Discussion on draft information letter 3/2012 in respect of binder relationships

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• DISCUSSION ON DRAFT INFORMATION LETTER 3/2012 IN
  RESPECT OF BINDER RELATIONSHIPS

• 22 May 2013

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INTRODUCTION

• Context of binder services within existing
  legislation
• Topics for discussion in light of draft
  information letter 3/2013
• Analysis of services
• Remuneration
• Competition law aspects
• Practical application
• Questions

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INTERMEDIARY services

• Definition in S49 of LTIA and S48 of STIA and
  commission regulations (not FAIS)
• Why regulated?
• Regulates payments to intermediaries from any
  source for rendering services as an intermediary
• Who are regulated in terms of these sections?
• 2 tests (both must be affirmative)
• Person must interpose between client and
  insurer
• Recent Tristar SCA judgement (16 May 2013) in
  support hereof
• Services must be one of the services mentioned
  in the definitions
• The intermediary can act either on behalf of the
  insurer i.e administrator or tied agent or the
  client i.e broker

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INTERMEDIARY services (continued)

• Example 1 Agent of client (i.e. broker)

Broker
Insurer
Commission agreement
Mandate
Broker acts as agent of client as principal
Client

• Example 2 Agent of insurer (i.e. administrator)

Administrator
Insurer
Administration agreement (mandate)
Administrator acts as agent of insurer as
principal
Client
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BINDER services

• Definition in S49A of LTIA and S48A of STIA and
  binder regulations
• Binder services are a subset of outsourcing
• What does this regulate?
• Relationship between insurer and binder holder
  for performing certain services that legally
  binds the insurer
• Binder holder acts on behalf of insurer as
  principal in its capacity as agent in the strict
  sense
• Binder services begin where intermediary services
  end!
• Only certain services are regulated as binder
  services, namely
• Enter into, vary or renew policy
• Determine policy wording
• Determine premiums
• Determine the value of policy benefits
• Settle claims

In the context of definitions in binder
regulations
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Binder services (continued)

• Side note meaning of entering into
• means any act that results in an insurer
  becoming liable to provide policy benefits under
  a policy where the person performing the act may
  do so without the insurer becoming aware of the
  act until after the act has been performed
• An act that results in a principal becoming
  liable can only mean either an offer or
  acceptance of an offer by the binder holder on
  behalf of insurer
• Conditional offer?
• Communication of offer or acceptance of offer by
  third party?
• Discretion is irrelevant

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binder services (continued)

• Remember
• Non-mandated intermediary (typical broker or
  agent) may sell policies of insurer
• UMA may not sell
• Important to note
• Difference between definition of UMA in LTIA and
  UMA in STIA
• LTIA If UMA renders services as intermediary,
  such services may not include any act directed
  towards entering into, maintaining or servicing a
  policy on behalf of an insurer, a potential
  policyholder or policyholder.
• STIA If UMA renders services as intermediary,
  such services may not include 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, a potential policyholder or
  policyholder

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INTERMEDIARY SERVICES VS BINDER SERVICES
SAME ENTITY RENDERING DIFFERENT SERVICES IN
DIFFERENT CAPACITIES
Client
Insurer
Acts as an intermediary
Acts as a binder holder
MANDATE
BINDER AGREEMENT
Promote or canvas policies on behalf of the
intermediarys clients and place business with
insurer THEREFORE acts as an independent
intermediary on behalf of the client
Renders binder services on behalf of insurer and
acts as the agent of the insurer THEREFORE acts
as agent of insurer when entering into a policy
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outsource services

• Directive 159.A.i
• An arrangement between an insurer and another
  person in terms of which that person performs a
  function which would otherwise be performed by
  the insurer itself
• Capacity in which the services are performed is
  irrelevant
• Carve out for intermediary services
• Outsourcing does not apply to intermediary
  services
• Carve out necessary as the service is outsourced
  to a third party interposition

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other services

• Example procuring leads
• Not of intermediary nature
• Not of outsourcing nature
• Service is unregulated

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Client
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comments to draft information letter 3/2013

• It is important to interpret the document in the
  context of existing legislation and in view of
  relationship as explained
• Document in its current format can lead to two
  conflicting interpretations
• Option one - Three types of services
• Binder services
• Ancillary services
• Deemed binder services (ancillary / incidental
  services loses its character as either
  intermediary services or outsourced services and
  is deemed to be a binder service)
• Interpretation cannot be supported in the
  context of the current legislation

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comments to draft information letter 3/2013
(continued)

• Option two - Ancillary services may not attract
  additional remuneration
• All services retains characteristics of
  intermediary services / binder services /
  outsourced services
• Implication is merely that ancillary services may
  not attract additional remuneration
• Interpretation can be supported in the context
  of the current legislation

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comments to draft information letter 3/2013
(continued)

• Group schemes
• Compulsory group schemes no binder services
• Voluntary group schemes incorrect to state that
  there is a binder every time the liability
  changes. Depends on the structure of the group
  policy and group scheme

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comments to draft information letter 3/2013
(continued)

• Suggestions to address issues raised in
  information letter
• Current legislation distinguish the various
  services
• Blanket categorisation of services is problematic
• Annexures creates the impression that the nature
  of the service loses its characteristics
• Circumstances will dictate nature of services
  (binder / outsourcing / intermediary services)
• Support in legislation must be considered
• Suggestions
• Delete references to deemed services (binder
  and ancillary services)
• List of services in annexures must be evaluated
  in depending on circumstances

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REMUNERATION

• Draft Information Letter 3/2013 Background
• Divergent interpretations in respect of
  remuneration applied by various industry
  players
• Registrar indicates concern with wide range of
  fees negotiated by insurers with binder
  holders performing similar functions
• Introduces so-called activity-based fee model

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Outsource Services
Fee Reasonable and commensurate
Binder Services
Non-mandated intermediary Fee Reasonably
commensurate with the cost incurred reasonable
rate of return
UMA Fee Reasonably commensurate with the cost
incurred reasonable rate of return and profit
share
Rendering services as an intermediary
Commission
Rendering services as intermediary
Commission plus section 8(5) fee (STIA)
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REMUNERATION (continued)

•   Ancillary or Incidental Services as
  contemplated may not attract an additional
  outsource fee  over and above the binder fee
•   Binder fee may be of gross premium or fixed
  rand amount 
• New format for reporting on  agreed fees paid by
  insurers to binder holders standardised
  activity-based fee model
• Standardised activity-based fee model does not
  apply to profit share for UMAs
• Binder fee payable per binder service
  Amendments to current binder agreements required
  
• Registrar to determine benchmark for
  reasonableness of binder fees

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COMPETITION LAW ASPECTS

• OVERVIEW
• Relevant provisions of the Competition Act and
  Binder Regulations are sufficient to deal with
  potential competition concerns arising from
  payment of binder fees
• What are the concerns from a competition law
  perspective?
• How are the concerns addressed by the Competition
  Act and Binder Regulations?
• Potential competition law effects of regulating
  binder fee payments

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Purpose of THE Competition Act

• To promote and maintain competition in order to
• promote efficiency, adaptability and development
  of the economy
• provide consumers with competitive prices and
  product choices

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binder feeS - Possible COMPETITION CONCERNS

• If competition between binder holders is
  restricted -
• as competition should promote efficiency and
  lower costs (lower binder fees passed on to
  policyholders)
• If binder fees are loyalty inducing -
• as may reduce competition between insurers
• may result in reduced product choice and higher
  prices

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SAFEGUARDS IN BINDER REGULATIONS

• Linking binder fee to actual cost -
• encourages competition and efficiency between
  binder holders
• constraint on loyalty-inducing effect
• Disclosure requirements to policyholders -
• encourages pass through of positive effects of
  increased efficiency and price competition to
  policyholders
• constraint on loyalty-inducing effect

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SAFEGUARDS IN THE COMPETITION ACT

