Further investigation into the cap of PDAs

Patrick Bracher, Norton Rose Fulbright

We recently came across an article in Norton Rose Fulbright’s Legal Snapshot, written by Patrick Bracher, based on the policy data administration services initially proposed in the draft Regulations which we thought would be interesting to share with you.

Maintaining the status quo

A previous draft of the Short-term Insurance Regulations included policy data administrative services (PDAS) as a service attracting remuneration of 2% of premium. This was left out of the final regulations.

According to the National Treasury Key Issues document ‘It has been decided, at this stage, to maintain the status quo by not classifying PDAS and introducing a mechanism for fees for PDAS and to reconsider the introduction thereof as part of the Tranche 2 amendments to the Regulations – at which time the activities segmentation process which is being undertaken as part of further technical work under RDR will be at a more advanced stage’.

Determining the cap for PDAs

In short, they accept that further investigation is needed of what an appropriate cap is for PDAS and this is something for the future.

This means that if policy data administration services are done it will be on an outsource basis under Directive 159 because the proposed amendment recognised that this is a service in addition to intermediary and binder functions.

The following considerations will apply (in addition to all the other requirements of Directive 159):

1. Remuneration must:
   1. be reasonable and commensurate with the function or activity performed;
   2. not result in remuneration being paid a second time for a function or activity for which commission or a binder fee is paid;
   3. be fair to policyholders;
   4. not be linked to claims rejected wholly or partly. 

2. Therefore, the functions or activities outsourced must not be functions or activities necessarily incidental to services as intermediary or binder activities.
   
   
3. Binder activities include providing updated policyholder and policy information to the insurer at intervals not longer than 60 days to enable the insurer to identify the policyholders, contact the policyholders and assess its liability under the policies, so that cannot be remunerated again.
   
   
4. From 1 January 2020 a binder holder will have to provide up-to-date, accurate and complete data using an IT system integrated with the insurer that will enable the insurer to comply with regulatory requirements relating to the management of data including the requirements in the Policyholder Protection Rules. From 1 January 2018 that function cannot be remunerated again (regs 6.2A(2) & 6.3(p)) unless new PDAS regulations are introduced, allowing a fee for this service. 

More considerations will apply

When an insurer decides to pay an independent intermediary or representative for additional services, functions or activities which do not constitute services as intermediary or a binder function, the Registrar must be notified in writing (in a format still to be determined) at least 30 days before the arrangement is entered into (reg 5.11).

For personal lines policies where the policyholder is a natural person or juristic person under the R1 million asset value or annual turnover, the insurer may not help intermediaries collect fees from the client unless it appears the fee relates to an actual service other than rendering services as intermediary and does not duplicate any service paid for by the insurer (PPR 12.4.1).

Data management is dealt with in Policyholder Protection Rule 13 which includes data that will be processed under the Protection of Personal Information Act. An effective data management framework must be in place complying with PPR 13.3. At the minimum the insurer must have access to the names, identity numbers and contact details of all policyholders including mobile numbers and email addresses where available. If the insurer outsources processing of its own data it must have access to the data at any time when required by the insurer.

Editor’s Thoughts:
Previously, concerns where raised on the fee cap proposed, as being too low and many wanted answers as to what the rationale behind the 2% was, without any additional functions in question. But only time will tell what holds for the industry once clarity has been gained. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za.