In The Merchant of Venice, Shakespeare tells the story of a young and successful businessman, Antonio, who stands surety for the debts of a friend, Bassanio. The moneylender is Shylock, who stipulates in the contract that, should Antonio not be able to fulfill his obligations, Shylock will be entitled to take a pound of his flesh in settlement.
By all accounts, Bassanio and Antonio are delighted with the terms of the contract, and all seems well.
However, matters turn out for the worse. Bassanio goes to another town to court a rich heiress, Portia, and, while he is away, Antonio falls on hard times, which means that he can’t pay Shylock what they owe. Shylock demands his pound of flesh and it seems that Antonio is going to have to pay the price. Bassanio returns and offers repayment, but Shylock insists on the letter of the contract.
He is saved by Portia, a lady posing as a lawyer, who finds a clause in the contract that Shylock may not spill a drop of Antonio’s blood and that then prevents the taking of the flesh. In the end, more laws are invoked to force Shylock to give up his wealth and convert to Christianity.
In our modern times, this story still resonates with those who find themselves with contracts that they willingly concluded and that do not turn out as they had hoped. Shylock is also despised for his wealth and religion, and is thus a ready “villain of the piece”. On the other hand, Antonio, who, one can assume, has at least a passing familiarity with commerce and the legal stuff applicable to it, given his ownership of several ships and obvious wealth is a victim of the situation and is only saved by liberal interpretation of the law and the contract.
This tale is centuries old, but we may still learn some valuable lessons from it.
The short-term insurance industry finds itself cast in the role of the villain more and more these days, while the consumer plays the wronged hero. In this play, there are also various players who intercede on behalf of the hero and use questionable interpretations to protect the hero at any cost. The slew of legislation and regulation that has been imposed on the industry in the name of consumer protection has added layer upon layer of complexity on the operational structures of insurers and brokers, with regulatory examinations and demands for higher professional standards coming at insurers and brokers more and more. Clearly, the insurance industry must be populated by unprincipled and mean businessmen and women, all set to take the insuring public for all that they’ve got, or so it would seem.
Consumers, in contrast, are depicted as poor, innocent and naive individuals who need the protection of the government and various agencies to survive in this inhospitable environment. They are babes in the wood with the ugly predators stalking their money with avaricious zeal.
In addition, structures such as the Financial Ombudsman Schemes Act are used as a weapon by ever more shrewd consumers against the industry, if recent reports are anything to go by. Indeed, it is difficult to detect any kind of sympathy for the insurer or broker these days. Let’s examine a few examples:
In principle, fraud (including insurance fraud) is a crime. However, the Office of the Ombudsman has stated that it believes “that where the true value of a genuine claim can be established, even if certain aspects of the claim are tainted with fraud or misrepresentation, then the bad portion of the apple should be cut out, so to speak, and the insurer should pay the true value of the claim”. This reasoning, whilst being defended as based on equity and fairness, is flawed in that it does not recognise that a crime has nevertheless been committed. One cannot argue that an employee who steals only a part of her employer’s money is still basically honest. This is a slippery slope, as the question of the degree of fraud then arises and one would have to make a judgment on that – is ten percent okay, but twenty not? What level of tolerance are we to apply to crime? The ombudsman’s office clearly states that it believes that the “simple” inflation of quantum or misrepresentation of the extent of a loss is only “incidental fraud” which is not as serious as “relevant or causal fraud”. It is particularly disturbing that these decisions are purported to be made in accordance with “public policy” which includes notions of fairness, justice and reasonableness, while these arguments are only ever used to favour the insured. But then, perhaps we should not forget who the villain is supposed to be in this play.
Another example that seems to be liberally interpreted in the consumer’s favour is the full disclosure of pre-existing conditions. A very recent court decision ruled that an insurer had to pay for a motor vehicle accident claim despite the insured not having disclosed a previous conviction for negligent driving. In fact, the court ruled that the non-disclosure was “inconsequential”. The presentation of the risk at the time of underwriting it is surely the crucial element in determining the premium, or ultimately, whether the risk is to be underwritten at all. If the insurance industry is to be kept in the dark as to the real nature of the risks that it is to underwrite, on the basis that disclosure of such facts and the sanction that those facts may elicit may be prejudicial to the consumer, then we have a clear example of circular logic. There is a distinct disincentive for the insurer to enter into such an insurance agreement.
It is from time to time alleged that the insurer dictates the terms of the policy and that the consumer is left in a vulnerable position. Market competition has ensured that policy wordings have advanced well beyond the archaic language and dense fine print once used – this problem was solved decades ago. Our forefathers knew very well that contracts were not to be entered into without due care – even if they had little of the formal education and sophistication that our society today takes as commonplace. Signing a contract was not a frivolous thing and needed mental application. Why are things so different today, one wonders?
