The amendments to the Short-term Insurance Regulations gazetted on 15 December 2017 became effective on 1 January 2018 with some later effective dates below. Corresponding amendments required to the Short-term Insurance Act 1998 (STIA) also take effect on 1 January 2018.
The majority of the changes to the Short-term Insurance Act Regulations relate to the circumstances in which an insurer may enter into a binder agreement, the respective rights and obligations of the insurer and binder holder, and the remuneration that may be paid to the binder holder.
Remuneration for binder holders
- The most awaited regulation is that relating to the remuneration of binder holders and intermediaries.
- The general principles require that all binder remuneration:
- must be reasonable and commensurate with the actual cost of performing the binder function, taking into account the nature of the function and the resources, skills and competence reasonably required to perform the binder function;
- must not result in double counting;
- conflicts or potential conflicts with policyholders’ interests must be effectively mitigated;
- payment must ‘not impede the delivery of fair outcomes to policyholders’ (which is an impossibly subjective test but the intention is apparently to prohibit excessive remuneration at the cost of the client’s benefits).
- The maximum remuneration for a non-mandated intermediary (not an underwriting manager) who is a binder holder authorised to give advice under the FAIS Act (or an associate of such an NMI) is 9% made up of:
- there is no fee at all for anyone who only determines wordings, premiums or benefits;
- 5% for entering into, varying or renewing policies coupled with one or more functions of determining policy wordings, premiums or benefits (but limited to 3.5% if the NMI only enters into, varies or renews policies); and
- 4% for settling claims.
- Underwriting managers can still share profits attributable to the policies referred to in the underwriting management binder agreement. An NMI who has entered into a cell structure arrangement with an insurer can receive dividends in respect of the shares held.
- If the NMI is not authorised to give advice, their remuneration is only subject to the general principles in paragraph 2 above but it is difficult to see how you would justify more than 3.5% for entering into, varying or renewing a policy if no advice is given.
- The binder fee (of non-mandated intermediaries but not underwriting managers) must be disclosed to policyholders by the binder holder and disclosure must be required in terms of the binder agreement. There is no need to disclose profit shares or cell arrangement dividends.
Remuneration of intermediaries
- Intermediary’s remuneration remains at 12.5% for motor business and 20% for other business.
- The section 8(5) broker fee (policy fee, etc) is no longer provided for in the STIA and is only dealt with in the FAIS Act.
- Any other remuneration paid by an insurer to a non-mandated intermediary which in the opinion of the insurer does not constitute remuneration for services as intermediary or for a binder function must be notified to the Registrar before the insurer enters into the arrangement, in a written format to be determined by the Registrar. Thus far no format has been published. The requirement does not relate to existing remuneration arrangements.
- The definition of ‘associate’ in relation to a mandated intermediary with whom an NMI may not conduct business, or a mandated or non-mandated intermediary with whom the underwriting manager may not conduct business has been expanded. In addition to the FAIS definition of ‘associate’, the binder holder will be an associate of a juristic person that shares a significant owner or member of the governing body (for example a board member or trustee) or another juristic person whose significant owner or governing body is an associate under the FAIS Act of a significant owner or member of the intermediary concerned.
- The ‘significant owner’ is extensively defined but generally relates to a 15% threshold for shareholding, control, disposal of shares and board appointments.
- For this purpose, the definition of ‘juristic person’ has been expanded to include companies, close corporations, cooperatives, trusts, a corporate association, a partnership and, extraordinarily, ‘a club or other body of persons of whatever description’ even if unincorporated which is probably too vague to be enforceable.
Who is an underwriting manager?
- The definition of ‘underwriting manager’ has been expanded to include anyone having a legal relationship with the insurer (for example secondment of employees or outsourcing of infrastructure like a call centre) whereby the underwriting manager’s employees are effectively entering into, varying or renewing policies on behalf of the insurer.
- A binder holder may only be a non-mandated intermediary or underwriting manager.
- An insurer may only enter into a binder agreement if doing so will promote the delivery of fair outcomes to customers, and will not result in the duplication of administrative efforts and costs or otherwise impede the insurer’s ability to identify, assess, manage and report on the risks of poor customer outcomes. Transparency and effective oversight are therefore important.
- There are significant governance and oversight obligations placed on the insurer which must have the necessary resources and ability to comply. Prior to and at all times after entering into a binder agreement, an insurer must:
- identify, assess, manage and report on the risks of poor customer outcomes;
- ensure the adequacy of the binder holder’s governance, risk management and internal control framework and ability to comply with applicable laws and the binder agreement;
- ensure the fitness and propriety of the binder holder, including any specific technical expertise required to perform the binder functions;
- ensure the validity, accuracy, completeness and security of any information provided by the binder holder;
- ensure that the binder holder has the operational ability to achieve integration between the insurer’s and binder holder’s IT systems so that the insurer has access to up-to-date, accurate and complete data held by the binder holder as and when requested by the insurer and when required by the binder agreement, or by regulatory requirements relating to data management including the Policyholder Protection Rules.
- The insurer is obliged to regularly review the performance of the binder holder and assess the appropriateness and suitability of the binder functions in delivering fair outcomes to policyholders.
- The insurer must implement appropriate contingency plans to address any shortcomings in the binder holder’s performance or outcomes to policyholders.
- Therefore the insurer is the overseer of the conduct of binder agreements and is accountable to the Registrar for the failure of their binder holder as to performance and integrity.
- The additional immediate requirements for binder agreements are:
- The requirement of non-mandated intermediaries (not underwriting managers) to disclose binder fees to policyholders;
- The governance and oversight requirements;
- The ongoing requirement to ensure that the binder holder is fit and proper;
- Giving the insurer the right of access to any data held by the binder holder when requested by the insurer;
- A right to take prompt and reasonable steps to rectify any non-adherence to the binder agreement.
Later requirements for binder agreements
- There are further provisions requiring binder holders to provide the insurer with up-to-date, accurate and complete data on a daily basis to enable insurers to comply with their data management and reporting requirements and with the Policyholder Protection Rules, and to ensure that binder holders have the operational abilities to comply. These provisions will only come into force on 1 January 2020.
- The amendments to the regulations take effect on 1 January 2018 except that the binder remuneration provisions (which are effective immediately for any new agreements) are effective for:
- existing agreements as soon as there is any amendment to binder fees; and
- from 1 July 2018 for agreements entered into between 1 January 2017 and 31 December 2017 (unless the remuneration is amended in the meantime); and
- from 1 January 2019 for agreements entered into before 1 January 2018 (unless the remuneration is amended in the meantime).
[A previous version of this blog incorrectly said that underwriting managers have to disclose their binder fees. They don’t.]