New draft premium collection legislation
The National Treasury has published draft regulations for comment by 23 April 2018 regarding the collection of premiums by intermediaries (short-term and long-term premiums). The draft regulations require detailed premium collection authorisations by insurers to intermediaries. The proposed regulations also require a separate bank account for premiums received and require payment directly out of that bank account to the insurer less premium refunds and commission within a maximum of 45 days. The amendments will take effect on 2 July 2018 which is probably irrational because of the agreements and systems that will have to be in place by then.
Detailed authorisation and monitoring required
- A premium collection authorisation will have to specify the duration, functions performed, commission payable, level and standard of services, required operational requirements of the intermediary, the type and frequency of reporting, and the manner and means by which the insurer will monitor performance and compliance with the authorisation. Only one intermediary can be authorised to deal with specific premiums.
- Before granting the authorisation the insurer must be satisfied that the independent intermediary has the operational ability to perform the functions, that the insurer’s risks will not be materially increased, and that the fair treatment and continuous satisfactory service to policyholders will not be compromised. Insurers must monitor independent intermediaries ‘on an ongoing basis’ and have contingency plans in place if there are any shortcomings.
Payment deemed to be payment to insurer for all purposes
The provision in s 54(4) of the Short-term Insurance Act that payment to the intermediary is deemed to be payment to the insurer for the purpose of validity of the policy (which will be, mistakenly, repealed when the Insurance Act comes into force) is now in the regulations (reg 4.2(1)). The deeming provision will be for all purposes, not only the validity of the policy.
Separate intermediary bank account needed
The intermediary receiving premiums must account for their premiums properly and promptly and open and maintain a separate bank account for that purpose. Premiums must be received by electronic means or in cash. If in cash, a proper detailed receipt must be given as specified in reg 4.2(4).
Payment directly from bank account to insurer
- Money in the bank account can only be transferred out of that bank account directly to the insurer. No other investment of premiums will be permitted which will presumably take a large chunk of investment money out of the economy. Has the impact of this legislation on the economy been assessed?
- Premiums must be paid over by the intermediary to the insurer within 15 days of the end of every month in which the premiums are received. At the same time the independent intermediary must furnish the insurer with returns in the form required by the insurer containing information regarding premiums received, commission payable and amounts paid to the insurer.
Commission and premium refunds can be deducted
When paying over the amount, the intermediary can deduct a refund of premiums payable by the insurer to any policyholder or prospective policyholder represented by the independent intermediary. This will mean a netting off across the board of refunds ‘due and payable’ by the insurer without any obligation on the intermediary to account specifically to the insurer in that regard. This will have to be dealt with in the authorisations. The intermediary can also deduct the consideration payable for rendering services as intermediary (usually commission). The regulation will not allow, for instance, the deduction of binder fees.
Transformation assistance by binder holders
- The regulations also deal obliquely with transformation requirements. A binder agreement must ‘provide for mechanisms and measures that will assist the insurer in meeting procurement, enterprise and supplier development targets relating to the transformation of the insurance sector’. In other words, when insurers outsource binder functions, the binder holder must help the insurers to achieve their committed or required BEE transformation targets under the Broad-Based Black Economic Empowerment Act and Financial Sector Code.
- Insurers will have to consider whether it is rationally and reasonably possible to replace all premium collection authorisations with the detailed authorisation required by the regulations by 2 July 2018 bearing in mind the pre-authorisation assessments needed and followed by the negotiation of new agreements with premium-collecting intermediaries.
Other regulations update the text
For the rest, the draft regulations tidy up the existing regulations with improved definitions and delete the specific provisions regarding Lloyd’s correspondents and Lloyd’s brokers.