Oops, your car has no insurance

The Financial Services Conduct Authority (FSCA) has warned Constantia Insurance clients that their short-term insurance policies have finally lapsed – and they have no car insurance as of 1 October 2022.

In a statement on Monday, the FSCA warned that Constantia Insurance clients will need to secure cover with new insurers with effect from 1 October 2022. “The FSCA recognises that this may not provide brokers with sufficient time to contact all impacted policyholders to give them options for suitable alternative cover.

“The FSCA strongly encourages CICL (Constantia Insurance Company Limited) policyholders to urgently contact their brokers or financial advisers for future coverage options to ensure uninterrupted insurance cover,” says the financial authority.

In fact, clients have had a few months’ worth of warning that it would be wise to look for new insurance. Constantia Insurance was placed under provisional curatorship towards the end of June 2022, following several warnings by authorities that the company lacked the capital needed to ensure it could continue to operate.

Best attempt

At first, curator Ashish Desai seemed optimistic that the company might survive. In a letter to the Reserve Bank’s Prudential Authority on 18 August, the curator wrote: “Upon assuming office, I motivated to the authority not to suspend the [licence] of the company in terms of section 27 of the Insurance Act, and I indicated in meetings with the authority (on and around 27 July 2022) that I considered it important to receive permission from the authority to issue new policies in order to have a reasonable prospect of conserving the business in accordance with the court order.

“My motivations in this respect were set out in my letter to the authority, dated 29 July 2022. My motivations were made on the basis of the understood position of the company and the business as set out in the founding affidavit that was filed in the authority’s application for the court order.

“I have taken control of, managed and investigated the business and operations of CICL, together with all assets and interests relating to such business, subject to the control of the Prudential Authority. I have consistently given consideration to the best interests of the company’s policyholders (in accordance with the court order); I have exercised the powers vested in me with a view to conserving the business; I have – up to the date of this letter – made payments of policyholders’ claims subject to the available resources of the company; (and) I have furnished the authority with progress reports on a weekly basis, specifically on 5 August 2022 and 12 August 2022.”

Worse than expected

Unfortunately, things changed.

Desai said in the letter that the “earliest provisional results of my team’s investigation of the financial position” of Constantia Insurance suggested its financial position was worse than anticipated.

“As communicated to the authority at the time, I had legitimate concerns regarding unqualified reliance on those results given that, among other things, I only had access to unaudited data; the results had not yet been tested with the company’s head of actuarial function; and I had not yet received an explanation of the company’s treatment of the applicable solvency quota share arrangements.

“The available data procured by me from the company’s head of actuarial function record a markedly worse financial position, as contained in my report to you dated 12 August 2022,” wrote Desai, adding that Constantia then needed a solvency capital requirement of approximately R909 million, but that the solvency capital requirement ratio at the time was zero.

“While we have not had the opportunity to interrogate the valuation of the company’s unlisted investment portfolio, we have formed the view that there is a low likelihood of full recovery of related party loan assets and have observed further deterioration of the illiquid listed equity portfolio since 30 June 2022.

“My projections at this stage indicate that the business is unlikely to have sufficient cash flow to enable it to operate until the return day of the court order.

“The company does not have any realistic options to borrow to fund its inevitable cash shortfall,” said Desai.

He noted that Constantia Insurance’s executive management – suspended at the time – did not dispute his assessment of the balance sheet, despite having been afforded an opportunity to correct or supplement his views.

Liquidation

Desai then concluded that there was no merit in seeking to write new policies and to do so would have exposed new and existing policyholders.

“I have been unable to persuade any formerly tentative investors to commit to recapitalise the company and (the deteriorated financial position) has made it impossible to attract any additional potential investors, with the result that efforts to conserve the business are not feasible.

“The company has no prospects of achieving compliance with section 36 of the Insurance Act in the foreseeable future, if at all,” he said, then recommending that Constantia Insurance should be liquidated.

Liquidation means that policyholders with valid claims against their insurer become claimants in the liquidation process, and settlement of claims is effectively suspended.

“A commercial consequence is that any run-off liabilities that remain with the company will not be covered by sufficient assets given the insolvent position of the company. In my capacity as provisional curator, there is nothing that can be done to arrest this process, which ultimately serves to potentially prejudice current policyholders,” said Desai.

He proposed that the FSCA waive the usual requirement of 30 days’ notice to cancel policies to allow clients to immediately seek new insurance, and recommended any other assistance or intervention that the FSCA can give to help those policyholders.

On 14 September 2022, the Gauteng Division of the High Court granted an order to place Constantia Insurance under final liquidation.

Pending claims

The FSCA notes in its recent announcement that it is aware and concerned that certain Constantia Insurance policyholders with valid motor vehicle claims are experiencing challenges with securing the release of their vehicles from service providers, such as panel beaters and repair shops, due to non-payment of claims.

In short, policyholders with claims will need to pay for repairs themselves, and join the queue of creditors trying to get something from the remains of Constantia Insurance.

“The processing of and payment of existing claims will be adversely affected by the insolvency proceedings, but the liquidators will advise all existing claimants soon on the steps they need to take as part of the insolvency proceedings to submit and prove their claims as part of the insolvency process.

“All the CICL’s unpaid claims will be considered in due course by the liquidators as part of the winding up process. Once the liquidators have considered and taken a view on the company ability to make payments (in whole or partially) of the existing claims, this will be communicated to all existing claimants,” says the Prudential Authority.

The FSCA says that the liquidation might also result in unnecessary storage costs for policyholders.

“The FSCA urges service providers to immediately release vehicles if no repairs have been made or to allow claimants to settle payments directly to secure the release of their vehicles.”