The discussion on the retail distribution review conducted by the FSB provides for the following proposals specifically as it relates to the short-term industry:
Remuneration for selling and servicing short-term insurance policies
It appears that the Regulator wants to ensure that clients receive the required service support after the policy is issued.
It is proposed that the as-and-when model for short-term insurance, which provides for commission for the selling of a policy and service fees for ongoing servicing and maintenance of the policy, be retained. Additional requirements, which will be expanded on in more detailed “conduct standards” later, will support this model:
- The level of commission and service fee payments by short-term insurers will continue to be subject to regulated caps and other regulatory requirements. Further technical work and consultation will be undertaken to determine what the new maximum commission and service fee levels should be. The current provision, allowing for additional fees over and above commission (through section 8(5) of the Short-term Insurance Act), will be removed.
- Short-term insurance advisers will be able to earn advice fees from customers, separately from commission, subject to the requirements applicable to such fees.
- The service fee component of the intermediary’s remuneration will be subject to the following conditions:
- Further work will need to be undertaken to determine the range of services that fall within the category of ongoing product maintenance/servicing, to distinguish these from other “outsourced services” rendered solely on behalf of the insurer. In those cases where an intermediary is permitted to collect premiums (subject to specific qualifying criteria), premium collection will be included in this range of services and an appropriate service fee determined.
- Insurers must include the cost of these fees in the premium or other product charges they charge for the policy itself, subject to explicit disclosure to the customer regarding the quantum and purpose of the fee.
- Servicing fees will be regulated and capped (similarly to commission) to avoid provider bias, including a requirement that similar fees be payable to for similar services, regardless of which type of intermediary renders the services concerned.
- The insurer must monitor whether the ongoing service concerned is in fact being provided by the intermediary and stop charging the service fee against the policy if no ongoing service is in fact provided, including, but not limited to, cases where the intermediary concerned ceases to have a tied or multi-tied arrangement with the insurer or cases where the customer can show that no ongoing service is being provided.
- Product suppliers will be required to demonstrate how they have adjusted product charges on products sold after the applicable effective date, in light of the changes in level and structure of commissions.
