Binder Agreements,

Outsourcing

Arrangements and

Intermediary

Services

1

AGENDA

1. Binder Agreements

2. Outsourcing Arrangements

3. Intermediary Services

4. Market practices relating to the payment of fees

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BINDER AGREEMENTS

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Binder Agreements

• Section 49A read with Part 6 of the

Regulations under the Long-term Insurance

Act, 1998 (“LTIA”)

• Section 48A read with Part 6 of the

Regulations under the Short-term Insurance

Act, 1998 (“STIA”)

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Binder Functions

The actual:

o entering into, varying or renewing of policies

o determining policy wordings

o determining premiums

o determining the value of policy benefits (e.g.

no claims bonus)

o settling claims

On behalf of an insurer

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Binder functions (cont)

• functions that a binder holder performs as

agent of the insurer

• as if the binder holder were the insurer when

interacting with policy holders

• it is the actual entering into, varying or

renewing of a policy where insurer only

becomes aware of the policy after the fact

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Who may be a Binder Holder?

Only:

o Underwriting manager

o Administrative FSP (Long-term)

o Non-mandated intermediary

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Who may be a Binder Holder?

(cont) • Underwriting manager

o performs one/more binder function

o If person renders services as an intermediary:

- Does not perform any act the result of which is that

another person will or does or offers to enter into,

vary or renew a policy on behalf of an insurer, policy

holder above( e.g. does not sell, market or solicit

insurance business to potential policyholders /

policyholders)

- renders services as an intermediary to or on behalf

of an insurer only

• Administrative Financial Services Provider (FSP)

(long-term)

renders intermediary services on instructions of a policy

holder or another FSP (other than an administrative FSP)

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Who may be a Binder Holder?

(cont)

• Non-mandated intermediary

“representative or an independent intermediary

other

than a mandated intermediary or an underwriting

manager”

(Can have a binder with insurer and be agent of

policy holder for provision of intermediary services)

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** NB ** Mandated intermediary =

mandated by the policy holder to perform any

act, including termination, in relation to a policy

that legally binds the policy holder – in writing

** cannot be a binder holder **

** represents the policy holder only **

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Binder functions and related

issues

“The associate problem”

• a non-mandated intermediary may not conduct

any business with any mandated intermediary

that is its associate

• An underwriting manager may not conduct

any business with a mandated or non-

mandated intermediary or administrative FSP

that is its associate

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Binder functions and related

issues

“The associate problem”

• In the event that an insurer is the holding

company of

o a non-mandated intermediary

o and/or underwriting manager

x they cannot do business with each other

• An application can be made to the Registrar

• Registrar will grant if it is satisfied that no

conflict of interest exists

• Insurer must apply

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Binder agreements (cont)

Separate written agreement

regulating binder arrangements only

(intermediary services in a separate agreement)

In writing (requirements are in Regulations)

Prohibitions

x May not prohibit an insurer from communicating directly

with its policy holders/ the independent intermediary

x May not authorise another person to add any amount to

gross premium unless regulations allows it, or deduct

amount from claim

x May not further delegate any binder functions to any

party but may outsource functions that do not fall under

definition of binder functions

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Remuneration

Principle:

Binder fee must be reasonably commensurate

with the actual costs of the binder holder

associated with rendering the services under

the binder agreement

a reasonable rate of return

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Remuneration (cont)

Principle:

The policy holder should not be charged twice

for the provision of the same or similar service

** NB for the same intermediary performing

binder functions and intermediary services **

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Remuneration (cont)

Summary

Underwriting manager and Administrative FSP

can earn

Profit share Binder

Regulations

Binder holder fee

Non-mandated intermediary can earn

Binder holder fees Binder

Regulations

x A non-mandated intermediary may not earn a

share of the profits

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Binder agreements (cont)

Implementation dates • Binder Regulations commenced on:

