The binder regulations that came into force on 1 January 2012 require insurers and intermediaries to review all their agreements by the end of the year. There are some stark choices to be made before the agreements are redrawn. And there are limitations which are going to affect the way business is done.
Binder activities include entering into, varying or renewing a policy (which is something different from selling policies), determining policy wording, benefits or premiums (which can be subject to limits), and settling or rejecting claims on behalf of an insurer.
Inexplicably the regulations require a separate agreement for binder activities. That means that a binder holder who also performs intermediary services or outsource functions will be a party to two separate agreements with the insurer concerned.
Insurers will have to look at every intermediary agreement that might include a binder function. If so, a new agreement with the intermediary will be needed. Besides being a separate agreement, a binder agreement is also an elaborate document. The basis for binder agreements is the now enacted section 48A of the Short-term Insurance Act. This is coupled with the binder regulations and between them there are about 50 separate things that have to be in a binder agreement besides all the general clauses. What is left behind as intermediary services will have to be dealt with in a separate agreement. This agreement may be coupled with outsource services provisions which are likely to be formally regulated in the near future. Intermediary services, outsource services and other unregulated services can be dealt with together in the same agreement provided binder functions are excluded.
Intermediaries themselves will have to look at their terms of business agreements with their clients. Firstly, if an intermediary wants to perform intermediary services without first referring to each policyholder, a written mandate is needed from each client to enable the intermediary to act in that fashion. A broker who wants to be a mandated intermediary and to move a book of business without referring to each and every policyholder in the entire portfolio before doing so will have to have specific written mandates from each policyholder to move the book. A broker is not entitled to bind their clients in any way without a prior written mandate. That is going to make a broker’s life very difficult when there are things that have to be done urgently in order to protect the client’s interests. Otherwise a book of business will have to be moved with each client’s consent month-by-month or year-by-year. The alternative is to do a transfer under the Act which is an inappropriately elaborate procedure for moving a large book of motor policies, for instance, to a more appropriate underwriter. From now on, insurers who find a broker trying to move a book of business will be insisting on copies of the written mandates entitling the broker to do so.
There is a major disincentive being a mandated intermediary. A mandated intermediary does not act on behalf of the insurer. That means that a mandated intermediary cannot perform binder functions. There is an additional fee for performing each binder function based on the cost to the intermediary of performing the functions plus a reasonable rate of return. Brokers are likely to find the temptation of additional income for functions that they are accustomed to perform a good reason to be non-mandated intermediaries entering into policies, determining what limits and premiums apply and settling claims. The fact that brokers can be paid for binder functions in addition to commission earned for intermediary services will have consequences for policyholder fees. A binder holder cannot add any charges onto the premium. If an intermediary (mandated or non-mandated) wants a policyholder fee under section 8(5) of the Act, the intermediary will have to make sure they have a specific mandate from the policyholder to perform services on their behalf and to charge a fee for doing so. And they will have to ensure that the fee is for actual services rendered which are not already being remunerated by the insurer. These fees are not there for the taking. They are there for the earning.
Claims handling is also restricted. A mandated intermediary cannot settle claims for an insurer at all. A non-mandated intermediary cannot reject a claim (or even part of a claim), cannot repudiate liability (eg for fraud) under a policy or declare a policy void (because, for instance, of a non-disclosure). If the claim is not settled or paid in full, the decision has to be taken by the insurer. Every rejection (in the broad sense) will need a decision by the insurer and not the intermediary. There are other limitations on non-mandated intermediaries in regard to the extent to which they can insure risks and fix limits. These limitations must be clearly set out in the binder agreement.
The third type of intermediary who can enter into a binder agreement is the underwriting manager. There is no qualification for an underwriting manager other than the fact that the underwriting manager performs the binder services to or on behalf of the insurer only and does not deal directly with the insuring public in selling policies. If a binder holder fits within these requirements, it becomes an underwriting manager who is entitled to charge not only the fee performing the binder activities but also a profit share.
Another inroad into the way of doing business is the limitation on doing business with an associate. In the corporate world, an associate is a member of the same group of companies or a company which is accustomed to be controlled by another company. Underwriting managers may not do business with associated intermediaries who sell policies. Mandated intermediaries may not do business with associated non-mandated intermediaries. Intermediaries are going to have to break up their company group or form new companies which are not members of the same group and do not control each other. It will be necessary to show that there is no such control. Even although there may be the same shareholders of both companies, any inference of control can be avoided by appointing independent, non-executive directors onto the board of both companies to ensure that the companies act independently.
Although insurers and intermediaries have a year to get their existing agreements in order, that moratorium does not apply to new agreements. Any new agreement with an intermediary that includes binder activities must comply with the binder regulations now. Detailed new agreements will be required. If you are lucky, your existing intermediary agreement can survive simply by drawing lines through the binder functions in those agreements and putting them into a new binder agreement.
The binder regulations and binder provisions in the act will radically change the way in which business is done. New kinds of brokers and new kinds of underwriting managers will emerge and there are new pressures on insurers to share the risk premium with outsiders. It is not easy to see how policyholders will benefit from the elaboration now introduced.
This article has dealt mainly with the Short-term Act. There are also binder regulations for long-term intermediaries and the concepts described have been introduced into the long-term industry. This means that, in the long-term industry as well, an intermediary’s earnings are no longer limited to regulated commission. Additional binder functions can be additionally remunerated by the cost of performing the functions plus a reasonable rate of return and, in the case of an underwriting manager, a profit share. There are going to be radical changes in the long-term space as well.
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