PERL01-5: Personal Lines

Insurance

TOPIC 2
Topic 2: Personal Lines policy and processes

Introduction

Module Outcome

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

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

5. Analyse the different types of Personal Lines insurance products to advise a

client on an appropriate product.
Classes of Personal Lines insurance

The various classes of Personal Lines insurance are combined into a single “package-type” policy. In
this way, the policy as a whole can have general terms, conditions and exceptions that apply
throughout all sections of the policy.

Most Personal Lines policies cover the following classes:

• Homeowners (Building)
• Householders (Contents)
• All Risks
• Motor
• Personal Liability
• Personal Accident
• Pleasure Craft (Watercraft)
• Electronic Equipment (Personal Computers)
The implications of previous claims to an insurer

The size and frequency of claims is very important as it affects the company’s profit margin.

Loss histories vary from client to client. The acid test would be to divide the claims by the premium for
a 12-month, 3 year or 5-year period to calculate the loss ratio.

A loss ratio below 70%* would be viewed by most insurance companies as acceptable.

You also need to check the type of claims and if there is any repetitive claims as you do not want a
multi-claimant.

Low frequency/high severity claims are often called catastrophe risks. For example: Floods

High frequency/low severity claims can be regulated by applying an excess. For example: Windscreen
Analysis of various factors of the proposal form

Building and Contents sections

• The residence • No-claims discount

• Type of dwelling • Refund of premium – Cash Back
• Age of the residence • Self insurance
• Construction • New-for-old or market value
• Situation • Sum insured & Average
• Occupancy • Limits of high value items
• Security • Mortgagee
• Alarm systems • SASRIA
All Risks section
• Wearing Apparel and Personal items (Clothing and Personal effects)
• List of items and valuation certificates
• Value
• Existence

Other considerations:

- What should be insured?

- Cost of insurance
- How often is there exposure?
- Susceptibility to loss or damage
- Sum insured
Personal Liability section
• Is cover required?

• Incidents which may have happened

• Limit of indemnity

• Umbrella Liability

Personal Accident section

• Names of the insureds

• Age

• Occupation

• Hobbies/pastime
Motor section
• Vehicle details
• Year of manufacture
• Proof of ownership and condition
• Cover required
• Registered owner
• Use of vehicle
• Area where kept
• Imported or modified vehicle
• Name of principle driver or restricted driver
• Occupation
• Criminal record
Loss history and declaration

The proposer must give details of all losses and not just claims.

The underwriter will also look at 3- or 5-year claims history to establish a trend.

The proposer must also sign or confirm verbally that they declare that he has given truthful and
complete statements as the proposal is the basis of the contract and is a legal document.

The contract is a contract of good faith, and the declaration reinforces this.

If an agent makes a statement on the proposer’s behalf, it is binding on the proposer.

The policy documentation

The insurance policy document and schedule is evidence of the contract and confirms the terms and
conditions

Some insurers mandates intermediaries to issue policies on their behalf by giving them their computer
system. The broker is acting on behalf of the insurer and therefore, their agent.

The insurer, in terms of the Insurance Act, must lay down parameters within which the intermediary can
act. Regular audits are done to ensure the broker has complied with the terms of the mandate.

The insurer relies heavily on the broker honesty and integrity.

General conditions and exclusions

Preamble and Operative clauses

Preamble clause

This clause sets out the essential elements of the contract, which states the basic premise of the cover:

- That the insurer will meet its obligations That the premium will be paid,

- That the terms and conditions of the policy will be adhered to.

Operative Clause

This clause sets out the circumstances in which the insurers will make claim payments. In essence, it
states the promise of the insurer to pay, compensate or indemnify the insured in terms of the defined
events for specific classes of loss or damage.
Policy Definitions

The policy wording starts by identifying and defining the parties to the contract.

The insured is normally defined as “You, the policyholder named in the schedule” and the insurer is
referred to as “us” or “we”.

The insurer undertakes to provide insurance in terms of the policy during any period of insurance for
which a premium has been paid.

Most policies state that “the proposal and declaration made by the policyholder shall be the basis of
and form part of this policy”. This applies equally to telemarketing where conversations are voice
logged.

The basic principles such as good faith, insurable interest and the
onustodeclarematerialfacts,existwhetherthereisevidenceofaproposaland/or declaration or not.
Interpretations

Interpretations is important in any legal contract and the preamble states that, where a word or
expression is given a specific meaning, this meaning will apply wherever that word or expression
appears in the policy.

Nevertheless, each section has its own definitions too and certain words and expressions do not retain
one single meaning throughout the policy.

Unless given a specific meaning for the purposes of a particular section, every word must be given its
plan, popular, ordinary meaning.

The general rule is that, if a word or phrase in the policy is ambiguous, it will be interpreted
against the insurer and in favour of the insured.
Observance of policy terms

“Our liability is conditional upon the observance of the policy terms by any person claiming indemnity or
benefit.”

“Terms” – all the conditions, exclusions and other provisions. To be complied with before and others
must be complied with after a loss.

“Any person claiming indemnity or benefit” – May be one or more people and they need to observe
the terms whether they are aware of them or not.

Prevention of loss
The policyholder is required to take reasonable precautions and behave as though he has no
insurance.

Each case will be judged on its own merits with regards to intent.

Also allows for emergency repairs in order to prevent further loss.

Deliberate and fraudulent acts

Fraudulent acts

It is reasonable to exclude fraud by policyholders or other persons who qualify to receive benefit from
the policy.

If a claim is willfully inflated in amount, insurers may consider this fraudulent to the extent that they
avoid the entire claim.

Fraud must be proven if the insurer is to rely on this reason for avoiding the claim.

