RETAIL DISTRIBUTION REVIEW WORK STREAM 4 SHORT …...November 2015 and December 2016, its serious concerns regarding the ... (“MCRF”) Steering Committee to participate in these

RETAIL DISTRIBUTION REVIEW – WORK STREAM 4 – SHORT-TERM INSURANCE– DRAFT ACTIVITY SEGMENTATION ANALYSIS – REQUEST FOR INPUT

Page 1 of 21

RETAIL DISTRIBUTION REVIEW

WORK STREAM 4 – SHORT-TERM INSURANCE

DRAFT ACTIVITY SEGMENTATION ANALYSIS – REQUEST FOR INPUT

1. PURPOSE

1.1. The purpose of this document is to request industry input on the draft activity

segmentation analysis conducted by Work Stream 4 (“WS4”) of the Retail

Distribution Review (“RDR”) project team at the Financial Services Board

(“FSB”).

2. BACKGROUND

2.1. During November 2014 the FSB published its paper on the RDR which

proposed specific regulatory reforms for the distribution of retail financial

products to customers in South Africa. The paper outlined a number of key

risks inherent in the current distribution landscape, including distribution

relationships and intermediary remuneration models that potentially

contribute to poor customer outcomes. The paper further put forward a

number of proposals aimed at addressing these risks and confirmed that

these proposals would be implemented through extensive amendments to

the current regulatory framework in three phases.

2.2. The key structural amendments proposed in the RDR focused on the

following:

2.2.1. Placing greater responsibility on product suppliers for ensuring the

delivery of fair customer outcomes through their chosen distribution

channels;

2.2.2. Introducing specific limitations on the types of remuneration payable to

intermediaries to address conflicts of interest and to ensure reasonable


Page 2 of 21

commensuration between such remuneration and the actual activities

being performed by intermediaries on behalf of product suppliers

and/or customers; and

2.2.3. Clearly delineating between the types of activities performed by

intermediaries on behalf of product suppliers and customers

respectively, leading to greater transparency in remuneration practices

and enabling customers to better understand and compare the nature,

value and cost of advice and other services provided by intermediaries.

2.3. The FSB has consistently highlighted, including in RDR status updates during

November 2015 and December 2016, its serious concerns regarding the

inconsistent interpretation and application of the general principle that fees

payable for the outsourcing of insurer activities must be reasonable and

commensurate to the activity being performed. In particular prevailing market

practices relating to the determination of fees for the outsourcing of binder

functions have exacerbated the conflict of interest risk inherent in

circumstances where these functions are outsourced to financial advisers.

2.4. The following Phase 1 proposals were intended to specifically address the

above concerns within the short-term insurance sector:

2.4.1. Proposals J, Z and AA: Proposals relating to standards for outsourced

services and restricted outsourcing to financial advisers;

2.4.2. Proposal UU: Remuneration for selling and servicing short-term

insurance policies; and

2.4.3. Proposal ZZ: Binder fees payable for multi-tied intermediaries to be

capped.

2.5. On 30 March 2016 the FSB held a stakeholder workshop with

representatives of the RDR Short-term Insurance Industry Reference Group

to discuss concerns relating to the implementation of the above proposals as

well as other issues in respect of insurer outsourcing and remuneration

practices in general.

2.6. In light of the discussions during the aforementioned workshop it became

clear that certain critical technical work needed to be undertaken to ensure a

consistent understanding of the nature and type of activities that fell within

the scope of binder and other outsourcing. The capping of binder fees also

needed to be looked at holistically to ensure that the impact of any limitation

on binder fees introduced during Phase 1 of RDR would be appropriately

considered during the formulation of the proposed RDR interventions relating


Page 3 of 21

to other forms of intermediary remuneration, planned for Phases 2 and 3.

Hence, there arose an urgent need to embark on an exercise to understand

in detail the delineation of all activities for which short-term intermediaries are

currently remunerated under the existing regulatory framework, including the

types of remuneration (regulated and unregulated) currently payable across

the short-term industry for such activities.

