Does the fee versus commission debate extend to the short-term arena?

The question that immediately comes to mind is whether the market is mature enough to act responsibly in a fee environment without the risk of unfair customer outcomes. International experience suggests that the deregulation of commission resulted in a trend of high fees initially, which settled down over time.

The challenge identified is that the equitable treatment of policyholders takes a back seat while the market takes time to settle. It is also worrying that costs may be passed on to consumers who end up being out of pocket.

The South African insurance sector operates under a combination of commission and fees as set out in Section 8(5) policy fees, Binder fees and Outsourcing fees. Some interesting facts and observations on commission and fees practices include:

The Short-term Insurance Act of 1998 regulates the maximum commission payable for motor policies at 12.5% and at 20% for any other short-term policy. In practice these capped percentages usually become the standard commission that is being paid to the intermediary. Despite this provision, commission for assistance business is not capped.

Binder fees are governed by the Binder Regulations which provide for binder fees to be reasonably commensurate with the activity performed and allow for a reasonable rate of return. Binder fees can only be earned by non-mandated intermediaries for binder functions excluding the following activities:

o Refusing to renew a policy;

o Rejecting or refusing to pay a claim or part thereof;

o Terminating, repudiating or denying policy holder liability; or

o Declaring a policy void.

The reason for this provision is to manage the inherent conflict of interest wherein a non-mandated intermediary acts as an agent for the policyholder in providing intermediary services AND as an agent for the insurer for the provision of binder functions.

Section 8(5) policy fees must simply be agreed between the policy holder and the intermediary and properly disclosed. There are no caps on policy fees earned, nor is there any provision that the policy fees must be activity based and commensurate with the services rendered.

In its call for contribution on Intermediary Services and Related Remuneration in the Insurance Sector, a document published in November 2011, the Financial Services Board (FSB) rightly questioned what policyholder service activity takes place in return for the policy fee charged by brokers to policyholders. To this end the sector is awaiting the FSB’s next discussion document on Intermediary Services and Related Remuneration, expected before the end of 2012.

In addition, the Financial Services Laws General Amendment Bill (or Omnibus Bill if you prefer) provides for the deletion of Section 8(5) in the Short-term Insurance Act. It is expected that all remuneration issues will then be governed in regulations similar to the Binder Regulations and Commission Regulations.

The Omnibus Bill allows for a staggered implementation and this process of deletion of Section 8(5) will only be implemented when the process in respect of intermediary services and related remuneration and the drafting of the resulting regulations has been completed.

Outsourced fees are governed by Directive 159 and must be reasonable and commensurate with the actual function or activity when an insurer outsources an aspect of its insurance business, excluding intermediary services, to another person.

Implementation for both the Binder Regulations and Outsourcing Directive are immediate for new agreements, but must occur no later than 1 January 2013 for existing arrangements.

In his 2012 Budget Speech delivered on 22 February, the finance minister stated that fees for many products in the financial services sector remain too high. It makes sense therefore that the industry considers its current practices, whether fee or commission based, in light of the Treating Customers Fairly (TCF) regime.