The importance of risk transfer and reinsurance to realise Africa's opportunities
Economies in Sub-Saharan Africa are forecast to grow at rates which are likely to only be outstripped by some Asian economies in 2016. This is despite the significant prolonged effects experienced of depressed commodity prices, in particular, in the oil and gas sectors. This is a testament to the resources and opportunities on offer for indigenous companies as well as multinational corporations and foreign investment on the African continent.
Vital to the realisation of such opportunities is the insurance and reinsurance industry which underpins global commerce and trade. Insurance in commerce is a necessary precondition for many commercial activities that would not otherwise take place in the absence of such insurance. The insurance and reinsurance sectors are a key component for economic development and an important driver for growth and development in African economies. It is also a vital risk management tool to mitigate the financial risks associated with commercial transactions and ventures, particularly, for example in jurisdictions in Africa, which are developing quickly and often the legal/regulatory regimes and economies can change quickly creating risk to the success of commercial ventures and their investors. In addition, insurance can help mitigate the risk to projects introduced by the logistical difficulties caused by hazardous physical geographies.
The majority of jurisdictions in Africa require insurance for locally based assets and interests to be placed locally. The capacity limitations local insurers face leads many to look to reinsurance markets to transfer their risk, particularly when it comes to major project insurances such as property damage and business interruption risks. With limited local reinsurance capacity at present, there has been an exponential increase in facultative reinsurance placements to the larger, international reinsurance markets in London, Munich and Zurich, particularly in the energy, property and liability sectors.
With the importance of insurance to realise the opportunities that exist as well as the need to off load risk from local insurers to the reinsurance market, it is crucial that when considering a placement of a complex or large risk that a holistic approach is adopted to ensure there is effective risk transfer and claims response at both the insurance and reinsurance levels. Holman Fenwick Willan (HFW) has a significant amount of experience in advising on large and complex insurance and reinsurance claims emanating from losses around the globe and, from our experience, both recent and historic, there are a number of issues which all parties involved or interested in the insurance and reinsurance chain (policyholders, stakeholders through to insurers and reinsurers) should be aware of to ensure maximum coverage certainty.
Insurance and reinsurance
The requirement for insurance to be placed with local insurers who often have limited capacity will usually change the focus of large risks from the insurance placement to the reinsurance placement, the aim being to take advantage of the reinsurance markets who have the greater capacity to underwrite the larger, complex risks. With many projects taking place and forecast to take place in most African nations, significant levels of insurance (and reinsurance) are required. Due to the importance of reinsurance to large risks and projects, often reinsurers will seek to dictate the insurance terms and retain control through the retention of claims control clauses where possible. Policyholders will also try to create a direct relationship with reinsurers to maintain control over the risk transfer to the reinsurance markets and direct access to deep pockets for comfort in loss scenarios. However, care is needed when reviewing the insurance and reinsurance contracts, particularly because, in circumstances where the reinsurance is written with reinsurers in a different jurisdiction, different legal regimes have different contractual interpretations which creates coverage uncertainty.
Governing Law and Jurisdiction
Often insurance wordings have been based upon tried and tested wordings from developed insurance jurisdictions. However, as mentioned above, the governing law of the insurance policy is usually local law and this can lead to different interpretations of those wordings which might significantly impact upon the breadth of cover. It is therefore important to understand what the insurance policy covers and whether it does what is required under local law. It is also just as important to ensure that the reinsurance policy, which might be governed by a different law provides effective risk transfer from the risks covered by the locally placed insurance.
An example of this in a different context of South American territories is that the law governing insurance contracts in some of those jurisdictions has emanated from banking law. This creates a significant amount of uncertainty over policy coverage where a law more suited to banking products is used to construe and interpret complex insurance wordings.
The choice of governing law can therefore significantly affect the attempts to achieve back to back cover as between the local insurance and the reinsurance, particularly where the local policy and reinsurance have differing governing law provisions, or where the policies are silent on the governing law. This can create a mismatch between the two contracts jeopardising effective risk transfer for the policyholders as well as the local insurers.
Consideration needs to be given to any tensions between the interpretation of the insurance and reinsurance contracts and the effect of the governing law on those policies to ensure that the risks intended to be covered are actually covered.
