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RDR Update on Short-term Insurance

Theme 4 of the recently published RDR General Status Update by the FSB expands on items discussed in the RDR Phase 1 Status Update document, published a few weeks earlier.

Key stakeholder feedback and the Regulator’s response

Ongoing product servicing

Commentators highlighted the importance of identifying the particular types of post-sale servicing activities envisaged and requested clarity on the regulator’s expectations on which types of post-sale services would entitle an adviser to ongoing service fees.

Short-term insurance remuneration model

The RDR Phase 1 Status Update focused on the repeal and replacement of the current “section 8(5) fee”, which is currently permitted by the Short-term Insurance Act. In addition, further technical work will take place in the course of 2016 to test the impact of different commission cap levels for various levels and types of adviser sales activity and product combinations.

This consultation will include discussion on whether the remuneration payable by short-term insurers in respect of post-sale servicing, and the remuneration payable by them for the actual product sale (both payable as-and-when premiums are received), should be subject to separate standards and caps, or whether they should both be addressed through a single cap on commission.

Despite the simplicity and ease of implementing a single commission cap, this approach does not enable appropriate reward for advisers who provide ongoing services as opposed to those who do not. The FSB would therefore like to pursue an appropriate link between the entitlement to as-and-when remuneration and at least some degree of ongoing service.

Premium collection

Commentators expressed mixed views on the proposal that the outsourcing of premium collection should be limited to qualifying intermediaries (Proposal F). Some commentators proposed that premium collection by financial advisers should be prohibited completely, while others felt that this was a useful service and that sufficient safeguards were in place to mitigate risks of misconduct. A number of commentators proposed that premium collection should be carved out of the scope of “intermediary services” (as currently defined in the FAIS Act) and instead be regarded as an outsourced service on behalf of the insurer for RDR purposes. The FSB is considering the implications of this approach as part of the broader review of the RDR proposals relating to outsourcing, which was discussed in the RDR Phase 1 Status Update. It was also pointed out that premium collection may be necessary in the case of non-traditional bundled products such as travel insurance or credit insurance, where the premium is collected together with payment for the primary transaction.

The FSB intends to proceed with Proposal F regarding standards for premium collection, and consultation with the industry reference groups for both long-term risk and short-term insurance will take place regarding who should be a “qualifying intermediary” and the standards for such intermediaries. Consultation will include discussion on the circumstances in which intermediaries in so-called non-traditional insurance markets could be permitted to collect insurance premiums.

RDR application to commercial lines business

A general concern raised was that the RDR discussion document is not clear on the extent to which the various proposals will apply to commercial lines business. This point is well made and the FSB will engage with the short-term insurance industry reference group to consider the extent to which the various RDR proposals are relevant to, and impact on, the distribution of commercial lines policies. In the RDR Phase 1 Status Update, the FSB indicated that it is considering the extent to which commercial lines advisers should be permitted to enter into binder arrangements.

Short-term replacements

Some commentators highlighted practical difficulties in obtaining consent from all policyholders in cases where an entire “book” of policies is cancelled by an adviser and replacement policies entered into with another insurer – a practice that is most prevalent in the short-term insurance sector. The FSB feels strongly that the customer’s right to make an informed decision regarding such changes must outweigh any practical inconvenience. It also pointed out that customer consent to the replacement of cover is already required by the FAIS General Code, regardless of whether or not the replacement relates to an entire “book” of policies. Advisers who undertake such replacements without the required customer consent are therefore already exposing themselves to regulatory action.

Accordingly, the FSB intends to proceed with Proposal VV as part of Phase 1 of RDR, subject to two modifications to the Proposal:

  • In the case of cover cancellations by an intermediary, it will be clarified – for avoidance of doubt – that each customer’s explicit consent (as opposed to tacit, assumed or “negative” consent) must be obtained. Where the adviser holds a discretionary mandate in relation to the policy/ies concerned, any cover cancellations must be consistent with the mandate, and customers must be made aware of transactions.

In the case of cover cancellations by the insurer, the proposal will be modified to provide that the original insurer must remain on risk for the shorter of (i) a period of 30 days after the date on which the original insurer receives proof that the customer is aware of the cancellation of the cover or (ii) the period until the original insurer receives proof that the customer has secured new cover.

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