O exposure. There has been limited litigation in South Africa to date.
We are active in educating clients on D&O exposure having regard to the South African legislative work including the new Companies Act and amendments to the Competition Act. The firm’s professionals publish and lecture regularly in that regard.
Michael Mendelowitz: Actually, my perception is that although there may have been an increase in the uptake of D&O protection, the litigation wave that was predicted a few years ago has yet to materialise. Those of us in my firm who work in this area are aware of a significant increase in precautionary notifications of circumstances under D&O policies, but claims are still relatively few and far between. We have been working with clients - both insurers and policyholders - to review the scope of the protection which they provide or buy, as the case may be.
Who’s Who Legal: What are the biggest challenges facing the legal insurance community in your jurisdiction?
Jonathan Bank: California’s new insurance commissioner has a pro-consumer agenda. He has adopted many of the initiatives of his predecessor, and appears prepared to introduce new guidelines. The industry needs to keep a watchful eye toward regulations emanating from California.
Donald Dinnie: Gearing up for compliance with the provisions of the Consumer Protection Act insofar as it will affect insurers and the insured, including the plain language provisions of the Act, is an ongoing challenge.
Opportunities and challenges will be created by the binder regulations once they are finalised, and by conflicting provisions under the Financial Advisory and Intermediary Services Act.
Michael Mendelowitz: This question can be interpreted in more than one way. If the emphasis is placed on ‘insurance’, then the challenges simply reflect the developments already discussed or which will be discussed later. If the enquiry is directed more to providers of legal services to the insurance sector, then the biggest challenge is undoubtedly the ability to continue to provide a high quality service at a cost that the industry will accept. Litigation is undoubtedly expensive, and it remains to be seen whether implementation of the government’s proposals for reform of civil litigation funding and costs - discussed above - will have a significant effect in this area.
The Next Big Thing
Who’s Who Legal: Medical mass torts dominated the insurance litigation field for the last 15 years. Do you expect the recent spate of environmental and natural disasters to generate a host of property casualty litigation spanning just as long? And do you think policy changes in your region need to be made to better accommodate ‘Acts of God’?
Jonathan Bank: Climate change, whether due to ‘Act of God” or man made, is a subject that will continue to generate much discussion. The property market has already seen a rise in ‘natural’ disasters, which will spawn litigation over the significant losses we are now experiencing. Policy changes to accommodate these occurrences are unlikely until the market hardens.
Donald Dinnie: South Africa is fortunately geographically remote from the recent spate of environmental and natural disasters. It is not anticipated that those events will promote a spate of property litigation within the South African jurisdiction. Reinsurance may become more expensive.
While the Constitution has always permitted class actions, the new Companies Act and the Consumer Protection Act now specifically allow for class actions and it is anticipated that class action litigation will increase. That is so for instance in the context of a recent mining law judgment which removes a hurdle to litigation by miners suffering from industrial diseases such as silicosis and miners phthisis against mining companies, and consumer rights.
The South African market is fairly robust in respect of medical tort litigation but class actions in that regard are not anticipated.
Michael Mendelowitz: The short answer to both questions, in my opinion, is no. Disputes will no doubt arise over the scope and extent of cover for some of the losses, but the experience following Hurricanes Katrina, Rita and Wilma in 2005, which - in comparison to the scale of destruction and loss that they caused - did not generate as much insurance litigation as might have been expected, leads me to believe that the insurance industry will weather recent events without too much trouble. I have not heard it suggested that typical wordings of policies that insure against natural disasters have proved problematic, either from the point of view of policyholders or from that of their insurers.
Who’s Who Legal: How has the financial crisis affected the level of foreign insurance companies entering your jurisdiction? Have there been consolidations in the market, leading to fewer but bigger players, and fewer opportunities for new entries?
Jonathan Bank: We are in a ‘soft’ market, and have been for much longer than the usual cycles due to over capacity in most lines. While consolidations have been predicted, the pace is slower than expected, which is probably largely attributable to the deep recession we are slowly coming out of. We should expect to see more M&A activity this year.
Donald Dinnie: The South African markets saw the consolidation of market players approximately 10 years ago. Since that time a number of foreign entrants to the market have either withdrawn, or reduced their presence, no doubt in part having regard to the competitive nature of the local market. Few major new companies have appeared recently.
Some foreign insurance companies maintain a presence in the jurisdiction but some only servicing multinational clients at a corporate level.
We continue to receive enquiries from potential new entrants and to assist new entrants to the market.
Michael Mendelowitz: There can be no doubt that the insurance sector has seen a steady process of consolidation for some years, which is continuing. This is not a trend that was caused (at least not exclusively) by the financial crisis, but the crisis probably strengthened the trend.
Who’s Who Legal: How have client expectations changed since the global crisis? Is there more willingness to avoid ‘big ticket’ litigation and opt for alternative dispute resolution? Do law firms increasingly place more emphasis on preventative planning and settlements?
Jonathan Bank: Litigation has slowed up, not just in the US, but also throughout the worldwide industry. Clients are clearly more cost conscious, and the increasing costs of reinsurance arbitrations/litigation are a big factor in this trend. Lawyers who are able to resolve disputes short of litigation will find themselves in demand.
Donald Dinnie: Insurers remain cost conscious in respect of general liability claims. In respect of higher value work and litigation, clients value appropriate legal advice and assistance. There is no general trend to alternative dispute resolution. We have and continue to educate and assist in respect of risk prevention and control.
Insurers do value settlements in appropriate circumstances.
Michael Mendelowitz: It is certainly true that clients are trying to avoid big ticket litigation (and other formal methods of dispute resolution such as institutional arbitration) in favour of techniques such as mediation, and that law firms (and indeed their clients) are placing more emphasis on preventative planning and settlements. However, these tendencies pre-date the global financial crisis; the crisis did not cause these reactions, although it probably exacerbated them. The real causes are, I believe, to be found rather (looking at it from the policyholders’ point of view) in the perception that commercial litigation is becoming disproportionately expensive, or (from the point of view of the insurance market) that as long as the business remains profitable on the whole, insurers would rather settle claims than fight them. In any event, responsible litigators should (and most of them have always done this) look at their clients’ needs in the round and, whenever practicable, recommend preventative measures or the settlement of disputes as alternatives (or in addition) to litigation or arbitration.