Proposed Amendments to Insurance Binder Regulations

The National Treasury (NT) and Financial Services Board (FSB) requested public comment for the proposed amendments to Insurance Binder Regulations issued under the Short-term and Long-term Insurance Acts published in Government Gazette No. 37805.

The proposed changes seek to address emerging undesirable practices and regulatory gaps identified post implementation of the Regulations (Gazette No. 34877) in January 2012 and to better align the Regulations with the principles referred to below.

On 12 September 2013, the Regulator directed insurers to furnish it with information on binder functions outsourced to third parties by 18 October 2013. This request followed on the announcement in Information Letter 3 of 2013 which informed the industry of further calls for information which would initially be on a “as and when” basis but would eventually form part of regular reporting.

It would appear that the latest call for information stems in part from the feedback received, and also in response to emerging undesirable practices and regulatory gaps identified post implementation of the Regulations in January 2012.

The proposed amendments aim to address the following broad principles:

  • Accountability of the insurer: The insurer is responsible for complying with the Acts, irrespective of the fact that the insurer outsources some of its functions to a third party.
  • Responsible outsourcing: Where an insurer outsources binder functions to a third party, the insurer must ensure that the contractual arrangements, and the oversight and management of the contractual arrangements facilitate (not impede) the insurer’s compliance with the Acts and the fair treatment of policyholders.
  • Policyholder protection: Policyholder interests and the fair treatment of policyholders may not be prejudiced by the outsourcing of binder functions by an insurer.
  • Conflicts of interest: Any potential conflicts of interest that may arise where an intermediary is a binder holder must be mitigated or avoided.

The practical changes contained in the proposals aim to strengthen the existing regulations and enhance policyholder protection by:

  • Clarifying the definition of associate and underwriting manager: This new definition of “associate” is intended to limit potential conflicts of interest inherent in certain binder arrangements.
  • Further clarification of what constitutes matters incidental to binder functions and ensuring that these matters are addressed in binder agreements.
  • Authorising the Registrar of Insurance to prescribe and limit fees payable in respect of binder functions so as to address potential conflicts of interest.
  • Relaxing the circumstances under which an exemption may be granted where a conflict of interest can be appropriately mitigated.
  • Excluding SASRIA from the scope of the Regulations, given the limited risks to policyholder protection objectives arising from SASRIA’s arrangements with insurers to enter into policies on its behalf.

The proposal to allow the Registrar to determine fees, in particular, could have serious repercussions for the industry. If introduced, the current practice of determining binder fees as a percentage of the premium will be replaced by prescribed fees which, in the registrar’s opinion, are fair reward for the performance of the binder functions.

This is one area which we believe the industry needs to engage in serious discussion with the Regulator regarding the calculation and determination of such fees.

The government gazette containing the proposed amendments can be downloaded here.

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