The mis-selling of financial services products has affected many economies around the world where disposable income is relatively higher. In the UAE, to safeguard existing and potential customers, regulators have taken active steps to curb it with the issuance of directions from the Central Bank of the UAE in May 2017 and the recent enactment of the UAE Insurance Authority's Board of Directors' Decision No. (49) of 2019 Concerning Instructions for Life Insurance and Family Takaful Insurance.
The latest life regulations introduce a cap on all fees and payments to insurance intermediaries — those selling the products, such as independent financial advisers — for life insurance policies, whether pure insurance policies or investment policies. At the moment, intermediary payments are generally not disclosed to customers and are directly or indirectly built into the pricing of the products, thereby affecting performance and leaving the customer feeling cheated.
While the first draft of these regulations were published in early 2017, the final regulations were published by the UAE Insurance Authority on October 9 and will become applicable six months after their publication in the Official Gazette.
The new rules set out multiple changes, with the most important the overall cap of commission — any payments made to distribution channels — that can be paid to the insurance intermediaries. Such caps depend on the nature of the insurance product and the tenure of such product.
For example, pure protection products, more commonly known as term policies, only provide an indemnity linked to the life of the insured, but no other cash value return. Under the new regulations, the commission limit for such policy is capped at 10 per cent of the annual premium, but with an overall cap of 160 per cent of the annual premium across the life cycle of the product.
In simpler terms, if the insurance premium for Dh1 million cover is Dh10,000, then the yearly commission payout can be no more than Dh1,000. And if the policy period is 25 years — over which you pay a premium of Dh10,000 multiplied by 25, which = Dh250,000 — the overall commission limit shall be capped at Dh1,000 multiplied by 16 = Dh16,000.
Additionally, savings products, commonly termed as investment products, have a cash or return value attached to it. For such products, the cap limit is a combination of the cap limit for the insurance portion of the premium and the investment portion of the premium.
Under the new rules, the insurer — through the adviser — is required to provide a benefit illustration which provides details of the plan such as the premium payment mechanism and the premium amount. It must also detail the benefits under the policy, including the insurance, protection and cash value or return on investment, and the premiums towards each component, net of all fees and charges. Most importantly, the illustration must list full details of all the applicable fees and charges.
There can be no hidden charges. Therefore, this illustration document sets out the applicable premium a customer will pay under the policy, including what portion of the premium forms the commission. This must all fall in line with the regulation requirements.
As an end customer, you are only required to pay the premium specified under the proposed policy. All fees and charges towards commissions, payouts, administration and management of the product are part of the premium and these charges must be stated clearly in the benefit illustration.
The life regulations state the adviser can request an additional fee from the customer towards advice and management of the product. This would only not be considered part of the commission caps if the customer is separately disclosed at inception about these fees and informed they do not form part of the fees paid to insurer. However, it is not customary for advisers selling these types of products to request additional fees, as their remuneration is built into the commission that form part of the policy.
Additionally, the life regulations make it mandatory for insurers to provide a “free-look” period of 30 days. If a customer realises after purchasing a policy that it is not what they want, or the benefits do not match what was promised by the adviser, they have the right to cancel the policy within 30 days of issuance without incurring any costs or penalties. The insurer must then return the entire premium to the customer.
The life regulations are revolutionary to a large extent, as they address the most important issues relating to mis-selling, including overall commission payouts, upfront payments to agents/brokers by the insurers, fees and charges associated with investment products, the free-look period and mandatory benefit illustrations. They will certainly redefine the industry in a positive manner.
Anand Singh is a senior associate in the insurance and reinsurance practice at UAE-based law firm BSA Ahmad Bin Hezeem & Associates