3. APPROACH AND METHODOLOGY

3.1. Subsequent to the workshop on 31 March 2016, the FSB embarked on a

series of individual engagements with insurers, intermediaries and other

impacted stakeholders to understand at a granular level the types of activities

for which short-term insurance intermediaries are currently remunerated,

including activities that are understood to fall within the current ambit of

“services as intermediary”, “binder functions”, “outsourcing functions”, and

any “other” activities not readily definable under the existing regulatory

framework1.

3.2. An open invitation was extended to members of the South African Insurance

Association (“SAIA”), the Financial Intermediaries’ Association (“FIA”), the

South African Underwriting Managers Association (“SAUMA”) and

representatives of the RDR Short-term Insurance Industry Reference Group

and the Market Conduct Regulatory Framework (“MCRF”) Steering

Committee to participate in these engagements.

3.3. One of the objectives of these engagements was to understand whether

intermediaries are being consistently remunerated across the industry for

doing the same or similar types of functions, or whether there existed a level

of arbitrage that allowed certain intermediaries to “double dip” and perhaps

be remunerated more than once for performing the same or similar activities

in different guises. To this end, stakeholders were requested to provide

detailed breakdowns of any activity based costing analysis currently being

performed in support of prevailing remuneration levels across the sector.

3.4. The following entities responded favourably to the above invitation, and their

individual contributions formed key insights into the draft activity

segmentation analysis contained in Annexure A of this document:

3.4.1. Contributing insurers

1 Please note that the references to “services as intermediary”, “binder functions”, “outsourcing functions” and “other” activities

are used generally to cover the relevant activities as they are currently understood within the existing insurance regulatory framework as well as the activities that are envisaged under RDR for the future regulatory framework, broadly classified as “advice”, “services connecting product suppliers and customers” and “outsourced functions”.


Page 4 of 21

AIG South Africa Ltd;

Bidvest Insurance Ltd;

Compass Insurance Company Ltd;

Discovery Insure Ltd;

Guardrisk Insurance Company Ltd;

Hollard Insurance Company Ltd;

Infiniti Insurance Ltd;

Old Mutual Insure Ltd (previously Mutual & Federal Insurance

Company Ltd); and

Santam Beperk.

3.4.2. Contributing intermediaries/administrators

AON South Africa (Pty) Ltd;

Brolink (Pty) Ltd;

Collective Dynamics Administration (Pty) Ltd;

Indwe Risk Services (Pty) Ltd;

Integrisure Brokers (Pty) Ltd; and

PWV Insurance Brokers (Pty) Ltd.

3.5. The FSB’s analysis was also informed by insights gained through ongoing

regulatory and supervisory engagements with other entities not listed above,

to the extent applicable.

3.6. While the initial focus of the activity segmentation analysis related specifically

to short-term insurance due to the immediacy of the conduct of business risks

identified within short-term insurance outsourced distribution models, the

outputs of the analysis are equally relevant to the long-term insurance sector,

and possibly to investment-related business. This means that a similar

exercise will need to be explored for activities that are performed by long-

term insurance intermediaries, and possibly investment intermediaries albeit

at a less granular level.

3.7. As mentioned earlier, in order to ensure a holistic analysis of the current

remuneration landscape, the activities that were defined, segmented and

assessed were not limited to those activities falling within the scope of “binder

functions” only. “Binder functions”, “services as intermediary” and other types

of “outsourced” activities form key components of the overall distribution

value chain for short-term insurance, long-term insurance and, to a certain

extent, investment products. This value chain also includes activities related

to the execution of sales processes and non-advice related intermediary and

other services. It therefore follows that this segmentation analysis will be a

key source of insight in formulating the relevant proposals related to revised


Page 5 of 21

remuneration levels and enhanced conduct standards for a range of

intermediary activities planned for Phases 2 and 3 of the RDR

implementation.

3.8. It is envisaged that once a clear delineation has been established (to the

extent reasonably possible) as to what the specific “segments” of activities

are for which intermediaries could or should be remunerated, specific

conduct or quality standards will be developed to ensure a consistent level of

performance of these activities by intermediaries across the board in a

manner that would enhance value to customers, thereby entitling such

intermediaries to receive fair, reasonable and appropriate remuneration.

