Is it time for the regulator to take another look at guarantees for premium collection in the retail market?

The Financial Services Board (FSB) recently issued a directive – Directive 97.A.ii(ST) – on motor vehicle warranty and motor vehicle extended warranty cover, which insurers and intermediates who provide these kinds of products must comply with.

The most significant thing about the new Directive (which replaces its predecessor issued in 2004 in its entirety) is that it is much firmer in terms of regulating the provision of warranty products.

One of the areas that are more clearly regulated is the charging of inspection fees, which were traditionally not allowed. The practice manifested in the form of ‘dealer repair payment fees’, which were often exploitative, being levied. After much lobbying by the industry, the FSB has acknowledged that inspection fees are indeed justified as a risk-mitigating expense and, ultimately, in the consumer’s best interest. The new Directive approves the payment, by the insurer, of an inspection fee (only upon receipt of the inspection report), but does not set a monetary limit on the fee, providing that the fee is commensurate to the service provided. The Directive also specifies that proper records of the inspection and the relevant fees paid must be made available to the Registrar upon request.

One of the significant developments set to come out of the new Directive is the monitoring of warranty sellers’ Intermediary Guarantee Fund (IGF) cover. According to the Short-term Insurance Act, entities that collect warranty premiums are required to hold, and maintain, IGF cover to the value of 30% of expected annual premium.

In terms of the new directive, insurers will (by 1 November 2008) have to report to the FSB on all the intermediaries on its books who provide warranty products; identifying those that have IGF cover (and the amount of such cover) and those that don’t. In the case of the latter, the insurer will also have to place on record the steps it intends taking to insure that errant warrantee sellers put the required IGF cover in place.

Having to secure IGF cover can present a problem for smaller entities in that once the premium for this cover is paid by the intermediary it is not recoverable should the projected sales not materialize. Legislation currently provides for a guarantee policy issued by Intermediaries Guarantee Facility Limited and an undertaking provided by a bank guarantee; it does not permit warranty sellers to use other options such as alternative risk transfer (ART) vehicles to provide these guarantees. However, it may be time for the regulator to consider alternative ways of providing these.

It is widely acknowledged that smaller dealerships and non-traditional distribution channels – like retailers who sell insurance products to their clients – experience difficulties obtaining a conventional IGF guarantee. The current IGF structure was set up for the traditional broker distribution channel and does not really cater for the specific operational and practical circumstances of retail distribution channels.

Two of the problems that retailers selling insurance products face is that insurance is not their core business and the consumer’s premium payment is often combined with the monthly instalment payable to the retailer. Paying the premium directly to the insurer would necessitate a second debit order, and additional costs for the consumer, not to mention the inconvenience for the many customers who pay their monthly instalments in cash.

The ART industry could offer a solution by providing a ‘mutual’ self-insurance arrangement for specific segments of the retail industry, with the relevant sectors’ retail associations acting as the ‘promoter’ and members participating in the ‘special insurance fund’ established solely for this purpose.

In essence, it should be acknowledged that the distribution of volume and branded affinity products (such as warranty policies) has changed considerably over the last few years. These distribution channels are extremely efficient, provided that consumers are protected through adequate levels of disclosure and compliance.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Prepared  by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450