UAE's new life insurance regulations are a win-win for customers

Commission caps, strict disclosure requirements and a 30-day free cancellation period will reduce mis-selling by financial advisers and protect consumers

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The UAE Insurance Authority’s new regulations on life and family takaful insurance are expected to bring more transparency to the industry and better returns for investors, according to industry stakeholders.

The regulations, officially known as Insurance Authority Board of Directors Decision No. 49 of 2019 (BOD-49) concerning instructions for Life Insurance and Family Takaful Insurance, came into effect on October 16 and will have several benefits for end-users, including an increased customer service standard across the board.

The new regulations are expected to reduce mis-selling of life insurance products, increase policyholder confidence in the market and result in industry consolidation, experts say.

“The new law will ensure that advisers will treat their clients better throughout the term of the policy and not just focus on the initial incentive of a high commission,” says Yogesh Khairajani, global market strategist at Century Financial, a financial consultancy.

The UAE Insurance Authority first proposed an overhaul of the life insurance sector in 2016 to improve how savings, investment and life insurance policies are sold. At the time, the regulatory body said it had received several complaints from residents who were mis-sold long-term savings products.

These insurance products are provided by global insurers and distributed by IA-licensed financial advisers. They have been criticised for being expensive and inflexible, as clients are locked in for a set period of time and must pay the full charges if they exit early.

In July this year, the UAE announced the merger of the IA with the Securities and Commodities Authority as part of a restructuring of government and supervisory authorities in the country.

When The National contacted the insurance regulatory body on the roll out of the BOD-49 regulations, it said: "Any press questions directed to the Insurance Authority will be stopped until the merger procedures are completed."

Elie Irani, a board member of SimplyFI, a non-profit community of UAE investment enthusiasts, welcomed the new regulations saying they will help to protect consumers.

"We all know horror stories about unsuspecting consumers getting locked into long-term savings plans that are riddled with high fees and have virtually little chance of beating inflation over the term of the plan, typically 20 to 25 years," he says. "I hope with the new regulations in place, financial institutions will no longer be able to get away with just about anything."
As part of the regulations, the IA has capped the overall commission payable on a policy over its entire course. This means a greater portion of a customer's premium payment will be allocated towards the insurance policy.

Before the regulations were implemented, “for some investment-linked insurance products, 100 per cent of the premium used to be paid upfront as commission to the broker", Mr Khairajani says.

"Now, that will be restricted to 50 per cent in the first year and will be paid out in the remaining policy duration.”

Financial advisers must also include a mandatory 30-day “free-look” period in the policy, allowing customers to cancel it for free within the first month of the policy's inception.

Only the serious long-term players will be able to grow in this environment by changing their sales strategy

“With the introduction of a cap on commissions, the cost of saving, protection and credit life products has further decreased,” Rajesh Sethi, chief executive of Dar Al Takaful, says. “This will help improve the confidence of certificate holders in the long-term performance of their products and will ensure a fair treatment to them.”

The regulatory body has also imposed increased disclosure requirements on financial advisers, who are now required to provide a benefit illustration to customers before the policy commences and a policy statement every six months. The benefit illustration must clearly outline the client’s financial needs, insurance plan, premium amount, reasonable projection of financial performance, insurance or protection and explain the costs involved.

“The new regulations will change the landscape of the UAE insurance industry. However, intermediaries will likely witness a short-term impact given the new maximum commission limits, as well as the maximum allowable limits for indemnity commissions,” says Sivadeet Baruah, head of individual life at Oman Insurance.

“The drop in revenue for intermediaries will need to be compensated by higher sales and, therefore, only the serious long-term players will be able to grow in this environment by changing their sales strategy.”

With the introduction of a cap on commissions, the cost of saving, protection and credit life products has further decreased

Meanwhile, Zurich Insurance says it "welcomes the new regulations". "We will be pleased to provide the market with new solutions aligned with the requirements of BOD-49. Zurich in the Middle East will be working very closely with our distribution partners to ensure a smooth transition to the new environment," a representative tells The National.

Anand Singh, an insurance and reinsurance associate at law firm BSA Ahmad Bin Hezeem & Associates, says the changes in regulations “may lead to the departure of a number of advisers/distribution channels from the life insurance market on account of lower margins, leading to a shortage of distribution channel support”.

“Many have already taken action by changing structures and turning online to cut costs and stay afloat,” he adds.

According to Mr Khairajani, insurers have to achieve a complete overhaul within one year of issuance of the order to abide by the law. “This would involve the insurers changing their entire business structure to match the current law stipulations. This will be an added cost for the insurance companies.”

Thomas Bicknell, a partner in financial services at law firm Pinsent Masons Middle East, says the new regulations would impact the financials of the UAE’s life insurance sector. “In order to shore up their financials, we could see a rationalisation of some of the smaller market participants in the form of consolidation or else them leaving the market.”

Anand Singh is an associate, Insurance and Reinsurance at BSA Ahmad Bin Hezeem & Associate LLP. Courtesy BSA Ahmad Bin Hezeem & Associate LLP
Anand Singh, associate, insurance and reinsurance at BSA Ahmad Bin Hezeem & Associates, says the new regulations may lead to the departure of a number of advisers or distribution channels from the life insurance market in the short term. Photo: Courtesy BSA Ahmad Bin Hezeem & Associates

Existing policies will continue with the same fees, contribution and benefits as agreed at the time of the certificate inception. Only new policies issued after the implementation date will be covered under the new regulations.

“For existing policies issued to customers prior to October 16, 2020, if the policy terms and conditions comply with the life regulations, then those terms don’t require them to be changed. However, if the terms of your existing policy are not in compliance with the life regulations, then the same need to be revised and re-issued without a break to the coverage,” Mr Singh says.

The IA also warned customers of policy churning, in which financial advisers may try to cancel existing policies and re-issue new policies to customers. In case a policy issued prior to October 16, 2020, is cancelled and a new policy issued, the total commission paid under the old policy and the new policy must comply with the life insurance regulations.

“So, if the terms of a customer’s policy do not match the life insurance regulation requirements or if the distribution channel is pushing for cancelling the existing policy to issue a fresh policy, the customer has the right to raise a complaint with the insurer and with the Insurance Authority,” Mr Singh says.