The views expressed in this article are not necessarily those of the FIA. The article below was supplied by Hollard Insurance.
There have been two major regulatory changes in the short-term insurance environment this year: the updated Policyholder Protection Rules (PPR) and the new regulations that govern binder agreements. Both these pieces of legislation impact brokers and insurers alike – and the impact is considerable.
I won’t go into too much detail in this article about the contents of the legislation, but will rather touch on points that impact brokers, provide examples of how the legislation may play out and make some suggestions as to what intermediaries should be doing to get their houses in order.
Changes to the policyholder protection rules
The new policyholder protection rules represent a dramatic shift from what we’ve seen in the past. To give you an idea, the old rules could be printed out on about 12 pages. The new rules are around 58 pages and they affect all of us – brokers,
direct insurers, binder holders and insurers who work through intermediaries. It’s important to understand their impact.
Implementation will be staggered, with the majority of the rules coming into effect on 1 January 2019. These transition periods go quickly. The sooner you start strategising and getting things into place, the better.
One of the biggest changes in PPR is the inclusion of small commercial policies. Previously PPR only affected personal lines policies, where the insured is an individual. The new rules add small commercial entities to the mix. These are defined as companies with an annual turnover of R2.5 million or less. This means insurers are going to start asking for information on turnover for each and every commercial policy we underwrite to establish whether or not that client will fall under PPR. Brokers will need to have that information readily available to avoid delays. This will mean these small commercial policies need to be plain language and all the disclosure requirements will now also apply to these policies.
We have also seen Treating Customers Fairly (TCF) being formally introduced into law through legislation. Previously, there was no punitive action that could be taken against companies who breached TCF as there was no legislative framework from which it operated. Now the FSB’s six TCF outcomes are specifically set out in the rules.
The new rules place a lot more onus on insurance companies to ensure that all intermediaries acting on their behalf are providing clients with the right advice. This means we are going to start looking a lot more closely at your records of advice, competency of your reps and complaints registers. We would certainly appreciate your cooperation in this regard. It’s not enough just to show you have a FAIS license and PI policy.
Insurer must be a signatory to all agreements
There is also a lot of work to be done on the various types of intermediary agreements in which the insurer is not a party. Often you have sub-brokers writing for bigger brokers, you have brokers writing through administrators or UMAs, but the agreement actually sits between the administrator and the end broker, or the bigger broker and the sub-broker. That is no longer allowed.
he rules are very clear that the insurer must at least be a signatory – so it could be a tripartite agreement between the insurer, administrator and the end broker, but there must be an agreement between the insurer and the end broker. This is going to require a tremendous amount of work, both from an insurer and intermediary perspective.
Another big change is that clients need to see concise summaries of all policy wordings before signing. This will obviously require a change in the take-on process. Also, be careful if you plan to do any marketing. PPR goes into lengthy detail about the way we may or may not market ourselves and our products. There are very specific requirements around disclosure that you should be aware of.
Top of the list is the rule that any disclosure has to be given to the client at vocation stage. So if an insurer is using a broker to do the quote on its behalf, the broker will carry the responsibility to share those disclosures with the client upfront. This will have an impact on intermediary agreements, so expect a call from your insurer partner/s in this regard in the very near future!
Restrictions or exclusions
We will also have to be more upfront about material restrictions or exclusions in the policy – things that might change a client’s mind about taking out the policy in the first place. So, for example if the policy has a named driver clause or attracts cumulative excesses, or if it requires a tracking device or alarm to be fitted, the client might decide to go to another insurer even though the premium is higher. It’s important for a client to know these details at quotation stage.
Another thing they expect insurers to police is the broker fee. If we facilitate in the collection of the premium and the broker fee, the FSB says we need to ensure that the broker fee is reasonable, that the client has agreed to it and that you have explained to the client what the broker fee is for.
There is also a lot more emphasis on intermediaries understanding insurers’ management frameworks for data, claims and complaints as these will apply to you as well.
This is just a small taste of changes to the PPR. It would be in the best interest of all intermediaries to download the rules from the FSB website and get familiar with them. These rules affect everyone.
Amended binder regulations
Over and above the new policyholder protection rules, the FSB has introduced new binder regulations, which not only have an impact on the way you do business, but also affect your pocket.
Again, I won’t go into too much detail here about what the regulations are, but would like to highlight a few points of interest, starting with exactly who is affected by the new regulations.
These regulations only affect binder holders – in other words, intermediaries who work generally on their own off-platform systems, where the insurer doesn’t know what premium is being quoted or what risk is being entered into.
