UAE's Insurance Authority rolls out new life insurance regulations

The authority published the final rules that aim to overhaul the industry after three years of consultation

Key changes

Commission caps

For life insurance products with a savings component, Peter Hodgins of Clyde & Co said different caps apply to the saving and protection elements:

• For the saving component, a cap of 4.5 per cent of the annualised premium per year (which may not exceed 90 per cent of the annualised premium over the policy term). 

• On the protection component, there is a cap  of 10 per cent of the annualised premium per year (which may not exceed 160 per cent of the annualised premium over the policy term).

• Indemnity commission, the amount of commission that can be advanced to a product salesperson, can be 50 per cent of the annualised premium for the first year or 50 per cent of the total commissions on the policy calculated. 

• The remaining commission after deduction of the indemnity commission is paid equally over the premium payment term.

• For pure protection products, which only offer a life insurance component, the maximum commission will be 10 per cent of the annualised premium multiplied by the length of the policy in years.

Disclosure

Customers must now be provided with a full illustration of the product they are buying to ensure they understand the potential returns on savings products as well as the effects of any charges. There is also a “free-look” period of 30 days, where insurers must provide a full refund if the buyer wishes to cancel the policy.

“The illustration should provide for at least two scenarios to illustrate the performance of the product,” said Mr Hodgins. “All illustrations are required to be signed by the customer.”

Another illustration must outline surrender charges to ensure they understand the costs of exiting a fixed-term product early.

Illustrations must also be kept updatedand insurers must provide information on the top five investment funds available annually, including at least five years' performance data.

“This may be segregated based on the risk appetite of the customer (in which case, the top five funds for each segment must be provided),” said Mr Hodgins.

Product providers must also disclose the ratio of protection benefit to savings benefits. If a protection benefit ratio is less than 10 per cent "the product must carry a warning stating that it has limited or no protection benefit" Mr Hodgins added.

The UAE Insurance Authority rolled out new regulations for life insurance and family takaful, which will see greater disclosure for customers and commission caps applied to the sale of protection products including fixed-term savings plans.

Analysts said the final version of the legislation from the government body, which has been in draft form since November 2016, will be published in the Official Gazette “imminently” to signal the start of a six-month implementation period before the new rules take effect.

"The provisions of the instructions herein shall apply to the companies, distribution channels and any other insurance-related profession regulated by the authority," the IA said in its Decision Pertinent to Regulations for Life Insurance and Family Takaful document published on its website.

The new measures include better disclosure regulations and caps on commission paid to financial advisers selling IA-regulated life insurance products including fixed-term contractual savings plans and lump-sum bonds. Commission payments must now be drip fed over the term of the product rather than paid upfront.

Quote
The focus of the regulations is clearly to protect policyholders and ensure that they receive value for money from the products that they purchase.

Peter Hodgins, an insurance lawyer and partner at Clyde & Co in the UAE, said the IA’s Board of Directors Decision No. (49) of 2019 will appear in the Official Gazette imminently, with the effective date of implementation being mid May 2020.

“The regulations are a welcome (and, given the two year gestation period, long-overdue) reform to the life insurance industry in the UAE," he said. "The focus of the regulations is clearly to protect policyholders and ensure that they receive value for money from the products that they purchase."

Many UAE residents have been burnt by buying into long-term savings or lump-sum products sold by independent financial advisers or bank advisers that seemingly offer attractive returns, only to find early gains eaten up by commission fees, with an inability to exit plans without paying the full charges of the product.

“It is clear from the regulations that the restrictions on commissions are intended to apply in respect of all fees and charges, however described, that are paid to the distribution channel (insurance brokers, insurance agents and banks),” said Mr Hodgins. “Access fees paid to banks for multiyear distribution arrangements, for example, will be deemed to form part of the bank’s commission from the effective date.”

Another point of note, he added, is that any rebates or refunds received by an insurer or a distribution channel, such as a financial adviser, from a fund manager or any other third party “must paid to the customer and not retained by the insurer or the distribution channel”.

Swiss insurer Zurich — one of the leading providers of fixed-term contractual saving products in the UAE — said it was “well placed to work with our distribution partners to navigate through the changes”.

“The regulations push for greater clarity and transparency in the provision of products and services as well as the alignment of remuneration across different products,” said Walter Jopp, chief executive of Zurich Middle East.

Sam Instone, chief executive of fee-based financial advisory company AES International, said the latest regulations are “a step in the right direction”.

“Finally, financial services in the region are transforming from a product-driven and commission-laden industry to a profession that’s better aligned with investors’ goals and needs."

