The amendments to the Long-term Insurance Regulations gazetted on 15 December 2017 became effective on 1 January 2018 with some later effective dates below. The corresponding amendments to section 49 of the Long-term Insurance Act 1998 (LTIA) also take effect on 1 January 2018.
The changes to the Long-term Insurance Act Regulations include changes to the remuneration and practices for intermediary services for both investment policies and other policies, the remuneration for binder and intermediary functions, changes to other aspects of the binder regulations, and amendments to the section 54 limitations.
Remuneration for binder holders
- The long-threatened regulation relating to the remuneration of binder holders and intermediaries has appeared.
- The general principles require that all binder remuneration:
- must be reasonable and commensurate with the actual cost of performing the binder function, taking into account the nature of the function and the resources, skills and competence reasonably required to perform the binder function;
- must not result in double counting;
- conflicts or potential conflicts with policyholders’ interests must be effectively mitigated;
- payment must ‘not impede the delivery of fair outcomes to policyholders’ (which is an impossibly subjective test but the intention is apparently to prohibit excessive remuneration at the cost of the client’s benefits).
- The remuneration for a non-mandated intermediary (not an underwriting manager nor an administrative FSP) who is a binder holder authorised to give advice under the FAIS Act (or an associate of such an NMI) is a maximum of 9% made up of:
- there is no fee at all for anyone who only determines wordings, premiums or benefits);
- 5% for entering into, varying or renewing policies coupled with one or more functions of determining policy wordings, premiums or benefits (but limited to 3.5% if the NMI only enters into, varies or renews policies); and
- 4% for settling claims.
- Underwriting managers and administrative FSPs can still share profits attributable to the policies referred to in their agreement. An NMI who has entered into a cell structure arrangement with an insurer can receive dividends in respect of the shares held.
- If the NMI does not give advice their remuneration is only subject to the general principles in paragraph 2 above but it is difficult to see how you would justify more than 3.5% for entering into, varying or renewing a policy if no advice is given save in exceptional cases.
- The binder fee (of non-mandated intermediaries but not underwriting managers) must be disclosed to policyholders by the binder holder and the disclosure must be required in terms of the binder agreement. There is no requirement to disclose profit shares or cell arrangement dividends.
Commission for risk policies
- There are changes to the remuneration for intermediary services relating to investment policies that commenced from 1 January 2009, and changes to the intermediary remuneration for other policies.
- The commission regulations for policies other than investment policies (here called ‘risk policies’) make a number of changes that will have to be looked at carefully by long-term insurers. We do not intend to make a detailed analysis here and we only highlight some of the significant issues.
- The definition of ‘administrative work’ will be deleted from 1 January 2019.
- Commission is now due on premiums ‘payable’ and no longer on premiums ‘payable and received’ but clawback provisions remain.
- There are extensive new provisions regarding replacement investment policies and replacement risk policies including defined replacement investment events and causal events. A new Part 5C contains the principles for calculation of causal event charges.
- The regulations now deal separately with replacement risk policies and replacement investment policies. The special provisions concerning replacement risk policies cross-refer to the provisions in this connection in the amended Policyholder Protection Rules.
- The definition of ‘representative’ limits the right of an employee of one insurer to sell the products of another insurer except for a class of policies for which its own employer or mandatory does not underwrite or classes or types of policies determined by the Registrar. The representative may, however, continue to perform intermediary services in relation to a policy entered into before 1 January 2018 in terms of a written agreement with the other insurer concluded prior to 1 January 2017.
- The commission tables in Annexure 1 and Annexure 2 include the following changes:
- The amended commission table removes the commission of 22.5% for credit and credit life schemes ‘with administrative work’ from 1 January 2019.
- A 7.5% commission cap for credit and credit life schemes is applied so as to give effect to Proposal AAA of the RDR. The FSB’s rationale is that administrative work carried out by the intermediary that falls outside the scope of commissionable services as intermediary should be remunerated through other means (eg permissible outsourcing fees or binder fees, as appropriate).
- Scale A for normal commission for group schemes and fund policies has new thresholds ranging from 7.5% for annualised premiums not exceeding R200 000 (was R142 000) to 1.0% for annualised premiums above R2 million (was R1.55 million).
- The maximum once-off special commission for group schemes and fund policies is now R7 500 (was R5 000).
Equivalence of Reward
- The new provisions of what is ‘Equivalence of Reward’ are more uncertain than ever. Equivalence can be determined by the Registrar by notice on the FSB website whether any particular form of remuneration or consideration complies or does not comply with the principle. That is an impermissible delegation of authority because no provision is made for public consultation, nor are there any parameters set, nor is it said from when the determination will apply.
Notification of arrangements with independent intermediaries or representatives
- If an insurer pays an intermediary or representative an amount for a function or activity that in its opinion does not constitute the rendering of services as intermediary or a binder function, the Registrar must be notified in writing at least 30 days before the insurer enters into the arrangement. The format of the notification is to be determined by the Registrar.