If you’re working on the insurer’s system in real time, there’s no binder – regardless of the discretion that’s been granted to you. This activity would generally be referred to as policy data administration and it has not yet been regulated in the new regulations. The FSB will deal with these agreements at a later stage.
If you are a binder holder and you’re not registered to give advice on your FAIS licence and you are not administering policies provided by a broker associated with your company, the caps will not apply and the current rules will remain in force, i.e. fees must be reasonable and commensurate with the work being performed. If you’re taking business from a broker that’s associated to you, then the caps apply.
If you don’t have advice on your licence and you’re working with an end broker, the end broker is effectively telling you where to place the policy. In this situation, the fee caps won’t apply. This doesn’t mean you can pay profit share. It just means that the current rules will apply. In other words, you must charge a fair and reasonable fee that relates to what it costs you to run that particular client.
The FSB now requires 30 days’ notice of any agreement that’s not an intermediary agreement.
It’s quite confusing the way the caps were set out in the regulations. Looking at the table you might think you’re entitled to 3.5% + 5% + 4% if you perform all the functions. But that’s not the case.
If you only enter into, vary or renew policies under your binder agreement, the cap is set at 3.5%. If you add one or both of the other underwriting functions, i.e. determining policy wording and/or premium, you can have an extra 1.5% over the 3.5%, which makes up the 5%.
So just to stress, the maximum fee allowed under a binder agreement on the underwriting side is 5%.
For now there has been no segmentation on the claims cap of 4%. The FSB has, however, indicated that it will be apportioning the claims function into a number of components –salvage, recoveries and liabilities, claims handling, etc. – in due course
There are going to be some interesting conversations between insurers and binder holders between now and the end of the year to determine exactly how this is going to be handled. For example, if you’re only specifically doing a claims binder – which is quite common in the market – what fee will we arrive at?
Premium determination is in itself a big issue. If you have a discount mandate, does that qualify for premium determination or not? This is one of the untested questions of the new regulations that will undoubtedly be answered during the next few months.
Will any exemptions be granted from the fee cap? The short answer is yes, but the FSB will require a very thorough justification. At this point in time we do not know what the provisions for exemption will be, but we expect them to be extremely stringent
Governance and oversight
When it comes to governance and oversight requirements, binder holders are going to have insurers on their backs all the time. Unfortunately, there is simply no choice. Every time I get a query from the regulator now regarding a binder holder, the first question they ask is, “Can we see proof
of good governance and oversight?” We will need your due diligence, audit reports, etc. for every binder agreement. There’s simply no way anyone can get out of this.
You must have the right processes, people, skills, etc. to run the binder. Insurers have been tasked with ensuring this is in place – and it is immediate. There is no transition period.
Binder holders are required to amend their systems so that insurers have access to up-to-date, accurate and complete information at any time. So now instead of binder holders pushing data,
insurers will be pulling it as and when we need it. Binder holders will have to ring-fence the data that’s applicable to the respective insurer so they can’t see each other’s details, and it must be updated on a daily basis.
This is not just a matter of pleasing the regulator. The issue over data is to give our clients a
better deal. The better our data, the better our underwriting, the better our premiums.
It’s critical that we all start moving on this immediately, and in collaboration with each other, to ensure we meet the 1 Jan 2020 deadline.
Up until the new legislation came into effect on 1 January 2018, you only had to report material binder agreements or cancellations to the FSB. You didn’t have to report every single binder, which meant a lot of people got away with a lot of things. This has all changed.
Now, an insurer must notify the registrar in writing of the proposed binder agreement at least 30 days before entering into it. This stifles the process a little bit because it means you can’t effect a binder agreement until 30 days after you’ve notified the regulator. And in that notification the FSB wants to see how the fees are being put together. So you can’t just say, “I’m giving the capped fee because that’s the cap The fee has still got to be worked out to make sure that, even if you’re paying the cap, it’s still fair and reasonable.
As an insurer, we also have to motivate that we’re happy with the due diligence. At some point there will probably have to be a key individual within the insurance company, or certainly the head of binders, who will have to sign an affirmation to the FSB that he or she is comfortable that the binder holder can do the work.
While these new PPR and binder regulations may seem onerous, and will certainly require a lot more work on the part of insurers and intermediaries alike, the important thing to remember is that we’re working together for the benefit of our mutual clients. What stood out for me in the process leading up to the changes was the way the FIA, representing intermediaries, and South African Insurance Association (SAIA), representing insurers, reached consensus before making our presentations to the regulator. We presented a united front, proving that we are actually all on the same side.
The new PPR and binder regulations are the FSB’s way of ensuring that everyone gets a fair deal, and all members of the industry are prepared to work towards that goal.