Recent regulatory reforms to Abu Dhabi’s insurance industry have demonstrated the Insurance Authority’s (IA) intent to encourage market consolidation, setting strict standards for new entrants and high paid-up share capital requirements for existing players, as well as financial reporting stipulations aimed at improving brokerage transparency and sustainability. Although some stakeholders argue the reforms will have a negative impact on smaller players, despite the fact that these insurers may be performing at the same level as larger companies, the IA has been praised for finding an agreeable balance between encouraging competition and protecting consumer interests. At the same time, room for further regulation exists, particularly in distribution channels and in addressing discrepancies between insurance and other financial products.
In its 2013 annual report the IA noted it is in the process of completing legislation that would organise the sector, after issuing several new draft rules and directives for insurance agents and companies. These brokerage reforms were enacted in February 2014, establishing a framework to improve market security and sustainability and kick-start consolidation.
Prior to 2012 the industry had faced criticisms that the Insurance Law of 2007 did not go far enough in setting paid-up capital thresholds, clear licensing requirements or business conduct regulations, leading to an erosion of consumer confidence and inhibiting growth. “We have seen in the past that some companies have done no technical underwriting whatsoever. We have seen that consumers are buying luxury policies for peanuts, but when it is time for a claim, they suddenly discover that their policy was too good to be true. This has led to a very serious lack of trust in brokers and in the overall market,” Rasha Moukayed, manager of life and medical at Guardian Insurance, told OBG.
Plans for a new financial free zone in the emirate may also be driving recent reform efforts. In April 2013 the Abu Dhabi Executive Council announced plans to develop the Abu Dhabi Global Market, a free zone on Al Maryah Island that is expected to directly compete with free zones in Qatar, Bahrain and Dubai. Despite the specific provision made for the insurance sector by the Abu Dhabi Executive Council, as of June 2013 ratings agency A.M. Best did not expect the main focus of the free zone’s activities to be insurance-related, arguing that ultimately its success and contribution to regional financial market development would depend on the ability to focus on niche market segments, underscoring the UAE insurance market’s relatively small size and strong regional competition as the greatest challenges to expansion. “It is worth noting that while insurance demand in the Middle East has been growing in recent years, the sector is still relatively small. Total gross written premiums (GWPs) for the six GCC countries together reached $14.6bn in 2011 – for example, less than the GWPs of Indonesia ($14.9bn.) In particular, there is high demand for reinsurance, but little business is placed locally, with the majority of it ceded to international reinsurers,” the A.M. Best report stated.
One major impediment to market growth in the emirate has been its prior lack of brokerage oversight; until recently brokers did not have legislation establishing regulation and licensing procedures. The authority announced in 2013 that consolidation is needed to improve the operating environment and reduce risks in the industry. Consolidation will also help build up local players’ capacity to retain their own business, reducing reliance on foreign reinsurers.
The government has taken steps to address regulatory challenges and push consolidation, starting with the May 2012 announcement of the IA’s proposal to introduce some revisions of its insurance broking regulations, providing new brokerage and licensing rules. Resolution No. 15 of 2013 was issued in October 2013 and promulgated in February 2014, following consultation with industry stakeholders.
One of its primary reforms involves raising paid-up share capital requirements, in addition to mandating professional liability insurance for licensed brokerages. Any local company is now required to have Dh3m ($816,600) in paid-up share capital; a Dh3m ($816,600) bank guarantee for its head office; a Dh1m ($272,200) bank guarantee for each branch; and Dh2m ($544,400) in professional liability insurance.
Foreign brokerages face significantly higher requirements, such as Dh10m ($2.72m) in paid-up share capital; Dh5m ($1.36m) in bank guarantees for head offices; Dh3m ($1.36m) in bank guarantees for each branch; and Dh3m ($1.36m) in professional liability insurance. On top of these requirements, brokerages are also obligated to maintain separate bank accounts for paid premiums and other purposes, as well as submit annual and quarterly financial reports.
“The effect is to impose a tough solvency margin on brokers, similar to that which applies to risk carrying insurance companies,” wrote James O’Shea of Clyde & Co in a March 2014 review of the new regulations. “This may seem like overkill, particularly bearing in mind that a customer’s money has to be kept in a segregated broker account. On the other hand, the UAE does not have a financial services bail-out fund on the EU model, financed by the industry. At any rate, it looks as if broker customers will be well-protected in the future.”
Unlike the original 2012 draft law, the final regulations permit premium payments to brokers, provided they are deposited into a broker account, though exceptions are made for life, group health, risks of carriage by sea and air, and hull and petroleum insurance, whose premiums must be paid to the insurer directly. The regulations also prohibit claims payments, or due indemnities, to beneficiaries via brokers.
Separation Of Roles
Perhaps the most formidable challenge for existing brokerages lies in new regulations stipulating that the roles of CEO, operations manager, internal auditor and branch manager, as well as head of operations for each line of business must be filled by fully qualified individuals. Whereas a single person was allowed to fill multiple roles under the prior regulations, the new rules mandate the separation of each role, with employees required to pass an IA exam before being allowed to assume any responsibility. Significantly, the reforms also mandate that brokerages establish clear terms of business with their policyholders. These regulations, which carry penalties extending all the way to jail terms for violations, could help the market to improve the public perception of broker credibility, following a period in which the industry was undermined by unqualified advice and vague policies that have provided less than promised.
Still, some stakeholders point to the fact that paid-up capital is not the same as solvency, arguing that the new regulations unfairly target smaller players. “Overall the new regulations are in favour of everybody, from consumers to brokerages to employers. It is fantastic to have an internal audit, even if you have great leadership at the company. However, with regulations like the increase in paid-up capital, you might see some really good smaller companies pushed out of the market, which is unfortunate. It is more about having the right structure than biggest numbers,” Moukayed told OBG.
While the 2014 reforms will boost transparency, stability and market maturity, there is still room for improvement outside of brokerage-specific regulations. In May 2014, lawyer Peter Hodgins, also with Clyde & Co, highlighted several areas that are still in need of regulation, including new distribution channels such as telemarketing, websites, price comparison platforms and white labelling (the issuing of insurance products rebranded under the name of the distributor). He also highlighted a lack of harmony in the regulatory treatment of insurance products and other financial services.
For example, Article 28 of the Insurance Law requires that the exclusion clauses be initiated by policy holders, casting doubt on the legality of distance distribution channels such as telemarketing and online sales, both of which have been widely adopted in more developed insurance markets. Brokerages are also struggling to comply with the IA’s Code of Conduct, which was issued in 2009 and prohibits insurance company staff from completing an application form on behalf of an applicant, creating further technical issues for indirect distribution channels. “There are other questions arising in the context of direct sales such as whether insurers can use customer data to cold call or email potential customers, how often such communications may take place, and the right of the potential customer to request that the insurer cease to contact [them]. These types of issues will only be resolved with specific regulation,” wrote Hodgins.
In a broader context, there could also be greater harmony between the treatment of insurance and other financial products, with greater clarification needed on questions such as when a life insurance policy becomes an investment product. While current regulations allow unit-linked products to be written with or without an insurance wrapper, three separate regulators currently address the different financial services and products: the IA, the Central Bank of the UAE, and the Emirates Securities and Commodities Authority.
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