4. DRAFT ACTIVITY SEGMENTATION ANALYSIS FOR SHORT-TERM

INSURANCE

4.1. Annexure A of this document sets out the results of the analysis conducted

by the FSB in respect of the types of activities for which short-term insurance

intermediaries currently receive remuneration, categorised as follows:

4.1.1. “Advice” related activities that can be described as services rendered

directly to the customer2;

4.1.2. “Intermediary” activities that fall squarely within the current definition of

“services as intermediary” and which are currently subject to regulated

commission;

4.1.3. “Binder” activities which are currently remunerated through binder fees

payable in terms of the Binder Regulations3;

4.1.4. “Outsourced” activities which are currently remunerated through

outsourcing fees payable in terms of the Outsourcing Directive4; and

4.1.5. “Other activities” which are not readily definable under the current

regulatory framework.

4.2. The above categorisations are used merely for illustrative purposes and are

based on generally accepted terminology in accordance with the current

regulatory framework and the inputs received by the various stakeholders

2 It is envisaged that these are the types of activities that would more appropriately be remunerated in the form of an “advice

fee” negotiable and payable directly between a customer and an intermediary (possibly facilitated by the product supplier) as contemplated in the later RDR phases. 3 Part 6 of the Regulations published in terms of section 70 of the Short-term Insurance Act, No. 53 of 1998.

4 Directive 159.i.A.(LT&ST)


Page 6 of 21

during the engagement process. Specific input is welcomed in respect of the

appropriateness of the categorisations used.

4.3. The category of “binder” activities includes references to activities that may

be regarded as “incidental binder activities”. In the absence of a binder

arrangement, these “incidental binder activities” could however fall within one

of the other categories, most notably “outsourcing” activities. This alternative

or “dual” categorisation has not been reflected in the draft analysis. Specific

input is welcomed in respect of the appropriate categorisation of “incidental

binder activities” in instances where there is no binder arrangement in place.

5. REQUEST FOR INPUT

5.1. Stakeholders are requested to consider the draft activity segmentation

analysis contained in Annexure A and provide specific input on the following:

5.1.1. Appropriateness of the categorisations used to segment the respective

activities for which short-term insurance intermediaries are currently

remunerated;

5.1.2. Validity of the descriptions used for each activity and sub-activity per

categorisation;

5.1.3. Identification of areas where there appears to be a duplication of

activities;

5.1.4. Detailed description of any activities or sub-activities that may appear

to have been overlooked, including specific examples in this regard;

and

5.1.5. Any activities or sub-activities that should be sub-divided at a more

granular level due to their ability to attract specific remuneration on a

stand-alone basis.

5.2. Input must be submitted via email to Ms Farzana Badat at

[email protected] and Ms Vanasa Padayachee at

[email protected] on or before 30 March 2018.

5.3. Details on the process for formulating a similar activity segmentation

analysis for long-term insurance risk and investment business respectively

will be communicated through the relevant RDR consultation structures

shortly.

mailto:[email protected]

mailto:[email protected]


Page 7 of 21

ANNEXURE A – DRAFT SEGMENTATION OF ACTIVITIES PERFORMED BY SHORT-TERM INSURANCE INTERMEDIARIES

1. “ADVICE” – SERVICES RENDERED DIRECTLY TO CUSTOMERS

ADVICE RELATED ACTIVITIES

Activity Sub-activities

Advice and recommendations (including before sale

and renewal )

Client risk assessment and needs analysis including: collect client risk information; risk management advice; risk transfer advice; business unit/company risk management plan and execution; Identify, formulate and maintain risk responses and insurance needs for defined client target-market segments; risk management and advice solutions including enabling and providing risk survey report (if done for client); perform underwriting, risk and loss control surveys; recommend and engage with professional e.g. surveyors, structural engineers, etc.

Explain and facilitate insurer product application process to client

Client product recommendation

Explain and recommend renewal terms and changes to policyholder

Consult insurance market for best solution including cover options and analysing market related pricing (quote comparisons)

On-going advice on suitableness of product through policy life cycle for example, conducting courtesy calls, visits and written communications.

Identify and study niche clients’ product needs

Execution - including finalisation of the advice process which includes ensuring all residual administrative tasks have been completed


Page 8 of 21

ADVICE RELATED ACTIVITIES


Product development (broker input into product development process)

Create, produce product information

Research, develop, maintain client target-market demographic and risk profiles

Designing product covers, wordings, benefits, risk acceptance criteria

Consult with insurers regarding design product cover, features and benefits based on client needs

Design client loyalty programs

Legal and compliance management of product and policy wording

Analyse client base to identify and address underwriting segments according to risk profile

Design and provide tools to calculate e.g. sums insured correctly

Develop added value benefits and products including risk warnings, weather, etc.


