Binder regulations Reshaping the industry

Although it may appear that the binder regulations merely introduce better governance, they will over time reshape the industry through the introduction of three main principles, all based on consumer protection.

After two years of discussion, the binder regulations have now been published for comment and we have come a long way from where we started. In the beginning, there were concerns that the FSB may completely prohibit the outsourcing of binding authority to brokers. However, we have ended up with an acknowledgement of industry practices but with a recognition that the way we were doing it was probably not adequately governed and did not give sufficient comfort that the customer was adequately protected.

What it really means for the industry

The binder regulations, through the introduction of three main principles based on consumer protection, will reshape the industry over time. The first is clarity of agency which addresses the broker’s question: “Who do I act for, the insurer or the customer?” The second focuses on information, both from an access and disclosure perspective and the third, tied closely to the second, is that the binders force some real engagement as to who owns the customer - always a sensitive discussion.

Agency – who do I act for?

The regulations introduce a new creature into the short-term industry, a person called the mandated broker. In the past, anyone who was mandated was assumed to be mandated by the insurer. In true regulatory style, this is turned around - because the customer comes first, if anyone is to be called mandated then they will be mandated by the customer not the insurer.

The mandated broker is therefore a broker who has mandate from clients to act on their behalf to cancel or amend their cover without their prior approval. Initial reaction is that we just will not see these types of brokers in the industry because the PI risk is too high when linked with all the advice requirements under FAIS. However, if you look at the opposite implications for brokers who have a binder, where they are required to get the client’s consent to move the cover from insurer to insurer or to terminate the policy, I think we may see brokers seriously considering this option.

Insurer is ultimately responsible

In the past brokers with schemes, or binders, were quite easily able to move books of business from insurer to insurer. Now the binder regulations make this more difficult. Firstly, the regulations propose that the insurer is responsible for compliance with the Act which will ensure that insurers really apply their minds as to who can be granted a binder based on what IT they have, what their information sharing capabilities are, what their skills are for managing the binder, what their business continuity looks like and how they manage their disclosure and marketing communication with the customer.

If the broker does not comply, it is the insurer that will be held to task. This makes the FSB position very clear: the function that is being outsourced is an insurer function. If it is to be outsourced to someone else, the FSB wants to ensure it does not lose its ability to supervise both from a prudential as well as market conduct perspective. The insurer holds the licence, therefore the insurer is responsible if it outsources its licenced functions.

Insurer’s agent

If a broker accepts this binding authority, it must accept that it is the agent of the insurer for these functions. Mandated brokers as described above can never be binder holders because they are the client’s agent and cannot be the agent of both client and insurer. Binder holder brokers, who currently see themselves as the client’s agent, now need to see themselves in a new light – as the agent of the insurer or of multiple insurers.

One of the requirements of the binder arrangements is that in the event of cancellation of a binder by the binder holder, it is now no longer sufficient just to inform the clients, but it becomes necessary to gain consent. This is stated in the Explanatory Memorandum, referring to Sec 36 of the Act, and requires that the binder holder has to ‘expressly secure the prior written approval of each policyholder’ and comply with section 36 of the Act. The FSB also have to be informed as to why the binder is being cancelled, where the book is going and how it will be managed.

Ripple effect

All of this makes it a lot harder to shift books of business. It will, in turn, impact not only on who insurers choose to give binding authority to, but which insurers brokers choose to contract with, how books are managed and whether binder holders, who are sole agents to one insurer, may wish to reconsider the fact that they have no alternative market and whether binder holders for multiple insurers prefer the sole agency approach.

Data sharing

I was once told by a broker, who has since retired, “You will get my data over my dead body”. It highlighted the very real fear among brokers that insurers would use the information to market directly to the customer. In acknowledgment of this fear, insurers have in many cases outsourced their business without requiring that brokers share customer data. This not only resulted in an inability to manage the business properly, but in a number of cases, where the binder holder moved the book to avoid corrective action and could not find a new underwriter, the clients were left uninsured.

No-one knew who these clients were because the insurers did not have access to data. This goes back to the requirement that insurers are responsible for compliance - it is their responsibility to ensure that the clients are protected and to do this they need data.

This Act can also not be read in isolation, we have Solvency Assessment Management coming at us at a rate of knots and insurers will simply be incapable of allocating capital appropriately unless they have data at a granular level. Fortunately, the industry has long been working on a solution to manage data flow, in initiative called STRIDE, and it seems that those old fears of sharing data are now a thing of the past in most cases. Very often regulation is simply the catalyst for business change and in this case I believe it is the catalyst for a positive shift towards more efficient management in era where information management is key to good performance.

Who owns the customer?

I am often warned away from discussing this topic because it is such a sensitive one – brokers represent the client, they are the client’s agent and therefore they own the client. Insurers argue that they hold the contract, that they incur the liability therefore they too own the client. Perhaps my response will sound trite as to why I do not shy away from this debate - I really believe that neither the broker or the insurer really ‘owns’ the client – each have independent obligations and rights, either in representing the client or responding to contractual obligations, but the client owns the client – it is as simple as that.

The binder regulations simply clarify what these obligations are where an insurer outsources binder functions.