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Financial Advisers
Wednesday, February 1, 2006
FAIS fallout

The short-term insurance sector can expect further broker casualties this year, though mergers and acquisitions may be more evident than a simple flight from the industry. This view comes from Keith Young, CEO of First Link Insurance Brokers.

He believes there is potential for industry growth driven by an expanding middle class and emerging SME business. However, intense competition and increased administration arising from the implementation of the Financial Intermediaries and Advisory Services (FAIS) Act could keep brokers under pressure.
“FAIS fallout will usually take the form of industry consolidation. Many independent brokers will look for strong partners who can make the necessary investments in skilled people, on-going training, modern systems and rigorous compliance structures.”
He believes it may be the second half of this year before FAIS fallout gathers momentum. September 30th is the final day of the ‘reprieve’ granted to personal lines brokers whose entry-level accreditation fell short of the 30 credits stipulated by FAIS. A year later, in September 2007, a similar reprieve comes to an end for those who do not achieve the 60 credits needed to operate in the commercial insurance field.
Those who fail to take their training and educational attainments to the required level will not be able to offer advice on short-term products. Mr Young says a dual challenge looms on these dates for intermediaries to prove their professionalism and for the authorities to prove their credibility.
He points out, “The authorities must maintain credibility after full FAIS implementation. The FSB will have to be proactive in policing compliance. Without a rigorous approach, fly-by-nights will continue to operate. Professionalism must be supported by rigorous enforcement. “It would be demoralising for those who have invested in FAIS compliance if non-compliant brokers were seen to operate with apparent impunity.”
Direct insurance companies may ultimately take a 20% share of the market, up from the current 15% mark. However, he sees evidence of less confrontational tactics in the attempt to increase market share.  “The tone of their advertising has become less antagonistic. There are fewer attacks on the ‘middleman’ and the concept of commission. This may have arisen on the realisation that the cost of delivery within the two channels is similar, vis-à-vis the cost of advertising and the cost of commission.”
Emerging market potential is another positive development, though the challenge of affordable and effective delivery has to be addressed.
“Opportunities are evident in personal lines for those who develop affordable products targeted at LSMs 1-5. This will not only serve to close a gap in the product offering, but will also demonstrate the industry’s commitment to social and economic education and development for this sector.
“Emerging SMEs also create growth potential in the commercial sector. Few brokers and insurers have played in this market before. I foresee partnerships between various players in order to exploit existing delivery channels into these markets.
“Basic covers sensitive to the needs of new customers will have strong appeal, but must be supported by quality service and efficient claims handling. Education of this market will need to be urgently addressed and if possible implemented through industry representative bodies.”

Copyright © Insurance Times and Investments® Vol:19.1 1st February, 2006
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