The intermediary remuneration minefield
“Any broker or underwriting manager who tries to formulate a business plan for 2009 has an impossible task at the moment,” says Patrick Bracher, director at Deneys Reitz Inc. He raises a number of issues with the Insurance Laws Amendment Act, 2008 which “has been gazetted but has yet to come into force.” And, he notes it won’t come into force for some time because the regulations under the Act have yet to be published… Even worse, the industry is till waiting for draft regulations to appear for comment.
Insurers, underwriters and brokers will be left in the dark as to commission incomes and expenses until the legislation is finalised. What exactly does the Act entail? In today’s newsletter we’ll cover some of the points raised in Bracher’s article titled “Intermediary Remuneration.” To read Bracher’s full article click here.
Two types of ‘third party’ activities
Bracher says that prior to the Amendment Act a third party to an insurance company “could be a broker intermediating between insurer and policyholder and performing certain tasks relating to entering into policies, collecting of premiums or submitting and processing of claims in exchange for specific regulated commission earnings.” Or they could be “people who are not intermediating between insurer and policyholder but who perform activities that the insurer might otherwise perform for itself.” This enabled insurers to outsource non-core functions with the result that certain industry expertise ended up in the hands of independent parties. We’ll call these entities Intermediaries on the one hand, and Specialist Outsourcers on the other.
Under the previous dispensation Intermediaries were paid limited commissions while Specialist Outsourcers were paid fees commensurate with the service they provided. When the Amendment Act is in force Intermediaries will be remunerated in accordance with the regulations – and it’s likely Specialist Outsourcers will see their incomes regulated too. The “businesses performing defined services will have to see whether they can survive on the proposed basis and, if not, will have to make urgent and cogent submissions to the authorities drafting the regulations,” says Bracher.
The earnings capability of both Intermediaries and Specialist Outsourcers will likely be severely impeded. “The authorities no longer appear to be prepared to condone outsourced services for collecting premiums on a market related rather than regulated basis for instance,” says Bracher.
Broken promises?
“When the FAIS Act was introduced in 2002, the promise was made that once the activities of financial services providers were regulated and conflicts and remuneration had to be fully disclosed, the remuneration itself would be deregulated so that market forces could operate,” says Bracher. This would allow the public the opportunity to choose his intermediary with due consideration to the “disclosed arrangement between insurer and service provider.” To date this ‘promise’ has not materialised and the industry is struggling with a double-dose of regulation. Many industry players believe that the combined load of the FAIS Act and the regulation of remuneration in the insurance laws is simply too much. But that’s not the only area of concern.
The accident versus health policy debate continues
If you’ve been following FAnews Online during the course of the year you’ll recall the ongoing spat between insurance companies offering so-called ‘gap’ medical insurance products and the Council for Medical Schemes (CMS). The CMS was unhappy with short-term insurers providing such products because it felt they should be governed by the Medical Schemes Act. Bracher notes: “The Supreme Court of Appeal eventually permitted insurers to sell medical expense top-up policies on the basis that they do not contravene the insurance and medical schemes legislation and are for the public benefit.”
This ruling has been circumvented by the Amendment Act. It provides that the relevant minister may “determine what can be sold as an accident and health policy (after consulting with the Minister of Health, the National Treasury, the Registrar of Insurance and the Registrar of Medical Schemes and allowing the public one month for comment).” A conservative regulator can thus block useful products that have been sold to consumers for decades...
“You cannot run an efficient economy where the most basic decisions regarding what can be sold and what you can earn for doing so is regulated at the whim of the authorities,” says Bracher. “It’s contrary to the spirit of a constitutional democracy that someone can be in or out of business according to the views, for the time being, of a minister as to what the requirements, limitations, prohibitions and earnings ought to be!”
Editor’s thoughts:
We’re not opposed to regulation; but we object to it being implemented in a slipshod or arrogant manner. The industry shouldn’t have to contend with a situation where a bill is gazetted prior to consultation, or where the bill affects the ability of participants to run their businesses effectively. Do you have any comments on the Insurance Laws Amendment Bill? Add your comments below, or send them to gareth@fanews.co.za
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