Short-term insurance regulation tailored for customers
The majority of financial intermediaries identify cost as their primary concern when complying with new regulation. They have to absorb both the actual cost and the opportunity cost associated with filling out forms instead of writing new business. The impact of regulation on financial services stakeholders featured prominently at The Insurance Conference, a joint initiative by the Financial Intermediaries Association (FIA), Insurance Institute of South Africa (IISA) and the South African Insurance Association (SAIA), held at Sun City on 24/25 May 2010.
Caroline da Silva, Executive General Manager: Business at Mutual & Federal says insurance companies and intermediaries constantly evolve to accommodate regulatory changes. New legislation (and the costs associated with adherence) force business to invent more efficient processes. An example of this is how cost effective technologies are changing the face of distribution.
Consumers and technology
The domestic insurance industry will mirror that of the United Kingdom over time. “In the UK brokers account for less than 30% of new personal lines motor premiums,” says Da Silva. And both broker and direct insurer are using direct technology to provide the accessibility their consumers demand. Nowadays only 7% of broker contacts in Britain are face-to-face, predominantly among older and high net worth clients. “22% of times customers use telephones to access brokers, and 28% of the time they’re using Internet to access brokers,” she says.
Why should we concern ourselves with the latest distribution trends? Perhaps the most important reason is that consumers ‘drive’ regulation. Regulators are responding to consumer demands for financial market stability in the wake of the sub-prime crisis, for example. As a result regulators are working on Basel II, Solvency, Risk-based Solvency and SAM, among others. Local insurers will struggle to comply with these regulations because of the amount of risk outsourced to third parties on external Information Technology platforms.
Customers are also calling for ‘fair treatment’ by product providers. “South Africa had its first glimpse of the Treating Customers Fairly concept when National Treasury published its paper on financial services reform,” observes Da Silva. Treasury wants the industry to tackle tough issues, such as whether charging commission on short-term policies is ‘fair’. South Africa’s response to this issue was to suggest the deregulation of commission, whereas the UK suggested the prohibition route...
Introducing the ILAA
The Insurance Laws Amendment Act (ILAA), due to be passed into law soon, is a direct result of the Treasury reform process. A big issue tackled in this piece of legislation is that of binder agreements (also known as outsourcing, portfolio management, group schemes or administration). Da Silva: “When insurers first started looking at the ILAA they thought the regulator was going to prohibit the practice of outsourcing!” Fortunately this is not the case. Insurers will still be able to outsource to brokers (brokers with binders, or persons with binding authority), but will have to address the inefficiencies and conflicts of interest inherent in the current binder structures.
Brokers who take on administration as part of binder agreements usually accept a number of other responsibilities, including managing information, managing risk and handling discretionary pricing and claims. “The inefficiency of having data on two separate platforms, and no meeting on minds on how to manage this information has resulted in a number of questions,” says Da Silva. The ILAA seeks clarity on relationships (is the broker an agent for the insurer or the client), what commissions and fees are appropriate under each scenario, and how relationships between insurer and broker should be managed long-term.
Managing conflict of interest
The IILA is focused on managing conflict of interest too, supported by the recently published conflict of interest provisions in the General Code of Conduct for Financial Services Providers. Regulation has costs attached,” concludes Da Silva. “But the long-term impact of regulation will be more fundamental than that.” The ILAA will change the way industry stakeholders interact with one another. Unless technology is applied to improve process efficiencies and respond effectively to these challenges, the industry will suffer mass consolidation similar to that seen in the UK.
Editor’s thoughts: Much has been written about so-called ‘white label’ financial products and ‘binder’ arrangements. These arrangements typically blur the line between the duties of product providers, distributors and administrators. Do you agree with this assertion? And is there too much room for conflict of interest in existing binder arrangements? Add your comment below, or send it to gareth@fanews.co.za
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