A presentation discussing the following topics in light of the draft information letter 03/2013. Analysis of Services, Remuneration, Competition law aspects, Practical application, Questions.

1. © Webber Wentzel 2013
DISCUSSION ON DRAFT INFORMATION LETTER
3/2012 IN RESPECT OF BINDER RELATIONSHIPS
22 May 2013

2. 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
2

3. 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]
3

4. INTERMEDIARY SERVICES (CONTINUED)
• Example 1: Agent of client (i.e. broker)
4
Broker Insurer
Client
Commission agreement
Mandate Broker acts as agent of client as principal
• Example 2: Agent of insurer (i.e. administrator)
Administrator Insurer
Administration agreement (mandate)
Administrator acts as agent of insurer as principal
Client

5. 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

6. 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
6

7. 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
7

8. 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 an
intermediary
Acts as a
binder holder
SAME ENTITY RENDERING DIFFERENT SERVICES IN
DIFFERENT CAPACITIES
MANDATE BINDER AGREEMENT
INTERMEDIARY SERVICES VS BINDER SERVICES

9. 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
9

10. OTHER SERVICES
• Example: procuring leads
o Not of intermediary nature
o Not of outsourcing nature
o Service is unregulated
10

11. 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 Insurer
Rendering 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.
11

12. 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
12

13. 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
13

14. 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
14

15. 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
15

16. 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
16

17. 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
17

18. 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

19. 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
19

20. 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
20

21. 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
21

22. 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

23. 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

24. 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
24

25. 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).”
25

26. 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.”
26

27. EXAMPLE 1: BANCASSURANCE MODEL
27
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.

28. 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)
28

29. 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)
29

30. 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)
30

31. EXAMPLE 1: BANCASSURANCE MODEL (CONTINUED)
31
Bank
Branch
Bank
customer/
Policyholder
Insurer
Intermediary agreement
Outsource agreement
Binder agreement
Call centre
Outsource agreement

32. EXAMPLE 2: CALL CENTRE MODEL
32
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)

33. 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

34. EXAMPLE 2: CALL CENTRE MODEL (CONTINUED)
34
Call centre
Client
Insurer
Intermediary agreement
Binder agreement
Third party
lead
provider
Unregulated payments (regulated
in Part 3A of FAIS Code)

35. EXAMPLE 3: BROKER MODEL
35
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)

36. 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)
36

37. EXAMPLE 3: BROKER MODEL (CONTINUED)
37
Broker
Client
Insurer
Intermediary agreement
Outsource agreement
Mandate
Binder agreement

38. QUESTIONS
38

39. KEY CONTACTS
• Johan Henning
• Janine Simpson• Zelda Swanepoel
39
+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

40. www.webberwentzel.com
JOHANNESBURG CAPE TOWN
10, 16 & 18 Fricker Road, 15th Floor, Convention Tower
Illovo Boulevard, Heerengracht, Foreshore
Johannesburg, 2196, South Africa Cape Town, 8001, South Africa
T +27 11 530 5000 T +27 21 431 7000
Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice