Binder Regulations: Impacted on UMAs
01 April 2013 | Magazine Archives FAnews & FAnuus | Short Term | Christine Rodrigues, Norton Rose SA
The past year has been a roller-coaster ride for underwriting managers and now the new binder regulations have created direct competition in the form of the non-mandated intermediary. Competition is always good – provided the playing field is level, of course.
Unlike the non-mandated intermediary, underwriting managers are precluded from marketing and selling insurance policies directly to the public. The Financial Service Board (FSB) is concerned that the public does not understand that the underwriting manager is only the agent of the insurer – in fact, the public may well think the underwriting manager dealing directly with them is acting as their broker.
Binder agreements have created compliance requirements for the non-mandated intermediary that did not previously exist. Non-mandated intermediaries that choose to enter into a binder agreement must be prepared to comply with all regulations pertaining to them as intermediaries as well as binder holders.
Being prepared for all eventualities
It will be interesting to see how individual non-mandated intermediaries cope with the requirements of compliance. Are they sure they are ready? Do they have all the necessary skills, expertise and resources to effectively perform functions that have typically been performed by the insurer and the underwriting manager?
Signing a binder agreement is easy but the performance of binder functions requires expert skills. Has the non-mandated intermediary considered that, in terms of the binder regulations, it is required to indemnify the insurer against non-compliance with the binder agreement? This means that the non-mandated intermediary must be prepared so that it may be exposed to indemnity claims from both the insurer and its clients for rendering services as an intermediary and as a binder holder.
The market has seen many independent intermediaries opting to enter into binder agreements with insurers. It makes business sense for them; the non-mandated intermediary has the luxury of accessing the insurer and the insured and therefore maximising income streams. But where does this leave the underwriting manager? Underwriting managers may only receive policies through brokers or the insurer itself. If most brokers want to perform the binder activities themselves, is there a need for an underwriting manager?
Is the demise of underwriting managers on the cards?
In an ideal world, a binder agreement should only be issued to underwriting specialists that can take on the binder activities that an insurer would ordinarily perform itself but the insurer wishes to tap into some expertise or a book of specialist business. However, it now appears that everyone wants a binder arrangement because it is permissible.
The binder regulations may lead to some underwriting managers reconsidering their business model. They may weigh up whether the right to earn a profit is better than the right to earn a binder fee and commission.
The South African insurance industry, especially in terms of specialised lines, has developed, grown and been maintained by many specialist underwriting managers. These are individuals who have both experience and the necessary skills to underwrite specialised risks. Will the new binder regulations lead to the demise of this valuable intermediary?
Binder activities should be regulated
It is important that binder activities are regulated, but the market practices for issuing binder agreements should be evaluated. Binder agreements should typically be issued to intermediaries that have specialised skills or contacts and not merely to anyone that wants an extra income stream.
Non-compliance with binder agreements will result in binder holders needing to indemnify the insurer. This risk needs to be considered before anyone enters into a binder agreement.