- The definition of ‘associate’ in relation to a mandated intermediary with whom an NMI may not conduct business, or a mandated or non-mandated intermediary with whom the underwriting manager may not conduct business has been expanded. In addition to the FAIS definition of ‘associate’, the binder holder will be an associate of a juristic person that shares a significant owner or member of the governing body (for example a board member or trustee) or another juristic person whose significant owner or governing body is an associate under the FAIS Act of a significant owner or member of the intermediary concerned.
- The ‘significant owner’ is extensively defined but generally relates to a 15% threshold for shareholding, control, disposal of shares and board appointments.
- For this purpose, the definition of ‘juristic person’ has been expanded to include companies, close corporations, cooperatives, trusts, a corporate association, a partnership and, extraordinarily, ‘a club or other body of persons of whatever description’ even if unincorporated which is probably too vague to be enforceable.
Who is an underwriting manager?
- The definition of ‘underwriting manager’ has been expanded to include anyone having a legal relationship with the insurer (for example secondment of employees or outsourcing of infrastructure like a call centre) whereby the underwriting manager’s employees are effectively entering into, varying or renewing policies for the insurer.
- A binder holder may only be a non-mandated intermediary, underwriting manager or administrative FSP.
- An insurer may only enter into a binder agreement if doing so will promote the delivery of fair outcomes to customers, and will not result in the duplication of administrative efforts and costs or otherwise impede the insurer’s ability to identify, assess, manage and report on the risks of poor customer outcomes. Transparency and effective oversight are therefore important.
- There are significant governance and oversight obligations placed on the insurer which must have the necessary resources and ability to comply. Prior to and at all times after entering into a binder agreement, an insurer must:
- identify, assess, manage and report on the risks of poor customer outcomes;
- ensure the adequacy of the binder holder’s governance, risk management and internal control framework and ability to comply with applicable laws and the binder agreement;
- ensure the fitness and propriety of the binder holder, including any specific technical expertise required to perform the binder functions;
- ensure the validity, accuracy, completeness and security of any information provided by the binder holder;
- ensure that the binder holder has the operational ability to achieve integration between the insurer’s and binder holder’s IT systems so that the insurer has access to up-to-date, accurate and complete data held by the binder holder as and when requested by the insurer and when required by the binder agreement, or by regulatory requirements relating to data management including the Policyholder Protection Rules.
- The insurer is obliged to regularly review the performance of the binder holder and assess the appropriateness and suitability of the binder functions in delivering fair outcomes to policyholders.
- The insurer must implement appropriate contingency plans to address any shortcomings in the binder holder’s performance or outcomes to policyholders.
- Therefore the insurer is the overseer of the conduct of binder agreements and is accountable to the Registrar for the failure of their binder holder as to performance and integrity.
- An underwriting manager for a long-term insurer is entitled to conduct business with a representative (person employed by or with a mandate from) of a mandated or non-mandated intermediary who is a natural person. This is a significant change because it means underwriting managers can, on behalf of their insurer, conduct business with natural persons who are representatives or agents of the insurer as well as employees of other intermediaries to sell policies on behalf of the insurer for the benefit of the underwriting manager’s portfolio.
- The additional immediate requirements for binder agreements are:
- The requirement of non-mandated intermediaries (not underwriting managers) to disclose binder fees to policyholders;
- The governance and oversight requirements;
- The ongoing requirement to ensure that the binder holder is fit and proper;
- Giving the insurer the right of access to any data held by the binder holder when requested by the insurer;
- A right to take prompt and reasonable steps to rectify any non-adherence to the binder agreement.
Later requirements for binder agreements
- From 1 January 2020 binder holders will have to provide the insurer with up-to-date, accurate and complete data for funeral and assistance policies on a monthly basis and for all other policies on a daily basis to enable insurers to comply with their data management and reporting requirements and with the Policyholder Protection Rules. Insurers will have to ensure that binder holders have the operational ability to comply.
- For this purpose, a funeral policy is a life policy where the benefits relate only to services or costs associated with funerals.
- The amendments to the regulations take effect on 1 January 2018 except:
- The definition of ‘administrative work’ is only deleted from 1 January 2019;
- The special provisions regarding the replacement of risk policies take effect on 1 July 2018;
- The commission changes regarding term cover take effect on 1 January 2019;
- The provisions regarding maximum 9% binder remuneration for non-mandated intermediaries not authorised to render advice (including the exemption provision) take effect:
- From 1 January 2018 for any new binder agreements;
- From 1 July 2018 for binder for agreements entered into between 1 January 2017 and 31 December 2017 (unless the remuneration is amended in the meantime);
- From 1 January 2019 for binder agreements entered into before 1 January 2017 (unless the remuneration is amended in the meantime);
- The requirement that the insurer must, before entering into a binder agreement, be satisfied that the binder holder has the operational ability and IT systems to provide access to data as and when requested comes into force on 1 January 2020;
- The requirement that the binder holder must provide accurate and complete data on a monthly basis for funeral and assistance policies and on a daily basis for all other policies comes into force on 1 January 2020.
[A previous version of this blog incorrectly said that underwriting managers have to disclose their binder fees. They don’t.]