If you want to know what is trending at the moment in the non-life insurance regulatory space, it is broker fees. Non-life insurers have been asked to justify their facilitation of broker fees under Policyholder Protection Rule 12.4. The Insurance Act, 1943 did not mention broker fees which were a matter between the broker and their client.  Under the Short-term Insurance Act, 1998, section 8(5) permitted independent intermediaries to charge their clients a fee (commonly 10-15%) as long as it was disclosed expressly and separately to the policyholder for those extra services that brokers provided to their clients which were not intermediary services as defined.  The FAIS General Code introduced section 3A in 2010, which entitles the independent intermediary to charge the agreed fee for additional services which the client can stop it in their discretion. 

The Policyholder Protection Rules, applicable to natural persons and small businesses, eventually introduced rule 12.4 to provide that the insurer may not facilitate the charging of a broker fee except under certain circumstances.  ‘Facilitate’, in this context, means adding the fee below the bottom line of the schedule and collecting it on behalf of the broker.  The insurer has to satisfy itself that the client has agreed to the fee in writing, that the fee relates to an actual service provided to the client, and does not remunerate the broker twice for the same service.

Non-life insurers have been asked to provide information the FSCA regarding the facilitated broker fees, instead of the FSCA checking on the brokers themselves under the FAIS Act.  Where Rule 12.4 requires an actual service to be provided to the client, this means that the service is available but not necessarily performed during a particular period of insurance for a particular client.  The fact that the broker has in place the skills and infrastructure, for instance to give risk management advice, to do risk surveys, to do all the extra things that surround a claim for replacement and repair of damaged goods, and to perform other helpful services is sufficient as long as the services are available when the client needs them. 

The fine line between outsource or intermediary services and services for which the broker fee is paid is not easy to draw and is never a straight line.  When does advice given by a broker to the client as to what to insure, what to self-insure and what to ignore when taking out a policy eventually shift into performing an act as a result of which someone enters into a policy? There are many similar examples.  The phrase that the insurer has to “satisfy itself” as to the charge is important.  Reasonable steps have to be taken.  Brokers have to produce, and insurers have to consider, the list of the services for which the broker fee is paid to see that there is no duplication. 

The South African market is a highly intermediated market and the fairness to policyholders relies extensively on the role of brokers in the market.  Many clients are prepared to pay a broker fee for the personal and additional services they get from their favorite broker.  If the insurer is facilitating the collection of fees which are described in the written agreement between broker and client as something in addition to what the insurer pays for, there is not much more that an insurer can do.  The wording of Policyholder Protection Rule 12.4 clearly understands that situation.

Patrick BracherNorton Rose Fulbright South Africa

September 2022