As well as commission caps, there are a number of disclosure requirements designed to ensure buyers of insurance products properly understand what they are purchasing.

These include a “free-look” period of 30 days, where the insurer is required to offer a full refund if the buyer wishes to cancel a policy, as well as extensive product illustrations for new policyholders at the time of purchase.

“In theory, these will improve outcomes for investors but there’s still a long way to go for the profession to fully regain their trust," said Mr Instone.

The IA first declared its intention to overhaul the industry in November 2016 in response to "an alarming amount of complaints".

“The data provided by the industry revealed that both the conventional and takaful operators charge heavy commissions and upfront fees to policyholders, which is perceived to provide poor policy value to customers in the early years of the policy,” the IA said in a circular at the time.

ABU DHABI, UNITED ARAB EMIRATES - - -  06 February 2017 --- Peter Hodgins was among a group of money experts who participated in a Money roundtable discussion with Business editors and reporters from The National on Monday, February 6, 2017, in Abu Dhabi.   (  DELORES JOHNSON / The National  )  
ID:  79727
Reporter:  Alice
Section: BZ *** Local Caption ***  DJ-050217-BZ-Money Roundtable-79727-047.jpg

Mr Instone said how these regulations affect the financial advisory sector will depend on how advisers are currently paid.

“Traditional commission-based financial advisers will be most affected,” he said. “These regulations will change not just how they are being paid but by how much. I anticipate we’ll see a few of them moving abroad to less regulated territories or perhaps closing shop entirely — only time will tell.”

Tom Bicknell, partner at Pinsent Masons law firm, said the new rules represent the most comprehensive overhaul of regulations for the UAE’s life insurance industry to date.

"The repercussions will require fundamental change to how brokers are remunerated for selling life products," he said.

"We expect this to lead to smaller participants leaving the market in the short term due to the increase in compliance costs and the restrictions on remuneration. We may also see some consolidation in the market. In the mid to long term we think the industry will adapt as other jurisdictions have done so in the face of similar regulatory change however. "

Mr Hodgins said if players exit the market, some insurers may move to a direct sales model where they employ advisers in-house rather than using independent distribution channels.

He added that the six-month implementation period may be tight for insurers as they have to redesign their products to comply with controls on commission, redevelop their systems to produce the necessary illustrations and disclosures, and train intermediaries who distribute their products.

Mr Hodgins added that in the short-term there may also be a rise in “churning” where unscrupulous advisers seek to maximise the revenue they can earn from their customers by having them switch between products before the new regulations are effective.

“It is surprising that provisions to relating the licensing, qualification and continuing education for individual advisers at the intermediary firms have been dropped from the final version of the regulations. It is to be hoped that these provisions will be issued separately in the near future,” he added.

Key changes

Commission caps

For life insurance products with a savings component, Peter Hodgins of Clyde & Co said different caps apply to the saving and protection elements:

• For the saving component, a cap of 4.5 per cent of the annualised premium per year (which may not exceed 90 per cent of the annualised premium over the policy term). 

• On the protection component, there is a cap  of 10 per cent of the annualised premium per year (which may not exceed 160 per cent of the annualised premium over the policy term).

• Indemnity commission, the amount of commission that can be advanced to a product salesperson, can be 50 per cent of the annualised premium for the first year or 50 per cent of the total commissions on the policy calculated. 

• The remaining commission after deduction of the indemnity commission is paid equally over the premium payment term.

• For pure protection products, which only offer a life insurance component, the maximum commission will be 10 per cent of the annualised premium multiplied by the length of the policy in years.

Disclosure

Customers must now be provided with a full illustration of the product they are buying to ensure they understand the potential returns on savings products as well as the effects of any charges. There is also a “free-look” period of 30 days, where insurers must provide a full refund if the buyer wishes to cancel the policy.

“The illustration should provide for at least two scenarios to illustrate the performance of the product,” said Mr Hodgins. “All illustrations are required to be signed by the customer.”

Another illustration must outline surrender charges to ensure they understand the costs of exiting a fixed-term product early.

Illustrations must also be kept updatedand insurers must provide information on the top five investment funds available annually, including at least five years' performance data.

“This may be segregated based on the risk appetite of the customer (in which case, the top five funds for each segment must be provided),” said Mr Hodgins.

Product providers must also disclose the ratio of protection benefit to savings benefits. If a protection benefit ratio is less than 10 per cent "the product must carry a warning stating that it has limited or no protection benefit" Mr Hodgins added.

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