Are you ready? New Binder Regulations ‘go live’ from January 2012

An entity that does not have an insurance license and wishes to conclude a binder agreement with one or more insurer must do so as one of two entities. And it makes no difference what your current status is in terms of your agreements signed prior to 1 January.

Under the new Binder Regulations you either enter a binder agreement as a non-mandated (from the point of view of the client) intermediary or an Underwriting Manager (UMA). A requirement for the first form of business is that there is no mandate from the client to move that client’s policy without specific sign off!

Insurer accountability

No other entity may enjoy a binder from an insurance company to bind that insurer. The insurer takes complete responsibility for its binder holder and how that binder holder deals with policy holders – and must be able to correct any wrongdoing by the binder holder.

To this end the insurer would have to have objective performance criteria by which to judge the binder holder’s performance. The insurer must also make sure that the binder holder has the correct risk management systems in place. Changes to the regulations also have implications on the storing and sharing of customer data.

The insurer must have all the policy holder information in its records, which records must be updated by the binder holder at least every 60 days. At the very least this information must be sufficient for the insurer to make contact with its policy holders should it need to do so in terms of the law. Intellectual property issues must still be dealt with and it makes sense that the agreement clearly states who the client base ‘belongs’ to.

You can gain a better understanding of the changes to Binder Regulations by considering each form of business in greater detail.

The non-mandated intermediary is effectively a broker with a binder, but does not have to be a broker! It can be any entity that wishes to bind the insurer, but carry on being able to speak to clients directly with respect to selling policies or getting the clients to vary their policies (such as many of the current administrators do). An entity that is an associate (as defined in the FAIS Act) of a broker would have to be a non-mandated intermediary, as a broker may not give business to a UMA that it is associated with.

The two critical issues with the non-mandated intermediary are the loss of the general mandate from the client and that the binder fee earned from the insurer has to be commensurate with the actual work being done to perform the binder, including a reasonable rate of return.

The loss of mandate is immediate and all brokers default to the status of non-mandated intermediary unless they have the general mandate with the wording the regulation prescribes, and are not associated with a non-mandated intermediary and enjoy no binder mandates from any insurer.

As for binder fees – these cannot be based on the profitability of the book! The regulation stipulates that there can be no relation between the fee and the profitability of the book whatsoever in order to remove any potential conflict of interest.

The non-mandated intermediary may still earn commission and broker fees (be it admin, policy or debit order fees) directly from its clients, as this has not been regulated in terms of these regulations. A non-mandated intermediary (unlike the UMA) may not reject claims or refuse to renew or void policies. This would have to be done by the insurer on its letterhead.

The UMA may earn a binder fee commensurate with the work being done to perform the binder functions that it has, but may also participate in the profits of the scheme. To alleviate any potential conflict of interest, the UMA may not talk directly to the policy holders in any way which will have the effect of the policy holders entering into, renewing or varying their policies.

Factual issues, however, can still be discussed directly with clients. The UMA may not be an associate of any broker that gives business to it, but unlike the previous Section 48 (2), it may bind an insurer in more than one kind of business – and may also write for more than one insurer, as long as the two insurers agree in writing that this can be done.

In terms of Section 48A, the binder holder may not add to the Gross Written Premium which in effect prohibits the UMA from charging any fees over and above this amount!

The main points you should take cognisance of with respect to the new Binder Regulations, effective 1 January 2012, are the following:

1) The regulations provide a one year grace period on all existing binder agreements to be brought into line with the regulations signed before 1 January 2012.

2) If a broker has a binder agreement with any insurer with effect from 1 January, their status will immediately change to non-mandated intermediary throughout that line of business with respect to all their binder agreements.

3) Any new binder agreement signed with an insurer has to be according to the new regulations. All current binder agreements will be redrafted by 1 January 2013, regardless of how similar we believe the current model to be. The regulations stipulate that very specific clauses have to be part of the agreement.

4) Any one of the following functions constitute a binder function and performing one or more of these functions turns the entity into a binder holder:

a) Entering into, renewing or varying a policy;

b) Determining the wording of a policy;

c) Determining the premiums under a policy;

d) Settling claims under a policy.