When competition is healthy

Healthy competition is the corner stone of our society and economy. It ensures service providers are up-to-date, efficient and productive, thus enabling them to provide the best possible product for the consumer.

By killing or eliminating the competition, you may win the battle, however you will still lose the war. In his book Ishmael Daniel Quinn states "Any group that exempts itself from the rules of competition ends up destroying the community in order to support its own expansion."

Binder regulation issues

The binder regulations, which came into effect on the 1st of January 2012, stipulate that either an Underwriting Manager Agent (UMA) or a Non-Mandated Intermediary (NMI) may be a binder holder.

The UMA acts as an agent of the insurer, as if the UMA is the insurer, and does not act on behalf of a policyholder, potential policyholder or an independent intermediary. The UMA does not solicit policies from, or market to, the public or any other segments of the public on behalf of the insurer. The UMA performs binder functions and/or other outsourced services on behalf of the insurer and provides specialist technical insurance skills and knowledge in a particular type of business. These binder functions are regulated by the binder regulations, and also by a written agreement between the insurers and the UMA.

The NMI, on the other hand, acts as a representative or an independent intermediary, other than a mandated intermediary or a UMA. An NMI simultaneously acts or may act on behalf of an insurer and a policyholder.

Going external

The insurer outsources these binder functions to technical specialists or experts. The UMA predominately underwrites specialised or commoditised insurance, and is prohibited from marketing or selling insurance policies to the policyholder, so these functions are performed by the insurer and intermediaries.

Some reasons why an insurer would outsource functions to a UMA include the cost of overheads if the insurer performs the functions internally, as well as if there is a lack of required expertise internally to provide the service or product offering. The binder regulations allow an insurer to pay a binder holder a fee for the services rendered under the binder agreement.

This fee must be reasonably commensurate with the actual costs incurred by the binder holder associated with rendering the services under the binder agreement, with allowance for a reasonable rate of return for the binder holder. The criterion is necessary to deter circumventions of the commission regulations and inappropriate incentives. The regulations do not affect any commission that may be payable to an intermediary for the rendering of their services as an intermediary.

This is in relation to the policies to which the binder agreement relates, or to an outsourcing fee payable for the functions performed by the binder holder on behalf of the insurer, provided that the commission regulations are complied with. The UMA is remunerated through a binder holder fee, and is not remunerated through commissions. Unlike an intermediary, the UMA acts solely as an agent for the insurer.

A cut throat industry

Competition in the market is increasing due to cut throat margins. UMA’s are only entitled to a binder holder fee for services rendered under the binder agreement. They can however also share the profits of the insurance business. An NMI can also be paid commission on top of the binder holder fee, subject to that, however, the intermediary may not be remunerated for the same or a similar service twice. The UMA is in competition not only with other UMA’s but other types of binder holders as well.

What will differentiate one UMA from another is not necessarily the price, but rather good technical underwriting, the selection of risks, claims management, the use of economies of scale, expense management and the proper use of technology.