© Webber Wentzel 2013

DISCUSSION ON DRAFT INFORMATION LETTER 3/2012 IN RESPECT OF BINDER RELATIONSHIPS22 May 2013

INTRODUCTION

• Context of binder services within existing legislation

• Topics for discussion in light of draft information letter 3/2013

o Analysis of services

o Remuneration

o Competition law aspects

o Practical application

o Questions

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INTERMEDIARY SERVICES

• Definition in S49 of LTIA and S48 of STIA and commission regulations (not FAIS)

• Why regulated?

o Regulates payments to intermediaries from any source for rendering services as an intermediary

• Who are regulated in terms of these sections?

o 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)

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Broker Insurer

Client

Commission agreement

Mandate Broker acts as agent of client as principal

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

Administrator InsurerAdministration agreement (mandate)

Administrator acts as agent of insurer as principal

Client

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?

o Relationship between insurer and binder holder for performing certain services that legally binds the insurer

o Binder holder acts on behalf of insurer as principal in its capacity as agent in the strict sense

o Binder services begin where intermediary services end!

• Only certain services are regulated as binder services, namely –

o Enter into, vary or renew policy

o Determine policy wording

o Determine premiums

o Determine the value of policy benefits

o Settle claims 5

In the context of definitions

in binder regulations

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:

o Non-mandated intermediary (typical broker or agent) may “sell” policies of insurer

o UMA may not “sell”

• Important to note:

o 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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Client Insurer

Promote or canvas policies on behalf of the intermediary’s 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

Acts as anintermediary

Acts as a binder holder

SAME ENTITY RENDERING DIFFERENT SERVICES IN DIFFERENT CAPACITIES

MANDATE BINDER AGREEMENT

INTERMEDIARY SERVICES VS BINDER SERVICES

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:

o Outsourcing does not apply to intermediary services

o Carve out necessary as the service is outsourced to a third party = interposition

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OTHER SERVICES

• Example: procuring leads

o Not of intermediary nature

o Not of outsourcing nature

o Service is unregulated

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Binder Services

(S49A LTIA / S48A STIA)

Outsource Services

(Directive 159 A.i)

A [long-term] insurer may, in terms of a written agreement only, and in accordance with any requirements, limitations or prohibitions that may be prescribed by regulation, allow another person to do any one or more of the following on behalf of that insurer (a) Enter into, vary or renew a long-term policy….; (b) determine the wording of a long-term policy; (c) determine premiums under a long-term policy; (d) determine the value of policy benefits under a long-term policy; (e) settle claims under a long-term policy.

Client

Intermediary InsurerRendering services as an intermediary

(S49 LTIA / S48 STIA)

"the performance by a person other than a long-term insurer or a policyholder, on behalf of a long-term insurer or a policyholder, of any act directed towards entering into, maintaining or servicing a policy or collecting, accounting for or paying premiums or providing administrative services in relation to a policy…."

An arrangement of any form between an insurer and another person, whether that person is supervised in law or not, in terms of which that person performs a function or an activity, whether directly or by sub-outsourcing, which would otherwise be performed by the insurer itself.

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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:

o 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)

o 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

o Compulsory group schemes – no binder services

o 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:

o Delete references to “deemed” services (binder and ancillary services)

o 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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FAIS Part 3A

Outsource Services

Fee = Reasonable and commensurate

Non-mandated intermediary: Fee = Reasonably commensurate with the cost incurred + reasonable

rate of return

Binder Services

Commission plus section 8(5) fee (STIA)

Client

Independent Intermediary

InsurerCommission

Rendering services as an intermediary

Rendering services as intermediary

Draft Information Letter 3/2013• Ancillary or Incidental Services “may not attract an additional outsource fee over and above the binder

fee”: Unclear whether binder holder is entitled to any compensation for ancillary or incidental services• If entitled to compensation – amends underlying remuneration basis• Insurer may not outsource to third party other than binder holder (this is not supported by legislation)• Legislation only provides for incidental functions not ancillary functions (broadens scope)

UMA: Fee = Reasonably commensurate with the cost incurred + reasonable rate of return and profit share

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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 UMA’s

Binder fee payable per binder service: Amendments to current binder agreements required

Registrar to determine benchmark for reasonableness of binder fees 18

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 -

o as competition should promote efficiency and lower costs (lower binder fees – passed on to policyholders)

• If binder fees are loyalty inducing -

o as may reduce competition between insurers

o may result in reduced product choice and higher prices

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SAFEGUARDS IN BINDER REGULATIONS

• Linking binder fee to actual cost -

o encourages competition and efficiency between binder holders

o constraint on loyalty-inducing effect

• Disclosure requirements to policyholders -

o encourages pass through of positive effects of increased efficiency and price competition to policyholders

o constraint on loyalty-inducing effect 22

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”23

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 -

o higher prices for policyholders

o 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

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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.

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)

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Bank

Bran

ch

Bank customer/

Policyholder

Insurer

Intermediary agreement

Outsource agreement

Binder agreement

Call centre

Outsource agreement

EXAMPLE 2: CALL CENTRE MODEL

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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)

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) 33

EXAMPLE 2: CALL CENTRE MODEL (CONTINUED)

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Call centre

Client

Insurer

Intermediary agreement

Binder agreement

Third party lead

provider

Unregulated payments (regulated in Part 3A of FAIS Code)

EXAMPLE 3: BROKER MODEL

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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)

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)

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Broker

Client

Insurer

Intermediary agreement

Outsource agreement

Mandate

Binder agreement

QUESTIONS

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KEY CONTACTS

• Johan Henning

• Janine Simpson• Zelda Swanepoel

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+27 72 530 2593

Zelda.swanepoel@webberwentzel.com

+27 11 530 5238

• Ernie van der Vyver

+27 82 888 8573

+27 11 530 5385

+27 72 437 0491

Janine.simpson@webberwentzel.com

+27 11 530 5940

Johan.henning@webberwentzel.com

+27 82 578 1299

+27 11 530 5349

Ernie.vandervyver@webberwentzel.com

www.webberwentzel.com

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