Santam has warned investors that its decision to appeal recent court rulings related to Covid-19 business interruption claims may significantly affect its provisions for such claims in future. It says the result of its appeal may see claims either being a lot lower, or higher, depending on the outcome of its appeal.
SA’s biggest short-term insurer raised its contingent business interruption (CBI) claims provisions by a further R1.7bn after the Western Cape High Court’s judgment against it in November in a case involving Ma-Afrika Hotels and Stellenbosch Kitchen, which suffered losses due to Covid-19. That was in addition to the previous R1.3bn increase in CBI provisions made in June.
“The potential outcome of Santam’s decision to appeal against the Ma-Afrika judgment, including other relevant court rulings on these and other Santam policy wordings may, materially impact Santam’s assessment of the estimated net CBI claims,” the insurer said in a trading update on Wednesday after a board meeting the same day. “This could result in significantly higher or lower actual claims.”
In November, a full bench of the Western Cape High Court ordered Santam to pay out Ma-Afrika Hotels and Stellenbosch Kitchen for losses stemming from Covid-19 business interruption for the full policy period of 18-months without limitations. Santam, which had wanted to limit the indemnity period to three months, was also ordered to pay costs.
Ma-Afrika and Stellenbosch Kitchen, together with loss-adjustment group Insurance Claims Africa (ICA), which assists companies in preparing claims, were seeking about R122.4m through five policies. Santam maintains that the claimants should only be indemnified for losses for a period of three months.
“The inherent complexity of business interruption claims, as well as bespoke policy wordings for corporate clients, require significant assumptions to be applied to determine the best estimate of net CBI claims provisions,” Santam said in the statement. “The overall financial impact of Santam’s CBI exposures will therefore take some time to finalise.”
In the past month, local insurers, including Guardrisk and Old Mutual, have lost court cases related to business interruption claims stemming from losses caused by Covid-19 and the subsequent lockdown.
Insurers have largely contested the cases on the basis of technicalities, arguing that losses were due to the government’s response to the pandemic and not Covid-19. Insurers also argued that policy wording only covered claimants for disease outbreaks within a specific radius and they should therefore not be liable for losses related to a global pandemic. However, the courts ruled that Covid-19 and the government’s response were inseparably part of the same insured peril.
They also dismissed arguments that policy wording only intended to provide cover for the impact of contagious diseases that occurred within a specified radius.
Ironically, in Wednesday’s trading statement, Santam said it had experienced lower claims frequencies across several insurance classes due to the Covid-19 lockdown. Nevertheless, it said this was offset by increased provisions for CBI claims.
Santam also said in the trading update that Santam Specialist business saw good underwriting results on the back of strong performances in the engineering, crop, liability and transport businesses. MiWay maintained its positive growth momentum while Santam Re saw its underwriting margin suppressed by the Beirut port facility explosion.
Santam said that while investment returns on insurance funds are under strain due to the low interest rate environment in SA and abroad, they have improved since June and still contributed to a net insurance margin of 6.2%.
The insurer is scheduled to release results for the year ended December 31 2020 on or about March 4 2021.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.