Page 9 of 21

2. INTERMEDIARY ACTIVITIES (“SERVICES AS INTERMEDIARY”)

INTERMEDIARY ACTIVITIES


Quotation

Obtain instruction from policyholder

Liaise with the insurers’ underwriting team including presenting client needs / business case to insurers

Consider and negotiate insurer quotations with insurer (including less punitive actions for multi-claimant clients; post loss changes and bulk-rates)

Communicate quotations to client

Maintain records and quote registers including assisting clients with developing and maintaining asset registers for insurance valuation purposes

Receive renewal quotes, negotiate renewal and prepare renewal listing for action

Proposal management: prepare, accept, issue quotes and endorse policies as per agreed underwriting terms and conditions

Perform Client Life-time Value (CLV) assessment / apply insurer requirements

Policy conclusion

Select and appoint insurer to provide cover

Consult with selected insurer regarding finalisation of policy benefits, conditions and price

Receive client selection / acceptance of product

Submit client acceptance of policy to insurer (to enter into, vary or renew)

Receive and check insurer policy

Provide hold cover

Issuing of policy Request insurer to renew and issue policy and renew


Page 10 of 21



policies as per agreed renewal guidelines

Print and issue policy schedules/documentation: Prepare and issue new and renewal policy documentation according to insurer‘s guideline and sign-off ; prepare and issue endorsement documentation according to client needs within insurer’s guideline and sign-off and make all disclosures for insurer

Policy Servicing

Provide on-going policy support to client including

Implementation of agreed appropriate actions with insurer in respect of product changes

Revise policy contract: Communicate to insurer to remove underwriting exceptions and refer risk improvements to underwriting

Confirm correctness of revised policy documentation and ensure receipt by policyholder

Respond to instruction from policy holder to vary or amend

Explain terms and conditions of policy/renewal/amendments – limited to conveying factual information

Ensure ease of access to and for clients – facilitate ease of communication between insurer and client

Conduct post sale follow up with client

Repudiation appeals

Prepare client policy summaries and register of insurance (schedule of important notes etc.)

Noting of interest - finance institutions- refers to when finance house requires proof that the financed asset is insured

Provide proof of insurance as required by client


Page 11 of 21



Premium intermediation Confirm to banks requirements for debit order collections

Premium collection on behalf of the insurers: follow-ups; maintaining a premium collection system; debit order / salary deduction collection processes and pay premium to insurer

Manage client queries regarding premium / client account reconciliations

Prepare premium notification and send to client

Refunds

Premium age analyses

Reconcile allocate and account for premium

Management of Returned Debit Order function to improve collection percentage

Bordereaux and insurer payment processing

Facilitate ex-gratia and commission payments

Claims intermediation

Receiving, submitting or processing claims including arranging emergency assistance where applicable

Inform client of claim process and required documentation

Advise client of claim impact on premium

Submit claims to insurer

Manage queries and provide on-going feedback throughout claims process

Advise client on fairness of claims settlement and assist client in lodging general complaints

Check validity of claim and advise client on claims reporting conditions including prescription and insurer

Record claims estimates

Segmentation of claims according to their complexity to


Page 12 of 21



enable streamlining of claims processing

Evaluating and review reports relating to claims

Finalise agreement of loss


Page 13 of 21

3. BINDER ACTIVITIES

BINDER ACTIVITIES

Binder function Incidental activities

Entering into, varying or renewing of policies includes:

Conclude a new policy contract with policyholders

Conclude a renewal policy contract with policyholders

Vary a policy by way of endorsement

Vary insurer liabilities under a group policy by varying the extent of risks or number of policyholders covered

In addition, underwriting managers may undertake the following activities:

Cancel a policy

Declare a policy void

Refuse to renew a policy

Prepare accept, issue quotes and endorse policies as per agreed underwriting terms and conditions

Confirm correctness of revised policy documentation and ensure receipt by policyholder

