There has been some amendments to the FAIS Code of General Conduct and, when read in conjunction with binder regulations, they provide scope for fair remuneration for underwriting managers, which may include profit shares. The FAIS regulations place severe restrictions on incentives and extend the obligations to avoid or mitigate as prescribed by the Conflicts of Interest regulations that is in force and effect. The challenge is to continue to do business successfully without contravening these remuneration and disclosure provisions.

 

The Short Term Insurance Act presented a number of interpretation difficulty, especially when it came to an underwriting managing agent (UMA). There is a clear difference between a UMA and an independent intermediary. The Insurance Laws Amendment Act, 27 of 2008 then levelled the playing field by introducing the concept of binder agreements. The FSB, in conjunction with short term industry stakeholders, drafted the regulations governing these binder relationships.

 

Binder agreements are an established feature of the short term insurance industry. A binder agreement is an outsourcing agreement between an insurer and a third party (broker, administrator or underwriting manager agent). The insurer mandates the binder holder to perform certain functions for and on behalf of the insurer in connection with administration of insurance policies and claims as prescribed in the regulations. A UMA may be paid a fee for services rendered and may share in profits of the insurer attributable to the type or kind of policies referred to in the binder agreement.

 

These regulations place restrictions on the underwriting agent. Policy issuing and premium collection will not be seen as a binder function and therefore no fee can be paid by an insurer for rendering these functions only. UMA’s will not be allowed to charge any additional fees – including what is usually referred to as a debit order fee – over and above the risk premium. If claims may be settled or value of policy benefits may be determined, a fee may not constitute or be based on a percentage of the difference between amount claimed or the maximum value of policy. All fees must be disclosed to the policyholder.

 

The industry was requested to submit comments to the FSB (Financial Services Board) on the draft binder regulations during October 2010. The FSB is in the process of revising and redrafting the Binder Regulations and it is expected that this process will be completed by March 2011. Thereafter the final draft will have to be approved by National Treasury and the Gazetting process will follow. It will be followed by guidelines in relation to the way in which third party administrators can carry on business. All agreements concluded before or on the date on which the Binder Regulations will commence, must be aligned with the regulations within one year of it coming into operation.

 

The intention of the Binder Regulations is to result in responsible outsourcing, policy holder protection and managing conflict of interest