News Article : Behind the IGF
|Category:|| Advisers & Brokers : Commission & Fees|
|Posted:||09 Apr 2006|
A question of guarantees
If short-term insurance brokers want to handle premiums they must provide an approved guarantee in terms of the Short-Term Insurance Act 1998 (section 45).
The alternative is for the premiums to be paid direct to, or collected by the insurance company concerned. Brokers need to weigh up any advantages of retaining insurance premiums in their account, as against the cost of the guarantee. They might also consider the services of a premium finance company.
Says manager of the Intermediaries’ Guarantee Facility Ltd (IGF), Charles Hitchcock, “In terms of the Act brokers who wish to handle insurance premiums must carry a guarantee, either from the IGF, or from a registered commercial South African bank.”
IGF is currently reinsured by nine members of the SA Insurance Association in terms of the Act (though this number may vary from year to year).
Those brokers who hold the required guarantee may retain insurance premiums collected on behalf of underwriters for up to 45 days after collection. Brokers may deduct their agreed commission and then remit the balance by the 15th of the month following the month of collection.
Mr Hitchcock says the IGF has 800 members, while those carrying bank guarantees number 197. All must be registered with the SAIA.
The level of IGF cover required is 30% of the gross premium collected by the respective business the year before, less broker commissions. The submitted figure for rating purposes must be confirmed by an auditor using Form RV9.
In addition the broker must complete the IGF proposal form, agreement by the proposer (to provide access to his books should he default), solvency certificate (to prove viability of his business), and indemnity agreement, whereby he indemnifies the IGF in the event of a claim.
Mr Hitchcock notes that some brokers “who are not considered financially strong enough” may require collateral security in addition to the required guarantee. By the same token he says that some broking houses and even individuals may volunteer additional security to benefit from premium discounts on the IGF cover.
Successful applicants can enjoy a relatively large premium discount if they can provide combined fidelity guarantee and professional indemnity cover, for instance. Neither additional cover on their own will attract a discount.
The premium for IGF cover ranges from 1,6% of annual premium per annum, reducing to 0.77% for a large book of business without FG/PI cover, and from 0.80% to 0.40% with such additional cover. Any discount is also proportional, for example, in cases where the FG/PI insurance covers only part of the estimated premium throughput. The minimum and maximum guarantee amounts are R100 000 and R50m respectively.
In one example, in which a broker might require R500 000 of cover, the cost for the year would be R4 446.00 with full FG/PI cover, or R8 521.50 without it. Bother rates include the R342 application fee and VAT.
There is a third option as an insurance broker explains: “For some of my clients I use Premium Finance, a business that collects premiums for me. The advantage is that I don’t have to worry about premium collection but do get my commission within a month of policy inception.”
As an example, assume a client takes out a policy whose annual premium is R100 000. Premium Finance charges 5,06% plus a R20 fee as the finance cost. The total cost to the client is therefore R105 080, which he pays in ten monthly instalments (R10 508); the net premium is paid to the insurance company and the broker receives his commission a month later.
Broker commission is 12,5% on motor and 20% on other business, including household. A combined policy might average out at, say, 15% commission. So the broker in this case would receive R15 000 and the insurance company R85 000.
There are many advantages of this method:
- The broker receives his commission up front;
- The client enjoys the lower premium rate because he is buying an annual insurance policy;
- His cash flow is manageable because he pays for it on a monthly basis;
- In the case where he can claim VAT, he can do so for the whole annual amount in the next VAT period;
- The client avoids any premium rate increases that can be introduced on a monthly policy; and,
- The insurance company receives its net premium up front for the whole year.
“Probably the only drawback I can see,” comments the broker, “is if the client, say, writes his vehicle off during the early period of the policy contract, because premiums are not refundable in such cases.”