Insurance Laws for the 21st Century

In this article, Stanley Jeremiah, President of the Insurance Law Association (Singapore), outlines the inadequacy of present legislation to meet the demands of the insured (consumer). He highlights the lack of transparency and clarity in the legislation and calls for a review and revision of the relevant laws to enable effective use of insurance contracts as a means of financial planning.

While much has been said about gearing up the financial services and the insurance industry to meet the challenges of the 21st century, it appears that not enough attention has been paid to the underlying laws to respond to the needs of the insurance industry. I will highalight a few examples.

First, in Singapore, we continue to use the 'Prudent Insurer' test with respect to the duty of disclosure, ie the insured has a duty to disclose all facts which the Prudent Insurer will want to know, in assessing the risk. This test is not defined in the Insurance Act (Cap 142), but is an application of the English common law. It was first formulated in 18th century England and has gone through several revisions. It is unsatisfactory in that it expects an ordinary insured (the consumer) to know what an insurer would take into account in assessing the risk. This clearly puts the consumer at a disadvantage. To add to the difficulty, s 25(5) of the Insurance Act (Cap 142) requires that a proposal form should carry a warning that the proposer must 'fully and faithfully give the facts as he knows them or ought to know them'. Thus, the problem facing the average consumer is: what is it that he ought to know but does not actually know?

Recognising this, the authorities have tried to deal with the problem by encouraging standardisation of proposal forms and the like. However, the duty of disclosure is fundamental to an insurance contract, and these indirect attempts at trying to deal with the problem are insufficient.

It is far better to take the approach of countries, like Australia and Malaysia, which define the duty of disclosure in terms that would be fair and reasonable to the average consumer.

The Australian Insurance Contracts Act, for example, states at s 21:

... an insured has a duty to disclose to the insurer ... every matter that is known to the insured being a matter

(a) that the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and if so on what terms, or
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.

This test clearly judges the insured by the standards of the 'reasonable insured' and not the 'Prudent Insurer'. I would submit that the law needs to be updated to reflect the 'reasonable insured' test to take into account that nowadays, most insurance contracts are consumer contracts.

Some further examples of the law not being up to date:

  1. We do not have clear legislation to allow the insured to nominate beneficiaries for their insurance policies similar to nominations in respect of their CPF Funds. Currently, only NTUC Income has nomination provisions provided under the Co-operative Societies Act (Cap 62) and even those have potential problems unlike CPF nominations, it is not automatically revoked on marriage. The Malaysian Insurance Act 1996 (Act 553) has one part (Part XIII) with 11 sections dedicated to dealing with the Payment of Policy Moneys under a Life Policy or Personal Accident Policy. The sections deal with the nomination of beneficiaries, revocation of nomination, payment of policy money where there is a nomination, assigned or pledged policies, payment where there is no nomination and even payment to persons incompetent to contract. In contrast, the lack of any legislative provision in Singapore to deal with so important a matter can only be described as a serious lacuna in the law. Like Malaysia, we need to introduce provisions to enable insurers to release the proceeds of policies to beneficiaries or their guardians as quickly and easily as possible.
  2. The law with regard to so-called 's 73 policies' (s 73 of the Conveyancing and Law of Property Act (Cap 61)) has many unresolved issues; for example, we can implicitly (and inadvertently) create a s 73 policy simply by naming a spouse or child as beneficiary. In Eng Li Cheng Dolly v Lim Yeo Hua [1995] 3 SLR 363, the High Court held that a wife who had since been divorced was entitled to the proceeds of a policy on the life of her ex-husband, notwithstanding the divorce and the fact that the policy contained an express right to revoke the nomination. Applying s 73, the court held that by simply naming the wife as beneficiary, the insured created for the wife a vested interest in the policy. Considering that he had divorced his wife and intended to remarry, one must ask if the result was one that was intended by the insured.

The law in this area is difficult for the consumer to understand, especially taking into account that there are no express beneficiary nomination provisions in the law.

  1. While the Insurance Act (Cap 142) allows for anyone above the age of 16 to own a policy (s 58), it does not make it clear that this 'minor' owner is then free to deal with the policy, ie assign, take a loan and so on. Therefore, we are left with a difficulty whereby a 16 year old may own a policy but most insurers will not allow them to assign or, in any other way, deal with the policy on the basis that they do not have the legal capacity to deal with the policy. This is a gap in the law which must be closed quickly.
  2. Insurers often sell policies to parents on the life of their child on the understanding that the ownership of these policies will be somehow 'transferred' automatically when the child reaches a specified age.

This is a good concept, however, as an insurance policy is in law a 'chose in action', the only way to pass legal title to the policy would be by way of assignment. Therefore, notwithstanding the contract provisions, it is doubtful if legal title passes. A further problem is title to the policy on premature death of the parent - we do not have clear laws to address this. Countries like Australia have specific legislation enabling the transfer of ownership of policies of this kind when the child attains a specified age, but such provisions are lacking in Singapore.

I have just highlighted a few examples to demonstrate that there is much to be done to update our insurance law to make it responsive to the needs of the 21st century consumer and to enable the insurance industry to provide services which meet the needs of the public in the new economy.

What is required, however, is not a piecemeal approach but a comprehensive review and revision of the relevant laws as was carried out in Australia and, more recently, in Malaysia. It appears that currently, much effort has been spent on legislation dealing with the framework within which the insurance and financial services industry operates. A few years ago, we had the Insurance Intermediaries Act (Cap 142A), which will soon be set aside when the Financial Advisers Act, now in draft form, is passed and introduced by Parliament. Regrettably similar efforts have not been made to address the laws applicable to the underlying transactions, ie the Law of Insurance Contracts, hence, true progress in enabling the consumer to successfully use insurance as an effective tool in financial planning is impeded.

Stanley Jeremiah
Insurance Law Association (Singapore)