South Africans remain underinsured especially when it comes to life and disability cover. And now new insurance regulations will further limit what types of business insurance brokers can do and prescribe how they are remunerated.
"Interaction between insurers and brokers has helped to maintain the balance between underwriting profits and policyholder protection for reasonable rates and this has been an important factor in driving the success of the insurance industry in SA," says Deneys Reitz director Patrick Bracher. "We need to be careful not to over-regulate the industry and destroy competition in the market."
Regulations under the act still have to be passed, but will seek to tightly govern the way in which brokers intermediate between insurers and policyholders as well as how brokers are remunerated.
Patrick Bracher
The existing system does not distinguish between a broker who simply sells a policy and does nothing else and one who performs the full spectrum of intermediary services described. The new regulations may introduce some sliding scale according to what services are provided by the broker concerned. The regulations might also attempt to prohibit brokers from performing any other services themselves.
"However, there is no reason why brokers shouldn't be rewarded on the basis of profitability since there is a direct relationship between the quality of service and receiving a fair income," he says. "As long as brokers are completely transparent about their costs, it should be up to the consumer to choose."
He says under the Financial Advisory & Intermediaries Services (Fais) Act brokers who act on behalf of clients have to make a full disclosure of all direct and indirect income they receive for performing their services and potential conflicts of interest. "As long as there is full disclosure, the public can assess for themselves whether to use a broker or not."
According to research by the Life Offices Association of SA, South Africans are underinsured by R10-trillion when it comes to life and disability cover. The average amount by which SA households should be insured against disability is between R645 000 and R833 000, yet an independent study by the association showed actual disability cover amounts to only about R430 000. The ideal level of life cover the average South African should have is R530 000, while they actually are only covered for R239 000.
Though some consumers deal directly with personal lines insurers, effectively by-passing brokers in return for perceived lower premiums, Bracher says the model isn't suitable for commercial insurance business. "In major risks, the benefit of having a broker negotiate lower premiums and fight your case if there's a query is important," he says.
Currently, the act creates three categories of intermediaries and administrators who are remunerated for performing intermediary services or other services on behalf of insurers. These include brokers, underwriting managers and administration providers such as those providing IT services, premium collection services, claim services and other services as outsource managers acting solely on behalf of insurers.
"With the advent of technology, many brokers perform a number of services for insurers," says Bracher. " These workable relationships should not be stifled." This can lead to conflicts of interest where the intermediary may be acting at the same time for the insurer and the policyholder. However, he says some intermediaries in small towns perform a variety of functions and need to be properly remunerated for the services they perform.
The combined role of the Insurance Act and Fais to avoid and disclose conflicts of interests is a positive development for consumers of insurance services - as long as the system does not substitute inflexibility for accountability.
