Let the chips fall before betting on your future
The Retail Distribution Review (RDR) proposals released in November 2014, as well as the Phase I update released a year later details the immediate regulatory landscape facing insurance brokers.
These proposals aim to dramatically change the rules and regulations facing brokers currently. If these proposals go through in their current format, brokers will have to take a hard look at their current way of doing business.
This introspection needs to happen as a matter of urgency. The Financial Services Board (FSB) is implementing Phase I of RDR by July which will bring certain controls into the industry which will restrict certain freedoms that members of the short-term industry are used to. Whether this will be a good thing or a bad thing remains to be seen, and we should wait for the chips to fall before we place any firm bets on our future.
Dealing with an industry first
The compliance challenges, for the first time in many years, include commission limits as well as staff and systems brokers have employed over the last few years. I will have a look at two critical proposed changes which will certainly take effect later on this year.
The RDR proposals state that the broker may charge the client specifically for the advice provided. Advice is currently being remunerated by the insurer in terms of the regulated commission, which is paid for intermediary services and advice.
The commission comes out of the premium and is paid by the insurer, so the client is not really affected by this payment. It is true that the broker may currently charge the client a direct fee in terms of Section 8(5) of the Short-Term Insurance Act for other services and the fee needs to be disclosed desperately to the client.
Client buy-in
If the broker is currently charging this fee, and it will work out to approximately the same fee that the broker will charge as an advice fee going forward, the client will in all likelihood accept this new fee.
If the broker is not currently charging a Section 8(5) fee, it may be a challenge getting the client to accept this fee as it means the amount the client is paying for insurance will increase.
The insurer, in fact, may benefit as the Financial Services Board have stated that commission caps may come down given that advice is currently being remunerated by commission. There is some thought that needs to go into this when the change comes through.
The outsourced headache
The second critical change is with respect to outsourced functions that the brokers are currently doing on behalf of insurers for an agreed fee. The outsourced and binder agreements were based on the Binder Regulations promulgated at the end of 2011 as well as Directive 159 passed shortly thereafter.
These regulations allowed brokers to perform binder functions, including the rating of premiums, and deal with commercial policies in return for binder and outsourced fees which were not linked to profit sharing.
Ensuring survival
Budgets and systems were employed to make sure the broker could service the insurer appropriately. The new proposals are suggesting that a commercial binder be stopped, and fees be capped to specified maximum amounts.
Furthermore those brokers issuing policies for insurers for an outsource fee will have to have a system that talks real time with the insurer’s system, and the fee will be limited to two percent of the gross written premium.
This will force brokers to renegotiate their outsourcing and binder deals with insurers, and their remuneration will be reduced in some cases fairly significantly. Brokers need to be flexible with regards to these specific possible regulatory changes coming their way as these changes can have quite an impact on their business.
