Smaller insurance brokers may be pushed out of business after the UAE Insurance Authority (IA) issued a new circular on Monday strengthening its capital adequacy regulations.
According to the IA's Decision document, brokers must maintain paid-up capital levels of 100 per cent with failure to do so risking intervention from the IA and even suspension of the broker.
“The insurance broker shall not resume its business, unless it achieves (100 per cent) of the paid-up capital required to practice the activity,” the circular said.
Peter Hodgins, an insurance lawyer at Clyde & Co in the UAE, says the decision makes clear that any reduction in capital must be approved by the IA and where this figure falls below the minimum level of Dh3 million, a corrective plan must be submitted by the broker.
“If the capital falls to below 80 per cent of the minimum, the regulator has power to intervene and if it falls below 50 per cent it can suspend the activities of the broker until such time as the capital is returned to above the minimum required," he said. "Importantly, the shareholders in the broker may not receive dividends until the minimum capital requirement is satisfied.”
This regulatory intervention comes at a time when the IA is already pushing ahead with tough new rules on the remuneration of brokers, particularly those working in the life insurance space, where it is looking to restrict indemnity commissions.
Mr Hodgins said both sets of regulation will adversely affect the income of some brokers.
“The result is likely to be that a number of smaller brokers exit the market," he said. "Whether that will be by way of merger or simply winding up remains to be seen," he said. "Certainly we have seen much more M&A activity in the insurance broking sector recently.”
Steven Downey, an associate at Holborn Assets, agreed. "Similarly to banks, the higher the capital cushion the more secure the broker is in the case of economic downturns and losses, " he said. "This will put pressure on brokers that do not have a large equity buffer on their balance sheet which could lead to smaller firms shutting down, industry consolidation and potentially less competition."
Last month the British insurer Aviva sold its Middle East and Asia-focused Friends Provident International (FPI) business to International Financial Group (IFG) for £340 million (Dh1.64 billion), which already owns the RL360° brand.
While the capital requirements (Dh3m plus a letter of guarantee issued on behalf of the insurance broker by a UAE bank for a further Dh3m) remain unchanged, Mr Hodgins said the new regulation indicates that the IA wants to guarantee brokers meet their liabilities and that consumers are protected.
“The decision has to be viewed as part of a drive by the Insurance Authority to protect the consumer and to strengthen the industry as a whole,” said Mr Hodgins .
“By trying to ensure that the minimum capital requirements are satisfied, the risk of insolvency of an insurance broker is reduced and therefore the risk to entities dealing with the insurance broker, both consumers and insurers, should also be reduced."
The decision document also lays out the financial data brokers must file to the IA at pre-determined levels.
"I am impressed the the IA will require IFRS accounting standards to be used in reporting financial statements to the IA from the brokers," said Mr Downey. "It seems they are leaning towards greater transparency as they are requesting a delineation of premiums and commissions paid from insurance providers."