Getting to grips with new binder regulations
Towards the end of last year National Treasury published amendments to regulations of both the Long-Term and Short-Term Insurance Acts. The changes stem from the Insurance Laws Amendments Act of 2008, which introduced provisions on binder agreements for t
You can e-mail info@fanews.co.za if you would like to subscribe to receive a copy of the FAews & FAnuus magazine.
Before taking a closer look at some of legislated changes we need to understand what a binder agreement is. In its simplest form a binder agreement is an outsourcing agreement between an insurer and a third party, typically a broker, administrator or underwriter – as set out in S48A and S49A of the respective insurance Acts. Upon the conclusion of a binder agreement an insurer mandates a third party (or binder holder) to perform certain functions for and on its behalf. These functions relate to the administration of insurance policies and subsequent claims. The new binder regulations define the type of entity that can enter into a binder agreement with an insurer and the functions this entity can perform. From 1 January 2012 you can only enter into a binder agreement as a non-mandated (from the point of view of the client) intermediary or an Underwriting Manager (UMA).
The give and take of financial services legislation
Financial services regulation is more transparent today than ever before. And thanks to numerous communications from Treasury and the Financial Services Board (FSB) the layperson can follow legislation from conceptualisation to implementation. One example of this transparency is the FSB document titled Regulatory Response to Public Comments Received on the Proposed Long-Term and Short-Term Insurance Binder Regulations, published Q4 2011. The document addressed the concerns raised by 11 insurance industry stakeholders around the new binder regulations. The following is a small subset of these interactions.
An insurer questioned whether it was fair for the legislation to require a “written mandate from potential policyholder or policyholder” in light of recorded telephone conversations being legally accepted for most transactions. The regulator dismissed their concerns and said the “written” agreement was not required for each transaction, but should be in place upfront. The South African Insurance Association (SAIA) was concerned with the requirement that “an underwriting manager can act for more than one insurer only with written permission of each relevant insurer.” They felt this would prevent underwriting managers from offering different specialist skills to different insurers. The Regulator countered that “requiring written consent was acceptable – because, if the binder holder acts as an agent for more than one insurer simultaneously, then insurers should agree thereto, thereby being able to identify and manage any conflict of interest that many arise.”
Santam raised an objection over the “binder fees must be commensurate with actual costs” clause. They felt the clause was too vague and could have unintended consequences: “It would appear that the FSB is hoping that the free market will keep the binder fee reasonable or fair, but we are of the view given the temptation to direct business to the highest bidder, the free market will fail!” The regulator was having none of this either, saying that it would rely on a combination of appropriate governance, disclosure and monitoring for the desired result.
Points for binder holders to ponder
When is a binder agreement necessary? There are four basic functions you might perform as a third party to an insurer… First – entering into, renewing or varying an insurance policy. Second – determining the wording of a policy. Third – determining the premiums under a policy. And fourth – settling claims under a policy. If your business is not a licensed insurance provider then you will be conducting these functions under a binder agreement! Remember – a binder holder by definition acts for an insurer.
With the legislative “debate” taken care of, binder holders – or prospective binder holders – must take steps to comply with the new binder regulations. Existing binder agreements (signed before 1 January 2012) must be brought in line with regulations within one year – regardless of how similar they are to the new model. A broker that enters into a new binder agreement with an insurer from 1 January this year will immediately become a non-mandated intermediary for the line of business addressed in the agreement!
What binder agreements mean for short-term brokers
The new binder regulations are extremely clear on what clauses must be included in a new binder agreement. You cannot rely on your existing contract to be compliant going forward and will have to make the necessary changes within the one-year grace period. You must also note that binder regulations introduce very specific instructions on the fees that can be earned out of the third party relationship. Fees have to be commensurate with the actual costs incurred by the binder holder in fulfilling its function, with a reasonable rate of return. Such fees cannot be linked to profits in any way! The legislation also stipulates that the gross premium “presented” to the client cannot be added to by the binder holder.
The new binder regulations mean that a binder holder cannot hold a general mandate to act on its client’s behalf. You have to get the client’s specific written consent to move his / her policy from one insurer to another, for example. The short-term broker is also obliged to update the insurer with policy holder information relevant to that binder at least every 60 days. Another important provision in the new binder regulation is that an insurance broker cannot be associated with an UMA or mandated intermediary if it provides business to that UMA.
Editor’s thoughts: If you thought you could conduct “business as usual” under your pre-2012 binder agreement it’s time to think again. The changes introduced by the new binder regulations redefine relationships between industry stakeholders. Is your business affected by the new binder regulations? Add your comment below, or send it to gareth@fanews.co.za
Comments