Advance repair payments under the spotlight
Advance repair payments, or risk management fees as they are sometimes called by insurers, to motor dealers in relation to motor vehicle warranties recently came under the spotlight, as the industry grapples to reach consensus on its definition.
Motor vehicle warranty insurance cover is currently offered at affordable premiums to consumers and advance repairs performed by motor dealers have played no small part in containing these premiums.
Advance repairs are a risk management measure employed by insurers, as an integral part of preventing the claims experience on these policies from deteriorating to the extent that motor vehicle warranty insurance premiums become unaffordable.
An advance repair payment is a payment of a pre-delivery or pre-insurance servicing and repair cost, including an inspection of the vehicle, as a prerequisite for the granting of motor vehicle warranty insurance.
The payments are considered by some to be a payment for the creation of a designated fund for the payment of future motor warranty claims. Others have considered it to be an exorbitant inspection fee, or even an additional commission payable to motor dealers, wrapped up in another guise and in contravention of section 48 of the Short term Insurance Act 53 of 1998 (“the Act”).
The confusion surrounding the exact nature of these payments brought advance repair payments under investigation by the Consumer Credit Insurance Enquiry, chaired by Judge Peet Nienaber. Insurers, including Centriq, provided oral and written evidence to the Panel of Enquiry, including detailed evidence on the practice of the payment of advance repair payments by insurers to motor dealers.
The regulations that were considered in this regard included Section 48 of the Act which details the basis on which an independent intermediary can be remunerated, and Regulation 5.1(1) as interpreted by the FSB’s Interpretative Note on Regulation 5.1(1) which implies that motor dealers can be remunerated in their capacity as servicers and repairers of motor vehicles in addition to commissions which are payable to the motor dealers in their capacity as independent intermediaries. Other directives considered included clause 3.4 and clause 3.5 of the FSB Directive 97.A.i (ST) which directs that the maximum commission percentages as per Regulation 5.3 must not be exceeded and prohibits the payment of inspection fees or any considerations of a similar nature if applicable. Clauses 3.9, 3.10 and 3.11 of the draft FSB Directive 97.A.ii (ST) allow for the payment of an inspection fee under certain conditions, disallows advance repair payments to provide for future claims and allows payment to an independent intermediary for rendering a service which does not form part of the definition of “services as intermediary” in section 1(1) of the Act.
“Advance repair payments are made to motor dealers in their capacity as servicers and repairers of motor vehicles, not in their capacity as independent intermediaries,” explains Martin Penny (pictured above right), at Centriq. “An inspection fee is the cost of inspecting a motor vehicle to determine what repairs are required in order to place a motor vehicle in a sound and insurable working condition. An advance repair payment is the cost of servicing and repairing a motor vehicle in accordance with the items detailed in the inspection report. A clear distinction should be drawn between these separate costs.”
“In our submission to the Panel, we stated that motor warranty administrators are paid an administration fee plus a risk management fee which is passed on to the motor dealer in their capacity as repairer and servicer of vehicles and not in their capacity as providers of intermediary services. The Panel of Enquiry ‘agrees with this analysis. The payment for pre-sale repair of motor vehicles is not affected by the commission regulations unless such payment can be shown to be disguised rewards, of which there was no evidence’.” As such, there was no adverse findingin respect of motor warranty business written under Centriq’s short-term licence.
“There is considerable ambiguity and perhaps confusion in relation to what an advance repair payment is and what it is not,” says Penny. “This needs to be clarified by the regulatory authorities.”
