UMA's in the best interest of SA policyholders
Michael Blain (pictured), CEO of Centriq Insurance sheds light on certain perceptions concerning UMA’s in the marketplace
When it comes to the role and future of underwriting management agencies (UMA’s) in the South African insurance sector, two extreme views are often expressed by role players within various sectors of the industry.
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One perspective is that UMA’s are renegade operators, established to make profits at the expense of policyholders. People sharing this view generally claim that UMA’s are incentivised not to pay claims seeing that the payment of claims reflects in the loss ratio which UMA’s are measured against (they are either rewarded or penalised for the payment or non-payment of claims). Therefore perceiving UMA’s as unsustainable and inherently bad for the industry.
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The opposing view is that UMA’s are a direct and welcome consequence of the consolidation that has been a reality in the insurance sector for several decades, seeing that consolidation has resulted in fewer insurers and less choice for brokers and consumers as far as insurance products are concerned.
Skilled and experienced underwriters and administrators have been displaced through mergers and resultant retrenchments. Many of these insurance professionals grasped the opportunity to establish themselves in specialist niche UMA’s, effectively continuing their trade within an entrepreneurial small business environment. This proliferation of UMA’s has resulted in greater choice for brokers and consumers with increased competition keeping insurance premiums in check.
The actual role of the UMA
An underwriting agency is a legal agency agreement between a principal (insurance company) and an agent (UMA) whereby the principal mandates the agent to perform certain underwriting and administration functions on its behalf. The agent is required to adhere to the terms of the mandate and to account to the principal for all actions carried out in terms of that mandate. That said, the UMA “binds” the insurer in respect of policies issued by the UMA.
This arrangement was further codified in terms of S48 of the Short Term Insurance Act, which sought to control the activities of insurers and intermediaries acting under binding authorities from insurers. The UMA is further required to be registered as a financial services provider (FSP) under the FAIS Act and is held accountable for its actions in terms of this legislation. Interestingly, the Long Term Insurance Act did not envisage such arrangements.
It became abundantly clear that outsourcing was here to stay, that it was a growing part of the insurance industry and that both the long and short term insurance acts needed to be modernised to recognise it. The fact that the Insurance Laws Amendment Act, which was recently signed into law, now makes provision for outsourcing and binding authorities under both the life and short term insurance acts should be welcomed as it levels the playing field and gives explicit recognition to the reality of outsourcing insurance activities to various types of administrators and intermediaries.
The UMA business model
Centriq Insurance has developed a deep understanding of the UMA business model and supports the principle of binding mandates being granted to third party administrators in terms of innovative risk sharing structures.
Benefits of the above include:
- Greater broker and consumer choice
- Entrepreneurial energy unleashed
- Improved service standards and close relationships being forged with brokers
- Alignment of interests between the insurer, the UMA and reinsurers
- Scarce skills retained within the industry
- Greater flexibility and responsiveness to unique needs of policyholders
- Improved competition eliminating monopoly profits for insurers
The UMA business model however is not without its risks.
The integrity and reputation of the UMA partner is of paramount importance to the insurer and the broker seeing that the model requires a high degree of trust between the principal and its agent. Reputation risks also arise if there is a lack of integrity or a lack of alignment between the various parties’ interests. And it is for this very reason that professional UMA’s understand that they will not be able to stay in business if they gain a reputation of slow or non-payment of claims. This is particularly true in cases where claims are referred to the ombudsman for short term or long term insurance. Protracted disputes serve nobody and it is in everyone’s interests to limit the number of cases referred to such bodies.
In conclusion, it is important to note that the insurer has a duty to manage the relationship with its UMA partners and to enforce certain standards of conduct that business partners need to adhere to. The insurer is ultimately responsible for all policies issued by the UMA and is obliged to settle any valid claims which arise. It is therefore incorrect to assert that the UMA model is inherently incentivised not to pay claims as this would not be sustainable and would not be tolerated by the insurer principal.
