Incidental activities and UMAs

The letter advises that any insurer that is not compliant with this view, would have until the 1st of October to make the necessary changes to their binder agreements that are in place. This created difficulty in the market from a legal point of view, as this note does not technically have the force of law, if insurers were fully compliant with the wording of the original binder regulations, as legislated on 12 December 2011.

 

The situation is made slightly more problematic in that the note states that the lists of deemed incidental functions listed, are not necessarily exhaustive and may also be re-assessed going forward.

One needs to have a background on the definition of incidental activities. The binder regulations define the five binder functions that an insurer may outsource to a binder holder and such functions may then not be further outsourced. The binder regulations states further that activities which are incidental to these functions, would also be included in the binder agreement that an insurer would have with a binder holder, and may not be separately paid for, as such activities are necessary in performing the actual binder function.

 

There is, however, no prohibition in the binder holder sub-outsourcing the incidental activity. There is only a prohibition of sub-outsourcing the main binder function.

For the sake of clarity, the five main binder functions are:

• Entering into, changing or renewing a policy.

• Determining the premium of a policy.

• Determining the policy wording.

• Determining policy benefits and settling claims.

If any one of these functions is outsourced by an insurer to a binder holder, this would be dealt with in a binder agreement.

If an insurer were to simply outsource incidental activities to these five main binder functions, and retain the performance of the main binder functions, they would merely outsource these incidental activities in an outsourced administration agreement governed by Directive 159. The interesting question that arises is if the main functions are outsourced to a binder holder, and the binder holder wants to sub outsource some of the incidental activities, are they entitled to do this given that the prohibition on sub-outsourcing only applies to the main binder functions and not the incidental function?

Furthermore, an insurer cannot outsource the main binder function to a binder holder, and then pay an added outsourced fee to the same party for the performance of the incidental activity. The binder fee needs to cover the full activity.

 

This was a serious concern for the FSB, and motivated part of the contents of the note mentioned above. The duplication of costs needs to be carefully policed. Another scenario of duplication of costs is where the binder holder sub-outsources incidental functions to a third party. The third party cannot be paid a separate fee in addition to the binder fee being paid to the binder holder.

 

The sub outsourcing of incidental activities is important to underwriting managers. Underwriting managers are battling to compete for market share with insurers who are able to outsource binder functions to brokers and pay fees for the performance of those services.

 

The underwriting manager, being a binder holder, may not outsource any one of the five binder functions to a broker, but may sub-outsource incidental activities to those binder functions they have been entrusted to perform by insurers. For example, if they have been given a mandate to settle claims, underwriting managers may sub-outsource the appointment of the assessor to the broker, as well as the actual payment of the claim through a claims float.