• Section 8 (Prohibited Exclusionary Acts) -
  constraint on loyalty-inducing effect
• Section 8(d)(i)
• It is prohibited for a dominant firm to engage
  in any of the following exclusionary acts, unless
  the firm concerned can show technological,
  efficiency or other pro-competitive gains which
  outweigh the anti-competitive effect of its act
  
• (i) requiring or inducing a supplier or customer
  to not deal with a competitor
• Section 7
• A firm is dominant in a market if
• (a) it has at least 45 of that market
• (b) it has at least 35, but less than 45, of
  that market, unless it can show that it does not
  have market power or
• (c) it has less than 35 of that market, but has
  market power

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Potential competition law effects of regulating
binder fee payments

• Setting binder fee or margin may
• Reduce loyalty-inducing effect
• BUT
• Eliminate competition between binder holders
  resulting in -
• higher prices for policyholders
• reduced efficiency and innovation
• AND
• Place insurers at risk of contravening the
  Competition Act

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Section 3 CONCURRENT JURISDICTION

• (1A) (a) In so far as this Act applies to an
  industry, or sector of an industry, that is
  subject to the jurisdiction of another regulatory
  authority, which authority has jurisdiction in
  respect of conduct regulated in terms of Chapter
  2 or 3 of this Act, this Act must be construed as
  establishing concurrent jurisdiction in respect
  of that conduct.
• (b) The manner in which the concurrent
  jurisdiction is exercised in terms of this Act
  and any other public regulation, must be managed,
  to the extent possible, in accordance with any
  applicable agreement concluded in terms of
  sections 21(1)(h) and 82(1) and (2).

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Section 4 ReSTRICTIVE HORIZONTAL PRACTICES

• (1) An agreement between, or concerted practice
  by, firms, or a decision by an association of
  firms, is prohibited if it is between parties in
  a horizontal relationship and if
• (a) it has the effect of substantially
  preventing, or lessening, competition in a
  market, unless a party to the agreement,
  concerted practice, or decision can prove that
  any technological, efficiency or other
  procompetitive gain resulting from it outweighs
  that effect or
• (b) it involves any of the following restrictive
  horizontal practices
• (i) directly or indirectly fixing a purchase or
  selling price or any other trading condition
• (ii) dividing markets by allocating customers,
  suppliers, territories, or specific types of
  goods or services or
• (iii) collusive tendering.

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EXAMPLE 1 BANCASSURANCE MODEL
Practical example A client of a bank concludes
a loan with the bank and is required in terms of
S106 of the NCA to conclude a credit life
insurance policy with the preferred insurer of
the bank (normally associates in the same group
of companies). The branch staff hands the client
a brochure which specify the terms and conditions
of the credit life insurance policy. All
enquiries are referred to a call centre used by
the insurer who are licensed to furnish advice to
the clients. The branch staff hands the client
an application form and assists the client in
completing the application form. The branch
staff member captures the information on the
system of the insurer (not live). The branch
staff member informs the client of the insurance
cover and also prints the policy certificate and
hands it to the client. All compliance functions
are rendered by an employee of the bank. In the
event of a claim, the client / beneficiary
approaches the bank and the bank assists the
client in submitting a claim with the insurer,
which claim is then settled by the insurer.
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EXAMPLE 1 BANCASSURANCE MODEL (continued)

• The branch staff hands the client a brochure
  which specify the terms and conditions of the
  credit life insurance policy
• Unregulated (Tristar matter)
• All enquiries are referred to a call centre used
  by the insurer who are licensed to furnish advice
  to the clients.
• Outsource services between insurer and third
  party call centre to the extent that the
  insurer procures the infrastructure (Directive
  159.A.i)
• The branch staff hands the client an application
  form and assists the client in completing the
  application form.
• Intermediary services (S49 LTIA / S48 STIA)

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EXAMPLE 1 BANCASSURANCE MODEL (continued)

• The branch staff member captures the information
  on the system of the insurer (not live)
• Outsource services between insurer and bank
  (Directive 159.A.i)
• The branch staff member informs the client of
  the insurance cover and also prints the policy
  certificate and hands it to the client.
• Binder services (S49A LTIA / S48A STIA) and
  printing is now an ancillary service and not
  separately regulated as an outsource service
• All compliance functions are rendered by an
  employee of the bank.
• Outsource services between insurer and bank
  (Directive 159.A.i)