Deliberate acts

Deliberate acts require other considerations. Nearly all human actions are deliberate and only if the
damage was caused solely by an act of the insured, aimed at damaging or destroying the insured
property, should the insurer invoke this exclusion.

Deliberate acts performed by any person acting in collusion with the policyholder is also excluded.
Contribution

Applies when there is dual insurance and the insurer limit their liability to a rateable portion of the loss.
Not applicable to Personal Accident claims.

Average

The clause has been put into the policy wording of the sections to which it applies.

Reinstatement of sum insured

Refers to Houseowners, Householders and Unspecified All Risks items.

Changes in circumstances

If there is material changes that increases the risk, the insurers have the right to refuse to indemnify the
insured.
Cancellation

Insurers may cancel the policy, or amend terms or premiums, by giving the insured 30 days notice in
writing.

Monthly policies

The insured is not required to give a specific period of notice and it is sufficient to merely cancel his
debit order or request cancellation.

Annual policies

The insurer will give the insured a pro-rata refund of the premium. When the insured cancels, the
insurer is entitled to retain a “short period” or minimum premium.

Jurisdiction

The policy is subject to the jurisdiction of courts in South Africa.

General Exclusions

These will apply to all the sections of the policy, except where the wording specifically states otherwise.

• Riot and war exclusions

• Terrorism exclusions

• Computer losses exclusions

• Policy exclusion (in addition to General Exclusions)

• Confiscation or attachment
Policy Maintenance

Premium Payment

Annual policies premiums are due on or before the inception or renewal date. Policy Protection Rules
(PPR) state that at least 15 days grace is allowed for payment of renewal premiums.

Monthly policies are collected by debit order (EFT) and very few insurers accept monthly cash
premiums. For new policies, depending on the inception date, an insurer will require a double premium
or pro-rata since premiums are payable in advance.

In practice, if a debit order is not met, insurers usually notify the client and put through two month’s
premium the following month. If the double debit fails, the policy lapses from the last day of the month
for which premium was paid.
Policy renewal

Inflation gives rise to problems for the policyholder (may result in underinsurance) and the insurer (not
receiving sufficient premiums but claims costs increase).

Automatic Inflation Margin (AIM)

AIM automatically increase the sum insured by an inflation-related percentage at renewal. Depending
on insurer it is usually applied to Houseowners, Householders and Unspecified All Risks sections.
This is usually an automated process, but the insured can discuss it with their broker/insurer.

A client must be given 30 days’ notice of renewal terms.

The insured must still ensure that the sum insured is correct at inception and during the life span
Endorsements – Alterations in risk

The General Conditions state that the insured should advise the insurer of any material change in the
risk as soon as possible and, until the change is accepted that no liability shall attach to the company.

The details that will be needed is the same as on the initial proposal form for the item added.

Once the endorsement conditions have been agreed to by both parties, the insurer will process a
change to the current policy and the client is issues with an updated policy contract.

Additional premium due following an amendment in risk

For additions there will be additional premiums due. For an annual premium, the insured will be
required to pay the additional pro-rata from the amendment date to the renewal date.

For a monthly premium, the pro-rata will just be adjusted with the next debit order.
Supporting documentation

The client will always be required to supply supporting documents.

Moving premises

The client will be asked the same questions regarding the protections, areas etc. as per the proposal
form.

Endorsement refunds

Sometimes the client requires an item to be deleted which will result in a pro-rata refund. For annual
policies, the insurer will pay this to the client and for monthly policies, the refund ill be deducted from
the following month’s premium due.
Record-keeping

As per the FAIS requirements, it is vital a record for each client is kept that reflect the following:

• The record on which the insured items were recorded.

• All quotations considered.

• Recommendation made to the client.

• The client’s acceptance of the recommendation or alternative quote.

• All additional documentation and information required.

• Policy schedule with the terms and conditions of the policy.

Impact of economic and environmental factors

It affects Personal Lines insurance but takes time to filter down to the end-user.

To combat peaks and troughs on their balance sheets, most insurers maintain reinsurance lines for
catastrophe risks. This is a prudent tactic to spread risk and ensure that insurers remain financially
stable and comply with the solvency requirements as set down by the FAIS Act, 2002, Companies Act,
2008 and Solvency Assessment Management (SAM).

Environmental factors like rising sea levels and global warming are of great concern to insurers.
Investment implications

Inevitable losses cannot be insured in the short-term insurance market.

Short-term insurance is focused only on compensation and indemnity, depending on the class of
business.

All insurers are required to make investments in order to comply with the requirements of Solvency
Assessment and Management (SAM), which is a risk-based solvency regime for the prudential
regulation of insurers.

The aim of SAM is to protect policyholders and to contribute to the financial stability of the insurance
market by:

• Align capital requirements with the underlying risks.

• Incentivising insurers to adopt more sophisticated monitoring and risk management tools.
Effect of applicable legislation
Extensive legislation governs the short-term insurance industry like:
- Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) (FAIS)
- Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001) (FICA)
- Prevention of Constitutional Democracy Against Terrorism and Related Activities Act, 2004 (Act
No. 33 of 2004) (POCDATARA)
- Prevention of Organised Crime Act, 1998 (Act No. 121 of 1998) (POCA)
- Solvency Assessment and Management (SAM)
- Short-Term Insurance Act, 1998 (STIA)

In addition, all companies are bound by the Companies Act, 2008 and other legislation.

The vigilance of the various regulatory bodies contribute to ensure that insurers and intermediaries
maintain financial stability.

Solvency Assessment and Management (SAM) implemented in a phased approach to improve the
liquidity, market capital requirements, financial soundness and liquidity risk assessments.