Respond to instruction from policy holder to vary or amend

Consider and negotiate insurer quotations with insurer (including less punitive actions for multi-claimant clients; post loss changes and bulk-rates [applied to books of business and not individual policy level])

Facilitating training - any training initiatives with third parties/service providers who are rendering services which are incidental to the outsourced binder activities `

Print and issue policy schedules/documentation: prepare and issue new and renewal policy documentation according to insurer‘s guideline and sign-off; prepare and issue endorsement documentation according to client needs within insurer’s guideline and sign-off and make all disclosures for insurer

Maintain records and quote registers

Despatch, record and store all policy documentation and correspondence (including policy data administration)

Liaise with the insurers’ underwriting department per agreed services levels

Ensure that risk adheres to insurer requirements

Renew policies as per agreed renewal guidelines: prepare renewal listing for action; risk and claims


Page 14 of 21

BINDER ACTIVITIES


analyses and set renewal terms and renewal underwriting terms

Collect client risk information

Present client needs / business case to insurers

Receive client background information to assess moral risk exposure (prior claims history screening)

Gather information on site(client’s premises) and provide risk control requirements

Consider and communicate quotations to client

Provide on-going policy support to client including action request from policyholder to vary or amend

Maintain policy including mid-term adjustments and ad hoc product support

Revise policy contract

Place on risk and issue policy according to agreed rates, terms and conditions

Set-up and operation of policy administration practices and procedures

Discounting of premium and use of insurer’s rating methodology - this is not considered to be “determining premiums” as contemplated in the Act

Arrange and manage appropriate reinsurance levels. Reinsurance reporting and notification process of all risks in excess of reinsurance limits

Facilitating the recording of telephonic conversation with client via a voice logging system (and effective retrieval process)

Prepare client policy summaries and register of insurance (schedule of important notes etc.)


Page 15 of 21

BINDER ACTIVITIES


Noting of interest - Finance institutions

Provide proof of insurance as required by client The following are considered to be incidental costs to performing all/any of the binder activities, where applicable, where these costs are incurred as part and parcel of performing these binder functions:

Technology efficiency - quote integration; policy management system; set-up and operate insurance accounting systems (premium and claims);source and operation of non-insurance software applications including people management, logical and physical access system security; source and contract suitable IT and communication hardware and networks; disaster recovery and business continuity policies and plans; exchanging data with insurers and other organisations; participation in industry-driven data-sharing initiatives; source and contract suitable insurance IT application programs; adequate change management over key applications; access rights on key applications aligned with job functions; transacting and viewing; distribution platforms; multiple communication channels

Internal control - maintain and operate appropriate risk management, internal control and governance practices; document all business processes; best practice management; basic operational risk management systems; service level management; adequate segregation of key functions


Page 16 of 21

BINDER ACTIVITIES


Legal and compliance - alignment to all applicable regulations, governance principles, industry Codes of Conduct; implement and operate fraud management policies and procedures; conclude agreements and corporate legal actions

Determining policy wordings

Determine the wording or amendments to the wording of a policy, either subject to limits prescribed by the insurer with respect to the risks that may be indemnified and/or benefits provided and/or other factors, or with full discretion

Designing product covers and wordings

Determining premiums

Determine the premiums under a policy, either using the underwriting criteria and rating methodology determined by the insurer, or with discretion with respect to the client segmentation and actuarial pricing

Develop product risk acceptance criteria

Analyse market related pricing

Determine premiums – this excludes the discounting of premiums with the use of an insurer’s rating methodology

Performing actuarial client-centric pricing

Determine the value of policy benefits

Determine the value of benefits under a policy, either using the underwriting criteria and benefit limits determined by the insurer, or with discretion with respect to the client segmentation and actuarial pricing

Portfolio Management

- Actively research and perform client segmentation and client management through various screening techniques and underwriting interventions

- Test client centric pricing and segmentation models against existing data and achieve target underwriting results

- Actuarial analysis - Perform Client Life-time Value (CLV) assessment and

apply insurer requirements - Manage the portfolio within the parameters of profitable


Page 17 of 21

BINDER ACTIVITIES


portfolio management principle that are equivalent to the internal insurer portfolio management requirements;

