The word “prohibition” always conjures up images of Al Capone and his merry men, armed with Tommy guns, outsmarting the cops who had to apply the ban on liquor which the majority of people in the USA in the 1930s appeared to disapprove of.
Like then, one would possibly also need a team like the “Untouchables” if you are required to arrest illegal inducements to market insurance products.
Our legal division recently referred two examples of advertisements to the FSB for commentary following complaints from compliance clients. We were not trying to nail anyone, but really only trying to understand the principles which applies when considering whether a business practice can be seen as an inducement in contravention with Section 44 or 45, or not.
Section 44 of the Short Term Insurance Act states:
44. Prohibition on inducements
No person shall provide, or offer to provide, directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel a short-term policy, other than a short-term reinsurance policy.
What are the characteristics or elements one should be looking at?
The FSB responded to this as follows:
Please note that there is no set rule when applying the provisions of section 44 of the STIA and section 45 of the LTIA (“inducement provisions”) and each matter must be assessed on a case by case basis. That being said, there are certain principles that can be applied when considering whether or not the offering constitutes an inducement:
- Whether the benefits are inextricably linked to the insurance product and policy benefits (“part and parcel”) or whether it is extraneous to the insurance product and policy benefits (the policy contract is also of importance here). If not linked to the insurance product and policy benefits itself, it is an indication that the benefit might constitute an inducement for purposes of the inducement provisions;
- Is the benefit informed by the risk exposure of the insurer in underwriting the policy? Generally, if the provision of the benefit is not effected or informed by the assessment of the risk to the insurer in underwriting the particular policyholder, it is an indication that the benefit might constitute an inducement for purposes of the inducement provisions;
- Does the benefit form part of the commitment made by the insurer and the policyholder to one another? This also relates back to 1 and 2 above but one can add that if such benefit is not of an insurance nature, it is an indication that the benefit might constitute an inducement for purposes of the inducement provisions;
- By whom is the benefit offered? If offered by a third party it will further the argument that the offering is an inducement for purposes of the inducement provisions;
- Does the benefit fall within the supervision of the Regulator? If not, the preference would be to exclude such benefit from insurance contracts and bring it within the ambit of the inducement provisions; and
- Whether the offering is contrary to the intention of the inducement provision (which is to avoid the persuasion of prospective or existing policyholders to take out or maintain a policy as a result of a “carrot” as such policy might not necessarily be appropriate for the particular policyholder). The inducement provisions must be interpreted contextually against the background of the Insurance Acts. It appears as of the legislature intended to cast the net to capture inducements that might be offered to policyholders as wide as possible.
The above must not be construed as an exhaustive list and, as stated above, each case must be assessed on its own merits.
An interesting development that stems from the above is the potential for conflict between treating customers fairly and clever marketing.
In the spirit of TCF, there should be a real benefit for clients, not only perceived ones.