Every year, boards approve insurance programmes designed to protect organisations against losses that may amount to hundreds of millions, and often billions, of rand. Those decisions are rarely made lightly. Yet, unlike acquisitions, financing arrangements and major capital investments, insurance programmes do not always receive the same level of governance scrutiny.
That distinction matters because an insurance programme is considerably more than an insurance policy. It is a legal, contractual, financial and operational structure that determines who ultimately carries the insurance risk, how contractual obligations are allocated, how claims decisions are made and, where claims become disputed, how those disputes may ultimately be resolved. Those outcomes are largely determined when the programme is designed, not when a claim is submitted.
Modern insurance programmes may involve multiple participating insurers, international insurance and reinsurance markets, fronting arrangements and other sophisticated structures designed to assemble the insurance protection organisations require. Each structure may represent the most appropriate commercial solution depending on the organisation’s risk profile and insurance requirements. The governance responsibility of the board is therefore not to determine whether one structure is inherently better than another. It is to understand the governance consequences of the structure it is being asked to approve.
Those consequences may influence which legal system governs different parts of the programme, who ultimately carries the insurance risk, whether participating insurers have accepted the same contractual obligations, how claims decisions are made, whether a disputed claim may give rise to multiple legal proceedings and how increasing structural complexity may affect governance oversight.
One insurance programme does not necessarily mean one legal system
Many boards assume that because an insurance programme is arranged through a South African broker and issued in South Africa, any dispute arising from that programme will be governed exclusively by South African law. In many cases that assumption will be correct. In others it will not.
Large corporate insurance programmes frequently involve international insurers through co-insurance arrangements, fronting structures and other internationally supported placements. Depending on the contractual arrangements, different participating insurers may be subject to different governing laws and jurisdictions. A disputed claim could therefore require an organisation to pursue or defend different aspects of the same dispute in multiple countries before different courts or arbitration forums.
International insurers play an essential role in providing the insurance capacity required for many of South Africa’s largest and most complex risks. The issue is not their participation. It is whether the board understands the legal implications of the structure it has approved before a claim ever arises.
The insurer named in the policy may not be the insurer ultimately carrying the risk
Many boards assume that the insurer named in the policy is the organisation ultimately carrying the insurance risk. In many insurance programmes that assumption will be correct. In others it will not.
Large corporate insurance programmes are frequently structured using fronting arrangements. Under these arrangements, the South African insurer issues and administers the policy while the underlying insurance risk is transferred to an international insurer or reinsurer. The insurer named in the policy may not represent the organisation ultimately carrying the financial exposure.
This distinction becomes even more significant because many South African fronting arrangements incorporate a pay-as-paid clause. Under these arrangements, the South African insurer’s contractual obligation to indemnify the insured is linked to its recovery from the insurer or reinsurer ultimately carrying the insurance risk.
Boards should therefore undertake appropriate due diligence on the organisation ultimately carrying the insurance risk rather than assuming that the insurer issuing the policy necessarily bears that responsibility.
The master policy wording may not tell the whole story
A master policy wording creates the understandable impression that every participating insurer has accepted exactly the same contractual obligations. In many programme structures that assumption will be correct. In others it will not.
Large corporate insurance programmes are often built around a master policy wording. However, each participating insurer will typically issue its own individual placing slip setting out the basis upon which it has agreed to participate. Those placing slips may contain insurer-specific exclusions, warranties, endorsements, subjectivities and other contractual conditions that apply only to that insurer’s participation.
The practical consequence is that a board may believe it has approved one insurance programme governed by one contractual framework when participating insurers have, in reality, accepted different contractual obligations. Those differences may only become apparent when a claim is submitted and each insurer begins assessing its own contractual position.
Good governance requires boards to understand not only the master policy wording but also the contractual qualifications contained within each participating insurer’s individual placing slip before approving the programme.
One insurance programme does not necessarily produce one claims decision
Many organisations assume that purchasing one insurance programme means they will receive one co-ordinated claims decision. In some programme structures that assumption will be correct. In others it will not.
Many large corporate insurance programmes involve multiple participating insurers. Unless the contractual arrangements expressly provide otherwise, each insurer generally retains responsibility for assessing its own participation and is not contractually bound by the claims decisions of the lead insurer or any other participating insurer.
Although insurers will typically appoint a single loss adjuster to investigate the claim, each participating insurer independently evaluates the findings, applies the master policy wording together with its own individual placing slip and determines whether it will accept or reject liability for its own share of the risk.
The governance issue is not whether this approach is appropriate. It is whether the board understands that one insurance programme does not necessarily produce one claims decision.
One claim does not necessarily produce one legal dispute
Many organisations assume that if an insurance claim becomes disputed, the organisation will become involved in a single legal dispute. In many circumstances that assumption will be correct. In others it will not.
Where an insurance programme involves multiple participating insurers, each retaining its own contractual rights and independent claims authority, different insurers may reach different conclusions on the same claim. If those differences cannot be resolved, a single disputed claim may ultimately give rise to multiple legal proceedings.
Where international insurers participate in the programme, the complexity may increase further. Depending on the governing law and jurisdiction applicable to each participating insurer, an organisation could find itself pursuing or defending different aspects of the same dispute in different countries before different courts or arbitration forums.
Good governance requires boards to understand those potential consequences before approving the programme rather than discovering them only after a major claim has become disputed.
Every additional insurer introduces additional complexity and governance risk
Many of South Africa’s largest and most complex risks exceed the appetite of any single insurer, making co-insurance arrangements the only practical means of assembling sufficient insurance capacity. These structures often represent the most appropriate commercial solution.
However, every additional participating insurer also introduces another independent contractual relationship, another decision-maker and, depending on the structure, potentially another governing law or legal jurisdiction. Individually these differences may appear insignificant. Collectively they may materially increase the complexity of the insurance programme.
The governance issue is not whether a programme contains one insurer or many. It is whether the board understands why every participating insurer forms part of the programme, what value each contributes and whether the resulting complexity has been fully understood before the programme is approved.
Ultimately, the most effective insurance programme is not necessarily the one involving the greatest number of participating insurers. It is the one that achieves the most appropriate balance between effective risk transfer, contractual certainty, operational simplicity and sound governance.
Conclusion
Boards routinely undertake extensive due diligence before approving acquisitions, financing arrangements and major capital investments because they recognise that those decisions may materially affect the future of the organisation. Insurance programmes deserve exactly the same level of governance.
The structure of an insurance programme may influence which legal system governs a dispute, who ultimately carries the insurance risk, whether participating insurers have accepted the same contractual obligations, how claims decisions are made, whether one disputed claim may become multiple legal proceedings and how increasing structural complexity affects governance oversight. These are not flaws in insurance programme design. They are governance considerations that boards should understand before approving the programme.
The governance question is not whether one insurance structure is inherently better than another. Different structures exist for legitimate commercial reasons and may each represent the most appropriate solution depending on the organisation’s risk profile and insurance requirements. The governance responsibility of the board is to understand the implications of the structure it approves and to undertake the same level of due diligence expected of every other significant corporate decision.
The greatest governance risk is not the insurance programme a board deliberately approves. It is the insurance programme the board believes it has approved but does not fully understand.
Antonio Iozzo is founder and CEO of Alpha Group
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