The Financial Services Board (FSB) published the proposed Binder Regulations on Friday, 22 August 2011 for public comment (by 5 September) after some two and a half years of debate.
Following a few minor subsequent amendments, the regulations have now been passed effective from the beginning of 2012.
The explanatory memorandum to the regulations confirms the four broad principles that inform the new approach, namely:
· Accountability of the insurer at all times;
· Responsible outsourcing by the insurer in compliance with the Short Term or Long Term Insurance Acts;
· Policyholder protection, which must be maintained;
· Managing potential conflicts of interest.
All agreements concluded on/before the date on which the regulations will come into operation must be aligned within one year, while all new binder arrangements must comply with the Binder Regulations with immediate effect.
In order to be properly understood, the regulations should be read in conjunction with the Insurance Laws Amendment Act, the Short Term (or Long Term) Insurance Act, the FAIS Code of Conduct and the Policyholder Protection Rules. (Note that this is a brief summary only and anyone who is affected should take time to study the actual regulations in some detail.)
It should be noted that binder holders do not include intermediaries who make use of technology to capture business on a terminal in their office which links directly into the computer of an insurer to draw quotes an upload the risk details, but are those parties who are empowered to bind an insurer to risks (within certain guidelines) without first approaching the insurer.
Mandated intermediaries (not common in the short term industry other than in the commercial space)
Mandated intermediaries are independents who hold written authority from their clients/policyholders to make certain decisions on their behalf without prior referral, especially to terminate cover or legally bind the client, typically when they move a policy or books of policies between insurers. As such they act entirely on behalf of the client/policyholder and may not hold binder agreements with insurers. They may earn commission, policy fees and a negotiated service fee from the client/policyholder (or a combination of these).
These are the typical intermediaries or representatives who usually offer intermediary services to clients in return for commission. They may only move a book of business with express approval of each client/policyholder. They may not be an “associate” of a mandated intermediary or an underwriting manager. (Note that a non-mandated intermediary may well be a mandated intermediary for another class of business, e.g. they may be a non-mandated intermediary with a binding authority for personal lines business while also being a mandated intermediary (no binder) for commercial business.
NB A non-mandated intermediary with a binding authority acts as an agent for the insurer for the performance and behaviour of the binder functions, but acts as an agent of the client/policyholder for the provision of intermediary services. It is here that the prudent managing of potential conflicts of interest is crucial.
Underwriting managers (UMA’s)
Underwriting managers act as agents of the insurer. They are not able to directly market, solicit or sell policies to the public, but may render other intermediary services, such as premium collection and receipt of claims. They accept business from intermediaries. In terms of the regulations, an underwriting manager may act on behalf of more than one insurer in respect of the same class of business if all of the relevant parties agree to this in writing. They are restricted from conducting business with intermediaries who are effectively associates of theirs.
Insurers need to apply for an exemption should they wish to conduct business with a non-mandated intermediary or underwriting manager which is an associate of that insurer.
If they perform binder functions they must make a clear choice as to whether they are to operate as an underwriting manager or as an intermediary. If they do not perform binder functions they can continue to operate under an outsourcing arrangement.
The binder holder may perform one or more of the following as an agent of the insurer:
· Entering into, varying or renewing policies where the insurer only gets to know about this “after the fact” (only the insurer can cancel or void a policy);
· Determining premiums;
· Determining policy wordings;
· Determining policy benefits (e.g. no-claim bonuses);
· Settling claims (only the insurer can repudiate a claim).
(These are different to intermediary services, which lead a person into entering into a policy.)
These must be in writing and must regulate the binder arrangements only (i.e. all other matters should be covered separately). The regulations spell out what needs to be covered in the agreement. One important requirement is that the binder holder must undertake to submit all relevant information about risks taken on to the insurer on a regular basis (see “Governance” below).
Hold covered arrangements fall outside of binder arrangements as they do not involve entering into a policy of insurance as such. However, hold cover arrangements are allowed for the “temporary” holding covered of risks awaiting finalisation (96 hours for personal lines and 30 days for commercial business).