The Insurance Act 2015
Reinsurance placed under English law will be affected by the Insurance Act 2015 which comes into force in England and Wales from 12 August 2016 onwards. In light of the significant part played by the London reinsurance market globally and the likely effect of this new legislation once it comes into force on local insurers and reinsurance brokers, we consider that it is worth highlighting the changes:
The new legislation will make significant changes to the approach of English law to important areas of insurance and reinsurance law:
- Disclosure/non disclosure:
- There will be changes to the disclosure regime with the replacement of the current duty to disclose all material facts with a new duty to make a fair presentation of the risk. Local insurers will need to disclose every material circumstance which the local insurer knows or ought to know of. If sufficient information is disclosed that puts a prudent reinsurer on notice that it needs to make further enquiries, then there is then an obligation upon the reinsurer to make such enquiries. If it does not, the local insurer (the reinsured) is likely to have a defence to any non disclosure allegations.
- What is known to a local insurer (the reinsured) will include what ought to be known to its senior management and those responsible for the local insurer's reinsurance (including its reinsurance brokers) in addition to what would reasonably have been revealed by a reasonable search of the information available to the local insurer. This is likely to impact those placements which are utilising a local fronting insurer who is simply acting as a post box between the policyholder and the reinsurer. In such circumstances there will be an increased reliance on (and therefore requirement for) the local insurer to make thorough enquiries in order to put reinsurers on notice to ask further questions concerning the risk to be covered.
- In the placing of a reinsurance policy, the reinsurance broker will usually be the agent of the local insurer. The reinsurance broker's knowledge of the risk will be attributed to his principal (the local insurer) except where such information is confidential and was acquired through a business relationship with someone not connected to the contract of reinsurance. There is however, a further important element which is if a reinsurance broker acquires information via a "business connection" with the policyholder/underlying insured, the local insurer (the reinsured) is taken to know this confidential information.
- Instead of the current draconian remedy available to reinsurers of avoidance for non disclosure, the Insurance Act will introduce a more proportionate approach. Avoidance will still be available if a reinsurer can show that it would not have written the reinsurance policy had it known about the material information or where the non disclosure was deliberate or reckless. However if a reinsurer can only show that they would have written the reinsurance but under an increased premium or under different terms had the correct disclosure been made, then the reinsurance will continue but under such new terms or increased premium.
- Warranties: whilst warranties will remain (except basis of contract clauses which will no longer be permitted), the remedy available for a breach of warranty is to change. Once the legislation comes into force, any breach of warranty has the effect of suspending a reinsurer's liability until the breach is remedied by the local insurer/reinsured. Also, where the warranty (or other term) relates to a loss of a particular kind or at a particular location or time, there must be a causal link between the loss and the breach of warranty/term. Whilst it is not usual to have basis of contract clauses in reinsurance policies, such terms as "terms and conditions as original/underlying" are common in circumstances where the underlying insurance contract may contain basis of contract clauses. From 12 August 2016 onwards, the basis of contract clauses will not be enforceable in insurance and reinsurance policies under English law.
- Late payment of claims: whilst there are no provisions in the Insurance Act relating to the payment of compensation for loss suffered due to the late payment of a claim, such provisions are likely to be introduced into English law through the Enterprise Bill which will make it an implied term of insurance and reinsurance contracts governed by English law that a (re)insurer must pay claims within a reasonable time. Failure to do so could make a (re)insurer liable to pay compensation for resulting loss to the local insurer. However as the Enterprise Bill is unlikely to come into force until 2017, there is likely to be a delay in the introduction of such implied terms into insurance and reinsurance contracts governed by English law.
- Contracting out: it will be possible to contract out of the Insurance Act with the exception of basis of contract clauses which will remain unenforceable. However, such language needs to be extremely clear. It is difficult to set out the full changes to English law and implications of the Insurance Act in a relatively short briefing note such as this. The intention of the changes is to bring English law into line with other more proportionate jurisdictions and making English law's approach "friendlier" to policyholders and insurers. The ultimate effect could be to make reinsuring under English law post 12 August 2016 more appealing to a local insurer to the extent that it may be more favourable to reinsure under English law than under the insurer's local law if such is permitted.
In jurisdictions where there is a requirement for insurance to be placed locally, claims are likely to be dealt with locally under the claims provisions of the insurance contract. However, in our experience of large and complex risks, those parties ultimately taking the most risk, usually reinsurers, will want to retain a degree of control over the inwards insurance claim and will attempt to do so utilising "claims control" or "claims cooperation" clauses. Therefore, such clauses need to be scrutinised so that the local insurer understands their own obligations to their reinsurers, and what those reinsurers are entitled to expect from them or entitled to do in a claims scenario. Reinsurance policies need to also be checked for "follow the settlements" clauses.
