FINANCE: Insurers Imposing Stricter Terms
Recent Western Cape Business News
A tougher economic climate and increasing pressure from regulatory authorities who are forcing insurance companies to take full responsibility for the actions of intermediaries conducting business on their behalf, is prompting some insurers to revise the terms of their agreements with brokers.
According to Barry Taylor, Chairman of the Short Term Exco and Director at the Financial Intermediaries Association of Southern Africa (FIA), while not all insurers will alter the way they do business with intermediaries, it is important that they are aware of the changing environment in which they operate. “As long as consumers are continuing to suffer they are likely to cut back on premiums, meaning insurance companies need to find new ways to hold down costs.”
Taylor says one of the ways of cutting costs is tightening up on claims settlements. “While this does not necessarily mean that valid claims will be rejected, it is likely that claims staff will apply an extra layer of vigilance when assessing the quantum of each claim or whether a claim is really valid, rather than just looking to pay.
“Intermediaries can assist in the claims process by making sure that claims are supported by all the relevant documentation. Intermediaries are, however, in the frontline of the fight for their client’s contractual rights and it is their primary duty to point out and motivate against frivolous and opportunistic interpretation by underwriters to the detriment of their clients.”
He says one issue that has become particularly pertinent for intermediaries specifically is the emergence of certain insurers setting increased minimum targets for intermediaries in order to justify servicing costs or even cancelling ‘dormant’ intermediary contracts. “In some cases, insurers are happy to negotiate their terms, even looking to settle on a form of reduced service level, but we are also seeing a move by some insurers to stick to strict criteria.
“This is justifiable to a certain extent because even if there is not a high level of service being offered to intermediaries, there are usually various overhead costs associated with maintaining a contract, such as producing monthly commission statements and compliance checks.”
He says some intermediaries have questioned whether these tactics are a contravention of the FAIS legislation, as intermediaries are being forced to place business with an insurer based on factors which are not solely related to the needs of the client and the product fit. “However, as this is clearly a commercial decision made by the insurer, it is unlikely to be in breach of any regulations.
Taylor says it is important for intermediaries to exercise skill when negotiating their insurer contracts, to allow them to fulfil their obligations to their clients. “When the risk service providers terminate agreements with perceived unproductive brokers, it is likely that opportunities will arise for successful mergers or joint ventures with a combined offering that may well be attractive to emerging smaller underwriting facilitators seeking additional market share.
“Another risk that intermediaries need to be aware of is that of insurers cancelling policies if loss ratios become unacceptably high. While suitable notice should be given to allow the risk to be substituted, intermediaries need to accept some responsibility for maintaining the balance between premiums and claims and to act in the best interests of their clients in arranging suitable cover, combined with suitable and appropriate risk management advice.”
Taylor concludes that there are multiple risks for intermediaries operating in a tough economic environment but says now more than ever there is a need for intermediaries to fulfil their role in the market by continuously seeking the best solution for each client while prudently choosing the best business partner to carry the risk.
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