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Financial Services
Thursday, January 1, 2009
Impossible task

Any broker or underwriting manager who tries to formulate a business plan for 2009 has an impossible task at the moment. The situation illustrates the undesirability of legislating by regulation when the statute itself gives no guidance regarding the scope of the regulations, notes Patrick Bracher, Director, Deneys Reitz Inc.
The Insurance Laws Amendment Act, 2008 has been gazetted but has yet to come into force. It cannot be brought into force until the regulations under the Act have been published. Draft regulations have not yet appeared for comment.
“Before the Amendment Act you could have two types of activities performed on behalf of an insurer by a third party,” he explains. “The third party could be a broker intermediating between insurer and policyholder and performing certain tasks relating to entering into policies, collecting of premiums or submitting and processing of claims in exchange for specific regulated commission earnings.
“The legislation recognised however that there are other people who are not intermediating between insurer and policyholder but who perform activities that the insurer might otherwise perform for itself. These arrangements allowed insurers to outsource functions they would otherwise have to perform themselves. These arrangements developed bodies of expertise in the hands of independent parties. The services were paid for on a rational market-related basis. Ordinarily, intermediaries were subject to limited commission and the others were remunerated according to the services they rendered and the role they played in the entire transaction.”
According to the Amendment Act, he says that intermediary services are remunerated in accordance with the regulations. “As soon as the draft regulations are published, businesses performing the defined services will have to see whether they can survive on the proposed basis and, if not, will have to make urgent and cogent submissions to the authorities drafting the regulations. The authorities no longer appear to be prepared to condone outsourced services for collecting premiums on a market related rather than regulated basis for instance.”
There is no knowing what will happen to those who enter into policies on behalf of insurers under binder agreements or determine policy wordings, premiums or benefits for insurers or settle claims. According to the Amendment Act, their activities must be “in accordance with any requirements, limitations or prohibitions that may be prescribed by regulation”.
“Who knows what is in the mind of the Minister concerned, advised by the Financial Services Board and the Department of Trade and Industries? Will they recognise the special role played by expert underwriting managers for instance who know more about their particular branches of business than anyone else can hope to know? Will these independent companies be allowed freedom to negotiate their earnings according to the skills they offer and the bargaining power they have or will there be some random table of remuneration limiting their earnings and thus their place in providing rational insurance services to the public?
“The Act recognises that these binder holders may, directly or indirectly, participate in the profits attributable to the policies that they handle. This is also, however, subject to the requirements, limitations and prohibitions in the regulations.”
When the FAIS Act was introduced in 2002, the promise was made that once the activities of financial services providers were regulated and conflicts and remuneration had to be fully disclosed, the remuneration itself would be deregulated so that market forces could operate. The public would have the choice where to go having regard to the disclosed arrangements between insurer and service provider. “Now all we have is overregulation in the FAIS Act and potential overregulation of remuneration under the insurance laws,” observes Bracher.
Another example of laws by regulation will be accident and health policies. The Supreme Court of Appeal recently permitted insurers to sell medical expense top-up policies on the basis that they do not contravene the insurance and medical schemes legislation and are for the public benefit.
The new insurance law entitles the Minister to determine what can be sold as an accident and health policy (after consulting with the Minister of Health, the National Treasury, the Registrar of Insurance and the Registrar of Medical Schemes and allowing the public one month to comment).
“This is all very well,” he says, “if progressive and liberal views are taken as to what the public needs. It is not all very well if the extremely conservative attitude of the Registrar of Medical Schemes prevails and useful policies that have been sold to the public for decades are stopped in their tracks.
“You cannot run an efficient economy where the most basic decisions regarding what can be sold and what you can earn for doing so, is regulated at the whim of the authorities. It is contrary to the spirit of a constitutional democracy that someone can be in or out of business according to the views, for the time being, of a Minister as to what the requirements, limitations, prohibitions and earnings ought to be for the time being.” Written by: Patrick Bracher, Director, Deneys Reitz Inc.

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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