Issues can develop over the operation of claims control and claims cooperation clauses, particularly the question of who takes the lead in dealing with claims. Tensions may arise in a claims context between the priorities of the local insurer and the reinsurers and any such tensions will need to be resolved in accordance with the terms of the policies. Who decides to settle a claim can also provide tensions. The question of which reinsurer has authority to act on behalf of the others is often dealt with by way of a "follow the leader" clause where the reinsurers delegate authority to settle a claim to the "leading" reinsurer providing the local insurer and the policyholder (the ultimate beneficiary) with the comfort that the leader's decision to settle the reinsurance claim will bind the other, following, reinsurers.
When dealing with large and complex risk placements, we advocate (where possible) for policyholders, local insurers, local reinsurers and international reinsurers to agree how claims are to be handled, and where relevant, to agree upon a claims protocol so that there is no dispute over the way in which a claim is being dealt with as well as ensuring the swift payment of claims thereby minimizing delays which can have a significant impact upon policyholders and stakeholders.
Loss of Protectionist Terms and Conditions
There are certain terms and conditions that are commonplace in English law and language policies, and are considered by (re)insurers as essential protections. These may become irrelevant when transposed into a local insurance policy either because they are unenforceable under local law or because there is no local jurisprudence to interpret them. This can create a lack of certainty in the insurance and reinsurance conditions and policy response, so this needs to be checked before policy terms are agreed.
Direct Access to Reinsurance
Generally, no privity of contract exists between the policyholder and its reinsurer under a reinsurance contract. However a policyholder may want the contractual right and ability to engage directly with the reinsurer and to be able to pursue claim indemnities direct from reinsurers where there is an issue with the local insurance or perhaps the local insurer becomes insolvent. A cut-through clause allows a party that is not in contractual privity with the reinsurer to have such rights as part of the agreement between reinsurer and local insurer, although careful consideration is needed to the governing law of the contract to assess the validity of such clauses.
In jurisdictions that require local insurance policies for indigenous based assets and interests, often claims paid under a master or reinsurance policy cannot be ceded back to the policyholder locally without breaching local laws, for which there can be significant repercussions to the policyholder. When claims monies are paid to a policyholder locally from an external jurisdiction in contravention of local insurance law, there can be a number of detrimental implications including: exchange issues; the transfer of money may trigger tax penalties; or the illegal act could more seriously lead to investigations by local regulators into the policyholder's compliance with local insurance regulations. This can have financial repercussions as well as cause reputational damage for policyholders locally. Careful consideration, therefore, has to be given to the local regulatory environment as part of the assessment of the effective risk transfer from policyholder to local insurer and through to reinsurers.
It is not unusual for the same insurance broker to be used for placing the local insurance and the reinsurance, despite the inherent risk of conflicts arising in acting for two principals with potentially competing interests. There are also the knowledge issues mentioned above when considering the effect of the Insurance Act 2015 on a reinsurance placement under English law post 12 August 2016. A broker undertaking a dual role in placing the insurance and reinsurance should ensure it understands the risks and that the risks have been fully explained and accepted by its two principals (policyholder and local insurer). The broker should also ensure that it has internal systems in place to deal with conflict scenarios. This is particularly so with split placements. For example, the broker should consider the separation of communications and documents relating to the respective placements and the undertaking of those respective placements by different individuals.
Competing Dispute Resolution Clauses
Occasionally competing dispute resolution clauses can exist between the local insurance and the reinsurance contracts. Where possible identical dispute resolution clauses should be agreed to ensure that coverage disputes can be resolved in one forum, limiting the chances of inconsistent findings by different tribunals.
Local Tribunal Advantage
In many jurisdictions there is no distinction between sophisticated and unsophisticated policyholders. This means that a policyholder with, say, a large, complex industrial risk will be treated the same way as a consumer purchasing personal lines insurance. Often the result is that standard terms, conditions and exclusions are ignored by the local tribunal or interpreted in favour of the insured. This removes from reinsurers the protection of well drafted wordings which benefit from lessons learned over many years. Further issues that can arise with local tribunals, include the tribunal not having the experience to effectively resolve complicated loss scenarios. The solution may be for coverage disputes to be dealt with by arbitration, enabling the parties to select the composition of the tribunal to ensure it has the right experience to effectively consider and adjudicate upon the issues in dispute.
The opportunities available for indigenous commercial growth within African nations together with the opportunities afforded to foreign multinationals and foreign investment are significant. There are always inherent risks (both financial and physical) to projects and commercial ventures however, these can be significantly reduced by transferring risks through the use of insurance and reinsurance. The importance of contract certainty and clarity to provide effective risk transfer cannot be overstated. With the ability through a well structured insurance and reinsurance programme to reduce the risks faced, the potential opportunities for African nations can be unlocked providing much needed support to the development of their economies.