How not to trip up over Binder Regulations

The new Binder Regulations apply to all new binder agreements concluded from 1 January 2012… Existing binder holders have until 31 December 2012 to ensure their agreements comply with the new rules. You cannot, under any circumstances, rely on your existing contract wording to meet the very specific requirements of the new legislation, and will have to make the necessary changes within the one-year grace period.

What do you need to know to get your new contract spot on? To fully understand the new Binder Regulations you must first get a sense of the type of entity that can enter into such an agreement with an insurer, and the functions this entity may perform.

From 1 January 2012 you can only enter into a binder agreement with an insurer as a non-mandated intermediary or an underwriting manager (UMA) – though the regulation also recognises mandated intermediaries and non-mandated intermediaries (without a binder) as valid intermediary categories.

A UMA is an entity that performs one or more binder functions, but must comply with two conditions. The first condition is that it does not solicit insurance business (meaning any act likely to cause another person to enter into, vary or renew a policy on behalf of an insurer). The second requires that it render said services to or on behalf of an insurer only.

Another important step in unpacking the new legislation is to understand the words "mandate” and "binder” as defined in the regulation. According to short-term insurer Santam – which shared some insights at their recent Regulation Overview presentation – a mandate refers to a relationship between an intermediary and a client, while a binder refers to a relationship between an intermediary and an insurer.

Upon the conclusion of a binder agreement the third party (or binder holder) may perform certain functions for and on the insurers’ behalf. These functions relate to the administration of insurance policies and subsequent claims and other tasks that typically arise from a relationship between an intermediary and insurer.

The legislation identifies four basic functions a binder holder might perform as a third party to an insurer… First – entering into, renewing or varying an insurance policy. Second – determining the wording of a policy. Third – determining the premiums under a policy. And fourth – settling claims under a policy.

Put another way… If you are not a licensed insurance provider that is performing any of these functions, you better have a binder agreement in place.

As is often the case in the financial services industry the discussion soon turns to intermediary remuneration. The new Binder Regulations introduce very specific instructions with regards the fees that can be earned out of the third party relationship.

These include commission (paid by the insurer) to the intermediary for its services, a binder fee (again paid by the insurer) for binder services, an outsourced services fee (you guessed it, insurer pays) for outsourced services not ‘binder’ in nature, and a policy fee (paid by the client).

It is important that any fees charged are commensurate with the actual costs incurred by the binder holder in fulfilling its function, with a reasonable rate of return. Such fees cannot be linked to profits in any way – and under no circumstances may any service be remunerated more than once! The regulator has already indicated that it will closely monitor business practices to ensure these rates are indeed "reasonable”.

A number of additional stipulations ensure that binder agreements cannot be used to ‘squeeze’ unsuspecting policyholders for extra expenses. Under no circumstances will the binder holder be allowed to charge a debit order collection fee, for example.

This – the collection of premium – is a specifically defined intermediary service for which commission is paid. And – in case you missed this previously – no activity performed for the client can be billed more than once! The legislation also stipulates that the gross premium presented to the client cannot be added to by the binder holder.

Be warned, however, that certain fee practices could be done away with in the future. The Financial Services Laws General Amendment Bill proposes the deletion of Section (8)5 of the relevant Insurance Act, which would effectively prohibit intermediaries (and binder holders) from charging so-called "top up” fees.

Activities outsourced under a binder agreement may not be sub contracted. This creates challenges for UMAs that currently subcontract certain binder functions. "To ensure compliance any subcontracted activities must be assumed by the UMA or the insurer. In agreed circumstances, the insurer may agree to enter into a binder agreement with the third party directly on behalf of the UMA,” notes Santam.

If you thought you could sidestep the regulator’s tough stance on binder holder remuneration by cutting yourself a slice of the insurer profits, then you will be disappointed. Profit share agreements have been outlawed except for those between UMAs and insurers.

The regulators, expecting resistance to their profit share provision, have further stipulated that a UMA may not conduct any business with a mandated or non-mandated intermediary that is an associate of that UMA!

Additionally a UMA who is a binder holder of one insurer may not be a binder holder of other insurers in respect of the same type or kind of policies, unless all the relevant insurers have agreed thereto in writing.