Brokers in the medical schemes market

Robert Vivian is Professor of Finance & Insurance, School of Economic and Business Sciences, Wits University, and a member of the Free Market Foundation’s Rule of Law Board of Advisors.  

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This article was first published in MedSuite on
1 July 2022
(see hard copy at the bottom)

Brokers in the medical schemes market

Brokers are a feature of the medical schemes market and subject to extensive regulation in terms of the Medical Schemes Act, its regulations, and circulars issued by the Council for Medical Schemes (CMS). The CMS has announced it intends to revise Circular 20 of 2010, the prevailing circular dealing with brokers and has called for public comment. The closing date for comments is the end of August.  It is not intended to comment on the proposed changes at this stage.  This will come later.  This article discusses the position of brokers in the insurance markets in general with specific reference to medical schemes, laying the foundation for the subsequent comments.
Agents, brokers and intermediaries
There are three related terms relevant to the proposed revision: agents, brokers, and intermediaries.
An agent is a person who has the authority to bind his principal. The extent of that ability is determined by the relationship between the agent and principal. This authority may well be very limited.
Agents played a central role in the historical formation of South African insurance markets, since both the insurance financial capital and expertise were located outside of South Africa. So foreign insurers appointed agents to represent them in South Africa. The first foreign insurance company to do so was the UK’s famous Phoenix, which granted power of attorney on 6 August 1806 to John Houghton and Alexander MacDonald at the Cape.
The first indigenous South African insurance company was established in March 1831.  This company also appointed agents in South Africa.
Although it is usual to think of agents as persons, that can be misleading. Since the real issue is whether the agent can legally bind his principal, the better way of looking at the issue of agents is with respect to specific transactions. An agent is usually associated with a specific principal. So Houghton and MacDonald would advertise themselves as being the agents of the Phoenix of London as they did in the first newspaper advertisement which appeared in South Africa.
Brokers came much later.  As a general rule, a broker is independent and has no general authority to bind anyone. A broker can, however, be appointed as an agent for specific transactions. So, for example, an insurer may appoint a broker as its agent to collect insurance premiums. It is therefore possible for the broker to be the agent of the insured for some transactions and the agent of the insurer for others.
Clearly a problem would arise if the broker tried to be the agent of both the insured and insurer for the same transaction! Strange as this may appear, it does happen, especially where Lloyd’s is concerned.  So, for example, when an insured has a claim, the insured notifies his or her broker and the broker advises the insurer. Clearly the broker is acting on behalf of the insured with respect to the claim.
In the case of Lloyd’s, Lloyd’s may on receipt of the claim instruct the broker to appoint a loss adjuster to investigate the claim.  The broker then becomes the agent of Lloyd’s.  The brokers become the agent of both the insured and insurer with respect to the same claim.  The UK courts have expressed their dissatisfaction with this situation.
A problem with brokers arose in South Africa when the AA Mutual was wound up in the late 1980s. Millions of rands were being held by brokers and the question then became “who owns that money – the insured or insurer?”  The courts were asked to pronounce on the matter and ruled in favour of the insurer, the AA Mutual.
In more recent times, premium collecting companies evolved. One of these is Insure Group. It collected substantial sums and defaulted. So a question could have arisen about who suffered the loss, insureds or insurers? But since the matter had been settled in the AA Mutual case, it was generally accepted the loss was that of insurers.
What about intermediaries? Unlike agents and brokers, this term has no clear legal meaning. This is despite the fact that the term features in the ill-conceived Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS).
Changing nature of contract
One of the reasons given for the proposed revision of Circular 20 of 2010 comes from the CMS Appeal Committee matter of Bonitas v Ramaph. The circular indicates that the current position may impact the party’s freedom to contract. So there is an implicit view that the law of contact still applies.  Very little thought has been given to the question of what the impact the massive regulatory and other interventions has had on the law of contract itself.  The common law contractual relationship recognized that the role of the broker was that of an intermediary facilitating communications between insured and insurer. A more recent interpretation of the role of the brokers is that the brokers is an adviser to the consumer.  These are clearly two different roles.
Brokers and the medical schemes market
The question now becomes what is the role of brokers in the medical schemes market? It must be realized that in South Africa, there are two medical health funding markets.  The first and main market is the medical schemes market and the other is the health insurance market. This is not the case in most countries, and thus overseas literature needs to be read, with care, in that light. 
The medical schemes market has its own unique history explaining how it evolved.  Many individual articles which deal with medical schemes issues contain a brief history of medical schemes, but a single comprehensive authoritative history of medical schemes still needs to be written.  Medical schemes evolved largely as closed schemes with open schemes being a more recent development.  The role of brokers in smaller closed schemes may well be vastly differ to a broker in a market which consists a few large open schemes.
Against the background of agents, brokers and intermediaries, comment can be given with respect to the proposed changes being considered with respect to brokers.

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