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Motor Insurance
Tuesday, July 1, 2008
Warranted confusion

Advance repair payments, or ‘risk management fees’ as they are sometimes called, are paid in terms of a motor vehicle warranty. And while a useful risk management measure used by insurers to control claims costs, their remain controversial, and were considered as part of the recent Consumer Credit Insurance Enquiry, chaired by Judge Peet Nienaber.
An advance repair payment is made as a pre-delivery or pre-insurance servicing and repair cost, to cover inspection of the vehicle before a warranty is issued. It is considered by some to be a payment for the creation of a designated fund for the future finance of motor warranty claims. Others have considered it to be an exorbitant inspection fee, or even an additional commission payable to motor dealers, wrapped up in another guise. If so it would be in contravention of section 48 of the Short term Insurance Act 1998, which concerns remuneration of independent intermediaries.
There is also Regulation 5.1(1), which implies that motor dealers can be remunerated in their capacity as servicers and repairers of motor vehicles in addition to commissions; clauses 3.4 and 3.5 of FSB Directive 97.A.i (ST), which directs that the maximum commission percentages as per Regulation 5.3 must not be exceeded and prohibits the payment of inspection fees or any considerations of a similar nature if applicable; and Clauses 3.9, 3.10 and 3.11 of the draft FSB Directive 97.A.ii (ST), which allow for the payment of an inspection fee under certain conditions, but disallows advance repair payments.
The confusion surrounding the exact nature of these payments brought them under the spotlight. Insurers, including Centriq, provided oral and written evidence to the Panel of Enquiry, including detailed evidence on the practice of the payment of advance repair payments to motor dealers.
Comments Martin Penny, at Centriq, “Advance repair payments are made to motor dealers in their capacity as servicers and repairers of motor vehicles, not in their capacity as independent intermediaries. An inspection fee is the cost of inspecting a motor vehicle to determine what repairs are required in order to place it in a sound and therefore insurable working condition.
“The advance repair payment is actually the cost of servicing and repairing a motor vehicle in accordance with the items detailed in this inspection report. A clear distinction should be drawn between these separate costs.
“In our submission to the Panel,” he explains. “we stated that motor warranty administrators were paid an administration fee plus a risk management fee and this is passed on to the motor dealer in his capacity as repairer and servicer of vehicles and not in his capacity as providers of intermediary services.  “The Panel of Enquiry agrees with this analysis. The payment for pre-sale repair of motor vehicles is not affected by the commission regulations unless such payment can be shown to be disguised rewards, of which there was no evidence.” As such, there was no adverse finding in respect of motor warranty business written under Centriq’s short-term licence.
“There is considerable ambiguity and perhaps confusion in relation to what an advance repair payment is and what it is not,” says Penny. “This needs to be clarified by the regulatory authorities.”

Copyright © Insurance Times and Investments® Vol:21.6 1st July, 2008
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