The current incumbents of the Short Term Ombudsman’s office have taken to attempts to overturn centuries of statutory, case and common law, openly lamenting the findings of senior courts and publicly calling for legislative intervention to support their novel views; for example, the wish is for South African common law not to be interpreted as the courts always have, but to be interpreted to require a “causal link” to exist between a breach of the terms of an insurance contract and the loss incurred before a claim is declined. (Or, to put it in the revealing terms of the Short Term Ombudsman’s office: “….before an insurer may escape liability”!) This would have insurers paying claims on the accidental death of an insured on the basis that there was no causal link to the terminal illness which he failed to disclose at proposal stage!
The logical outcome of this butchering of the established law and practice will be the inevitable tightening up of policy wordings. In the USA, we have seen that virtually every transaction in commerce is accompanied by long legalese which seeks to protect the seller from the litigious nature of that society. When last did you actually read the terms and conditions before you pressed the “I Agree” button on your computer? Simple and easy to understand policies invite liberal interpretation and in an environment where the insurer is always seen as the villain, there can only be a move towards more definitive and restrictive policy wordings, and the charging of more premium for the increased risk entailed in the wider process of doing business in such a hostile environment.
In conjunction to this increase in administrative and legal complication, insurers will have to recognise that the hostile environment in which they are operating increases the risks that they are underwriting. They will then simply factor in this increased risk in the pricing of their policies. In the end the honest consumer will pay much more to subsidise the less ethical ones and also for the added layer of complexity that the new liberal legal interpretations bring. This is one of the unintended consequences of a nanny state – in the end it consumes resources to “protect” a minority and so adds to the burden of the average man in the street. The affordability of insurance is already an issue and this will not improve under the current thinking. The risks are increasing and so must the premiums.
The point has been made that the Ombudsman deals with a small proportion of the claims made against the insurance industry. An even smaller proportion of claims made make it to the courts. Decisions that are made in these institutions nevertheless have a deep and important effect on the practice of insurance, because every bad decision made goes into legal precedence and will need even more legal action to overturn and correct. The new wave of consumerism may be understandable in some quarters, but all of this looks very much like an attempt at using a steam hammer to crack a nut.
Insurance has often been referred to as the Handmaiden of Commerce for the way in which it facilitates almost every modern commercial transaction. Without it no home, personal or vehicle loans would be possible, to say nothing of the really big development projects it makes possible every day. I am therefore uncertain why the insurance industry permits itself to be subjected to these liberal interpretations of the rules of the practice of insurance, as the courts remain the ultimate dispenser and adjudicator of the law. The intermediate structures, such as the Ombudsmen Schemes and others, were initially created to find quick, inexpensive and sound solutions based on established law for those who felt aggrieved. Unattractive a prospect as it may seem, it increasingly looks as if the court is the better bet to get sound jurisprudence. These new agencies, far from being impartial arbiters, are proving to be little more that consumer activists.
Is the solution not to be found in better consumer education, you say? Buying insurance, like buying a house, computer, dog or vehicle, is one of the life skills that a modern consumer has the personal responsibility to acquire. He cannot rely on government agencies in this regard. The ancients knew this when they, through much travail and error, concluded that the principle of caveat emptor had to be adopted into law, rather than caveat vendor which some seem hell-bent on experimenting with once again. The trouble with this is, though, that it is far harder to reach consumers than it is to bludgeon providers. Like herding cats, it is much more difficult to align consumer behaviour than it is to force the formal sectors of an economy to behave in a certain way. What we really need is that consumers must take responsibility for their actions, especially when they sail close to the wind and boats capsize.
The ombudsman is on record as asking for better consumer education, but that is also laid at the feet of the insurers. Thus, the “villain” is also expected to save the hero from his own mistakes. There is a decline in the ethical behaviour of people in our time, and I believe it is caused by the increase of nannying consumers to the point that they need no longer to consider the consequences of their actions.
Do insurers and brokers really treat their customers so unfairly that special action needs to be taken to force them to act responsibly? I think not. In an age of internet, Hellopeter, twitter, Facebook and the like, a free market will sort out the bad eggs as consumers take their business elsewhere if any operator is found to be systematically mistreating them. However, our market is becoming increasingly less free. What is needed is more transparency and clear recourse to the law. The law should be practised impartially and should be applied without prejudice – which is what we expect the Ombudsmen to do. However, the government of the day has apparently lost confidence in the free market system and is increasingly turning to the solutions of socialism and centralisation of power. This makes the practice of insurance fraught with danger and far less attractive to entrants than it might be, all to the detriment of the economy at large.
If the future of insurance in South Africa lies in many smaller enterprises, like brokers, loss adjusters, service providers in the claims restitution process and many other potential entrepreneurial opportunities, then the current mood and approach is extremely concerning. Why would anyone get into a business where they are already regarded with suspicion and mistrust before they start – and that is on the side of the government and like-minded agencies, while the consumer is fed the line that he is the underdog and needs their protection against the evil insurance industry. In the current hostile regulatory environment, we will be hard pushed to create the many opportunities – and the jobs – which we need to grow our economy and, consequently, our country.
Insurers need to be able to engage with their opponents, but at this time it does not look as if quiet diplomacy is working. Anyone out there in the mood for a protest march?
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