Insurers get guidance on binder functions
THE Registrar of Long-term and Short-term Insurance has issued a draft information letter — 3/2013 — which aims to provide guidance on the activities that constitute binder functions within the meaning of section 49A of the Long-term Insurance Act, No 52 of 1998 and section 48A of the Short-term Insurance Act, No 53 of 1998.
The information letter also requires insurers to report on remuneration payable to binder holders to ensure that the registrar can adequately regulate fees payable to binder holders within the parameters of the applicable legislation.
It is expressly stated that the guidance set out in the information letter reflects the manner in which the registrar interprets and will enforce such interpretation in respect of binder functions. This is so notwithstanding the fact that the document is merely an information letter and not in the form of a board notice or directive.
The impact of the information letter is that the registrar deems certain services set out in the annexures to the information letter as binder services and services ancillary or incidental to binder services. The information letter provides that if a person renders certain binder services and any ancillary services, the insurer will only be able to remunerate the binder holder for the binder services rendered and not for any of the ancillary services.
The registrar regards such an interpretation necessary in view of the opinion that certain ancillary or incidental services are required to adequately render the binder services and that such ancillary or incidental services cannot be separated from the performance of the binder services.
The printing and distribution of the policy documents are deemed to be ancillary services to the binder services
An example is where a binder holder is authorised to enter into policies on behalf of an insurer and also prints and distributes the policy documents to the policyholders. By virtue of the interpretation contained in the information letter, the printing and distribution of the policy documents are deemed to be ancillary services to the binder services, and the binder holder may not receive an additional fee from the insurer for the performance of these ancillary services.
The implication of the information letter is that insurers will not be able to pay additional fees and/or commission over and above the binder fee for any such ancillary or incidental services rendered. This means that even if some of these services qualify as intermediary services or outsourced services within the meaning of the applicable legislation, that commission or outsourced fees may not be paid for such services rendered.
Any other limitations normally applicable to such fees and/or commission would then similarly not apply.
Furthermore, in terms of the infor- mation letter, an insurer is not permitted to outsource ancillary services to a third party if a binder agreement is in place. However, a binder holder may outsource these ancillary or incidental services provided that the binder holder pays third parties to whom the ancillary services are outsourced from the binder fee received from the insurer.
Certain clarifications are also provided in the information letter:
Any “entering into” of a policy live on the insurer's systems is not regarded as a binder function as the insurer is at all times aware of its liabilities.
The use of a black box system for entering into policies is regarded as the binder service of “entering into” (as defined by the binder regulations).
The adding of members to voluntary group schemes by funeral parlours is regarded as a binder service irrespective of the fact that qualification requirements for membership to the scheme are set upfront by the insurer.
The registrar also seeks to implement a standardised remuneration model and so calls on all insurers to complete Annexure B to the informa- tion letter and to disclose the fees currently payable to their binder holders. The registrar is of the view that such disclosures will enable the registrar to compare the fees payable across the industry and to determine what reasonable fees entail, which in turn will enable the registrar to adequately monitor the payment of binder fees.
It is stated in the information letter that the registrar will perform investigations in the course of this year to determine the actual costs of certain services and will determine what constitutes a reasonable rate of return to serve as a benchmark for all insurers. It will be against these set fees that compliance with the binder regulations will be monitored.
The registrar believes that a standardised activity-based fee model may be more appropriate for non-mandated intermediaries due to conflicts of interests and the relevant standard of the services so rendered.
However, it is anticipated that binder fees payable to underwriting managers may vary due to the complexity of the services rendered and the lack of conflicts of interest.