Will the playing field ever be equal?

Short term insurance brokers differ markedly based on their size and what functions they are performing for both insurance companies and their clients. The regulator has been very active in shaping how brokers and intermediaries can be remunerated by insurers, and we still await the final comments from the Financial Services Board on the Remuneration Paper which hopefully will clarify further with certainty how and how much intermediaries can be remunerated.

 

In terms of Directive 159, which became effective in April of last year, outsourced insurance administration was regulated comprehensively for the first time and intermediaries can now earn administration fees from insurers for performing insurance administration functions on behalf of the insurer. These fees have to correspond with the functions being done and cannot be based on profit share so it becomes very important that these intermediaries have the capacity to perform these outsourced functions if they wish to earn extra fees.

 

Examples of these functions would the issuing of insurance policies, the appointment of loss adjusters and the possible surveying of insurance risks.

As stated above, with costs constantly rising for intermediaries, commission is not always sufficient. The more administrative capacity the intermediary has, the more they can benefit. Not all intermediaries have this capacity however and those small brokers who are just selling and marketing policies may be at a big disadvantage with respect to remuneration opportunities.

 

Furthermore the recently enacted Binder regulations to the Short term Insurance Act allows brokers to become non-mandated intermediaries and perform comprehensive binder functions on behalf of the insurer in addition to mere administration services. This entails binding the insurer on the acceptance of risks, determining the premium and settling claims.

 

These functions are highly specialized and a certain caliber of staff and systems are required in order to fulfill these responsibilities. Not all brokers can act for insurers in this manner or even may want to but those who do again create the opportunity for themselves to provide a quick turnaround service for their clients and earn extra revenue for themselves. Another issue to bear in mind is that once the intermediary performs these outsourced functions for insurers, they become subject to all the outcomes of the Treat the Customer Fairly regime which the Financial Services Board has now introduced which means more compliance and inevitably more cost and capacity.

 

There is also the policy fee that a number of brokers charge to their clients in terms of Section 8 (5) of the Short Term Insurance Act. This fee is paid directly by the client to the brokers (as opposed to by the insurer) for functions performed for the client other than intermediary services. Examples of such services would be specialized risk management advice, and compiling contents inventories as examples. In order to provide these services, systems, staff and specific capacity needs to be put in place to be able to perform such services exclusively for the client.

Again those brokers who are able to perform these services are able to be remunerated and do not just rely on commission.

 

Even though fees have been strictly regulated, there will always be a difference among intermediaries as to what fees and commissions they earn, depending on their size and operational capacity and it’s unlikely the playing fields will ever be equal.