- Monitoring performance of the portfolio against pre-set criteria

- Multi-claimant management - Fraudulent claims management - Claims supply chain management - Analysis and reporting of claims underwriting statistics

relevant to the effective management of the insurance business//

- Reduce churn rate (for insurer) - Reporting: premium per unit (PPU); attrition rates

(within segmentation groupings); deliverables pertaining to business case objectives; churn rates (per class of insurance); conversion rates (quotes > sales - per area and per class of insurance); profitability and growth; new business and cancellation data; retention ratios (supported by a detailed analysis report); segmentation analysis; channel cost analysis (reflecting supplier adherence to a contracts and agreed pricing models)

Product development

- Create, produce product information - Research, develop, maintain client target-market

demographic and risk profiles - Designing product benefits; risk acceptance criteria - Design client loyalty programs - Analyse client base to identify and address underwriting

segments according to risk profile


Page 18 of 21

BINDER ACTIVITIES


- Design and provide tools to calculate e.g. sums insured correctly

- Develop added value benefits and products; risk warnings, weather, etc.

- Improve underwriting margin

Settling of claims

Determine and accept liability for claims

In addition, underwriting managers may undertake the

following activity:

Reject claims

Repudiate liability under a policy

Manage Third Party Recoveries including reconciling of all recovery bordereaux and monthly submissions of bordereaux to insurer; reporting and appoint external attorneys

Appoint assessor/loss adjustor/investigator if required

Assess merit and quantum

Apply underwriting requirements including excesses, deductions and recoveries as part of settling claims

Refer repudiations/rejections to insurer for approval

Records management and reporting

Payments: Approve and effect claims payment to policyholder/approved procurement providers/suppliers/assessors/bank and float management

Managing suppliers/service providers:

- procurement; service provider register; developing and managing of service level, capacity and quality; ensure repairs and replacements are authorised; managing direction of spend and claims leakage

Claims Processing: indemnity; manage queries; check validity of claim; reserving; review assessor reports; record claims estimates; evaluating reports; finalise agreement of loss; claims segmentation; determine and accept insurer liability for claims; investigations; update


Page 19 of 21

BINDER ACTIVITIES


or close estimates; ensure effective claims process; check validity of a claim; collect all claims information; receiving, submitting or processing claims including arranging emergency assistance where applicable

Conduct quality reviews including client satisfaction survey reports, complaint centre reports, scheduled quality reviews and post-repair audits/surveys

Reporting: management reporting; detailed monthly analysis; trends; claims run-off exercises; claims registers; calculation and management of data, data integrity and ratios; re-opened claims; average cost per claim; profitability management reports; suppliers or assessors used, as well as authorized spend directed to suppliers not on the list of approved providers

Multiple claimants - appropriate actions

Repudiation appeals - refers to instances where the binder holder is not an underwriting manager

On-going training to suppliers/service providers


Page 20 of 21

4. OUTSOURCING ACTIVITIES

OUTSOURCING ACTIVITIES


Claims Assessing

Loss Adjusting

Investigations

Inspection fee – vehicle inspection, for example services rendered by providers like Glasfit

Intellectual Property and Branding Use of branding/ trademarks/ advertising/ market profile

Inputs into product development/ customer insights

Renewals

Risk and claims analysis

Salvage Processing

Manage motor and non-motor salvage

Recordings

Facilitating the recording of telephonic conversation with client via a voice logging system (and effective retrieval process)


Page 21 of 21

5. “OTHER ACTIVITIES” THAT FALL OUTSIDE THE SCOPE OF THE CURRENT REGULATORY FRAMEWORK

“OTHER” ACTIVITIES


Risk evaluation (Note: If a broker receives an advice fee then this fee should already be included in the advice fee)

Enable and provide risk survey report(if done for insurer)

Recommend and engage with professional e.g. surveyors, structural engineers, etc.

Gather information on site (for insurer) and provide risk control requirements

Perform underwriting, risk and loss control surveys (EML, MPL) for insurer

Ensure that risk adheres to insurer requirements

Receive client background information to assess moral risk exposure (prior claims screening)

Business unit/company risk management plan and execution

Documents

RETAIL DISTRIBUTION REVIEW WORK STREAM 4 SHORT …...November 2015 and December 2016, its serious concerns regarding the ... (“MCRF”) Steering Committee to participate in these