Payments for binder services
In general, the commission regulations must be complied with, while all binder-holder or outsourcing fees must be reasonably commensurate with the binder-holder’s costs plus a reasonable rate of return.
Intermediaries may earn commission for intermediary services, as well as binder holder fees, a policy fee from the client (as long as there is no duplication of charges) and outsourcing fees. They may not have a profit sharing agreement on profits generated by policies under a binder agreement, nor may they receive a percentage of savings on claims settlements. Intermediaries must adhere to the requirements of disclosure.
All premium and claim costs must be determined by the insurer and no amounts may be added to the gross premium or deducted from claims.
Underwriting managers may share profits made on policies written under the binder as well as binder fees and outsourcing fees but they may not levy debit order collection fees.
Above all, the policyholder should never be expected to pay twice for the same service!
Sets up detailed written agreement with the binder holder as per the requirements, including:
· Maximum discretion of the binder holder, risk factors for assessing premiums, service levels, etc.;
· Regular updating of client/policyholder data at least every 60 days;
· Adherence to the FSB reporting requirements on termination of the binder to ensure that the interests of the client/policyholder are protected.
Adheres to the binder agreement, including:
· Transfer of client/policyholder data to the insurer (data sharing);
· Compliance with the binder conditions;
· May not outsource the binder functions;
· May not reject or repudiate a claim or cancel a policy issued under the binder.
Further guidelines to be developed
The FSB is currently considering several related issues, such as:
· The outsourcing of certain core insurer functions to third parties;
· The definition of “intermediary services” in the Short Term Insurance Act;
· Cell and similar ownership arrangements;
· All forms of remuneration, including the Section 8(5) policy fee and interest payments.
NOTE: The issue of profit-sharing
Some members may find it somewhat strange that a non-mandated intermediary, who has little influence on the release of profits, is not allowed to share in these profits, while an underwriting manager, who can have quite a large direct influence on profits, may enjoy a profit sharing arrangement. In this regard, the following should be noted from the above:
At the outset, the Regulator was of the opinion that the independent intermediary operating a binding authority was totally conflicted between the allegiance to its’ client and that of the insurer principle who had granted the binder, and that such binding authorities should thus not be permitted at all. The Regulator was also aware of the various structures in place to circumvent the restrictions on the earnings of the broker in terms of Sections 45 and 48 of the Short Term Insurance Act.
The FSB Binder Workgroup, which included representation from the FSB’s Insurance Department (Long & Short Term) and FAIS Department, as well as SAIA, SAUMA, ASISA and the FIA, lobbied for the continuation of the binder model with the proviso that any possible areas of conflict of interest should be managed accordingly.
It was then accepted that “non-mandated” intermediaries would be allowed to operate a binder but with the understanding that for intermediary services they would be the agent of the client and for binder functions the agent of the insurer, with the insurer remaining accountable for the performance of the binder. The restriction on profit sharing was deemed necessary in order to prevent the non-mandated intermediary from acting in the interest of the insurer at the expense of the client.
The restriction on the repudiation of claims, refusal to cancel policies, etc. was a further measure to manage the potential conflict. This is a principle that has been well-accepted by the FIA and its’ members, as has the issue of profit sharing for non-mandated intermediaries.
The UMA is deemed to be an agent of the insurer and is not allowed to sell or provide advice directly to the insuring community. It therefore has a direct allegiance to the insurer without having to manage the client relationship, thus avoiding he potential conflict of interest.
Whilst the regulations determine that the insurer should limit or restrict the discretion of the binder holder, the terms and conditions of most binders are generous in the extent of the mandate given.
The client working through a UMA enjoys the “protection” of the intermediary to maintain a balance of interests. A non-mandated intermediary, although not able to turn down a claim, may well not be too motivated to stick up for the client too strongly if his profit share were under threat.
The regulations make allowance for a period of one year for parties to readjust their current arrangements (thus to 31 December 2012). Binder arrangements are most common in the short term industry. However, this law has been passed to allow for and regulate similar arrangements which may exist or come into being in the long term industry.
The next stages of the overall planned project, including looking at third party cell captive arrangements and the broader definition of intermediary remuneration, etc. have already commenced.