1 JANUARY 2012

• Binder agreements concluded before on

1/1/2012 must be aligned by 31 December

2012

New agreements must comply

Existing agreements must be aligned

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OUTSOURCING

ARRANGEMENTS

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Outsourcing Arrangements

• Directive 159.A.i (LT&ST) – Compliance with

sections 9(3)(b)(i) read with Sections 12(1)(c) of the

Long-term Insurance Act and Short-term Insurance

Act, respectively: Outsourcing

- Directive applies in respect of all aspects of

insurance business of insurers that are

or may be outsourced to another person

- Directive does not apply to “intermediary

services” as defined in the Regulations under

the LTIA or Section 1 of the STIA

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Outsourcing Arrangements

(Cont)

An arrangement of any form between an insurer

and another person in terms of which that party

performs a function or activity, whether directly or

by sub-outsourcing, which otherwise would have

been performed by the insurer itself

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Outsourcing Arrangements

(Cont)

• Insurer must have an outsourcing policy

approved by its board of directors

• The board of directors and managing

executives of an insurer remain responsible for

the insurance business, regardless of any

outsourcing

• Insurer must avoid or mitigate any conflicts of

interest between the insurance business of the

insurer, the interests of policyholders or the

business of the other person that performs the

outsourcing

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Remuneration

• Reasonable and commensurate with the

actual function or activity outsourced

• Not result in any function or activity in respect

of which commission or a binder fee is payable

being remunerated again

• Not be structured in a manner that may

increase the risk of unfair treatment of

policyholders

• Not be linked to monetary value of insurance

claims repudiated, paid, not paid or partially

paid

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Outsourcing Arrangements

(Cont)

Written contracts in respect of the outsourcing of:

o Control function

o Management function

o Material function

Registrar must be notified timeously but not later than a month prior to effective date of an outsourcing contract relating to above functions

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Outsourcing arrangements

(cont)

Implementation dates • Directive commenced on:

12 April 2012

• Outsourcing arrangements concluded before

12/4/2012 must be aligned by 31 December

2012

New arrangements must comply

Existing arrangements must be aligned

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INTERMEDIARY SERVICES

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Intermediary Services

• Rendering services as intermediary as defined

in Part 3A of the Regulations issued under the

LTIA

• Services as intermediary as defined in section

1 of the STIA

• Written agreement to comply with:

- Policyholder Protection Rule 5.1 (a)(i) of

the LTIA

- Policyholder Protection Rule 7.1 (a)(i) of

the STIA

• Remunerated by way of Commission (Part 3 of

LTIA Regulations and Part 5 of STIA

Regulations 26

INFORMATION LETTER 3/2012:

MARKET PRACTICES RELATING

TO PAYMENT OF FEES

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Remuneration /fees

• Commission as remuneration for rendering

services as an intermediary that does not

exceed maximum commission payable in

terms of the LTIA or STIA Regulations

• Fees as remuneration for preforming binder

functions under a binder agreement in terms of

Regulation 6.4 of the LTIA or STIA (binder

holder fee)

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Remuneration /fees

• Fees as remuneration for a function or service

outsourced in terms of Directive 159.A.i.

(LT&ST), which function must not constitute

rendering services as an intermediary or

binder functions

• Fees from a policyholder in terms of section

8(5) of the STIA read with section 3A(!)(a)(iii)

of the FAIS General Code

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Inconsistent practices

- Payment of binder holder fee relating to

service or function already remunerated by

way of commission

- Payment of additional fee (administration fee)

relating to service or function rendered to an

insurer or underwriting manager already

remunerated by way of commission or, in the

case of an insurer, a binder holder fee

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Inconsistent practices

- Payment of additional fee (Netco fee) for rendering

certain distribution-related services or functions

such as administration of new business, marketing

campaigns, sales management and commission

management where commission or binder holder

fee has already been paid for said service or

function

- Payment of commission exceeding commission

thresholds where there are a number of

intermediaries rendering intermediary services in

relation to a policy

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Inconsistent practices (cont)

- Intermediaries other than underwriting managers paid

binder holder fees that:

Incorporate a sliding scale based on profits attributable

to the type of policies referred to in a binder agreement

are based on a percentage of the premiums payable or

paid in respect of the type of polices referred to in the

binder agreement, where this is not commensurate with

the services or functions actually rendered plus a

reasonable rate of return

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THANK YOU

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