Binder Regulations are now in force
After about three years of waiting, the Binder Regulations finally came into force on 1 January 2012, and require that all binder arrangements concluded on or before 1 January 2012 be aligned with the regulations by no later than 1 January 2013. All new binder arrangements need to comply with the Binder Regulations with immediate effect.
The role players
Underwriting managers and non-mandated intermediaries are the only persons who may be binder holders.
The industry would do well to take note that “non-mandated” describes the relationship as between the client and broker, and not the relationship as between the broker and insurer. Non-mandated intermediaries are distinguished from mandated intermediaries, who are mandated by their clients to perform any act (including termination) in relation to a policy on the client’s behalf; mandated intermediaries act entirely on behalf of the client and may not hold binder agreements with insurers.
Underwriters have a similar allegiance – not to the client, though, but rather to the insurer. The underwriting manager is deemed to be an agent of the insurer and so is not allowed to give advice or sell insurance products to members of the public.
The binder functions
The Binder Regulations govern the following functions performed for insurers by either non-mandated intermediaries or underwriting managers:
1. The actual act of entering into, varying or renewing a policy;
2. Determining the wording of a policy;
3. Determining the premiums under the policy;
4. Determining the value of the policy benefits under a policy; and/or
5. Settling a claim under a policy.
Binder holders may perform one or more of the above functions, the terms and conditions of which must be contained in an agreement. That agreement may not deal with any other function the binder holder may be carrying out for the insurer.
Making use of technology to capture business on a computer in an intermediary’s office, which links directly into the computer of an insurer, to draw quotes and upload the risk detail is not a binder function, and those intermediaries may not become binder holders on that basis. However, entities empowered by the insurer to bind it to risks (with certain limitations set by the insurer) without first approaching the insurer may be binder holders.
Binder holders are agents of the insurer, with the insurer ultimately being responsible for the functions performed. As such, and to control the amount of risk the insurer opens itself up to, the regulations prohibit binder functions from being further outsourced by the binder holder.
The consideration payable to a binder holder must be reasonably commensurate with the costs associated with rendering the services under the binder agreement, with allowance for a reasonable rate of return. An underwriting manager who is a binder holder may also share in the profits of the insurer. However, a non-mandated intermediary with a binder agreement may not share, directly or indirectly, in the profits of the insurer.
Any fee payable to a non-mandated intermediary who settles claims or determines the value of policy benefits under a binder agreement may not be based on a percentage of the difference between an amount claimed or the maximum value of policy benefits payable under a policy and the policy benefits actually provided to a policyholder in settlement of a claim.
In closing, the above is just a brief summary of the binder regulations. In order to properly understand the binder regulations, brokers should study the regulations in some detail in conjunction with the Insurance Laws Amendment Act, the Short-Term Insurance Act, the FAIS Code of Conduct and Policyholder Protection Rules.