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EXAMPLE 1 BANCASSURANCE MODEL (continued)

• In the event of a claim, the client /
  beneficiary approaches the bank and the bank
  assists the client in submitting a claim with the
  insurer, which claim is then settled by the
  insurer.
• Intermediary services (S49 LTIA / S48 STIA)

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EXAMPLE 1 BANCASSURANCE MODEL (continued)
Intermediary agreement
Bank
Insurer
Outsource agreement
Branch
Binder agreement
Outsource agreement
Call centre
Bank customer/ Policyholder
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EXAMPLE 2 call centre MODEL
Practical example Insurer appoints call centre
to make outbound calls to a data base of clients,
the information of which has been purchased by
the insurer from a third party. The call centre
canvasses policies of the insurer telephonically
and makes an offer to the client in respect of
the products of the insurer. If the client
accepts the offer, the call centre captures the
data live on the system of the insurer and
informs the client of the cover incepting. The
call centre prints all policy documents and
distributes the policy documents to the client.
In the event of a claim, the call centre settles
the claim on behalf of the insurer.

• The call centre canvasses policies of the
  insurer telephonically
• Intermediary services (S49 LTIA / S48 STIA)
• and makes an offer to the client in respect of
  the products of the insurer.
• Binder services (S49A LTIA / S48A STIA)

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EXAMPLE 2 call centre MODEL (continued)

• . the information of which has been purchased
  by the insurer from a third party.
• Unregulated (albeit regulated in terms of Part
  3A of FAIS Code)
• If the client accepts the offer, the call centre
  captures the data live on the system of the
  insurer and informs the client of the cover
  incepting.
• Intermediary services (S49 LTIA / S48 STIA)
• The call centre prints all policy documents and
  distribute the policy documents to the client.
• Intermediary services (S49 LTIA / S48 STIA)
• In the event of a claim, the call centre settles
  the claim on behalf of the insurer.
• Binder services (S49A LTIA / S48A STIA)

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EXAMPLE 2 call centre MODEL (continued)
Call centre
Insurer
Intermediary agreement
Binder agreement
Unregulated payments (regulated in Part 3A of
FAIS Code)
Client
Third party lead provider
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EXAMPLE 3 broker MODEL
Practical example A client concludes a mandate
with a broker to canvas insurance quotes from
various insurers. The broker assists the client
in completing an application for cover. The
insurer appoints the broker to capture the
information on the system of the broker. The
broker also enters into the policy on behalf of
the insurer and distributes the policy documents
to the clients.
A client concludes a mandate with a broker to
canvas insurance quotes from various insurers.
The broker assists the client in completing an
application for cover. Intermediary services
(S49 LTIA / S48 STIA) The insurer appoints the
broker to capture the information on the system
of the broker. Outsource services between
insurer and broker (Directive 159.A.i)
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EXAMPLE 3 broker MODEL (continued)

• The broker also enters into the policy on behalf
  of the insurer and distributes the policy
  documents to the clients.
• Binder services and distribution of documents
  is now an ancillary service and not
  separately regulated as an outsource service
  (S49A LTIA / S48A STIA)

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EXAMPLE 3 broker MODEL (continued)
Intermediary agreement
Broker
Insurer
Outsource agreement
Binder agreement
Mandate
Client
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• QUESTIONS

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key contacts

• Johan Henning

• Ernie van der Vyver

• 27 11 530 5385

• 27 11 530 5349

• 27 82 888 8573

• 27 82 578 1299

• Johan.henning_at_webberwentzel.com

• Ernie.vandervyver_at_webberwentzel.com

• Zelda Swanepoel

• Janine Simpson

27 11 530 5940

• 27 11 530 5238

27 72 437 0491

• 27 72 530 2593

Janine.simpson_at_webberwentzel.com

• Zelda.swanepoel_at_webberwentzel.com

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purposes only and do not constitute legal or
other professional advice