Bancassurance in the United Arab Emirates
Historically, the strict legality of bancassurance arrangements in the United Arab Emirates have been unclear notwithstanding that this has been a significant growth area for the insurance industry. The Insurance Authority board has therefore issued a draft Board resolution setting out its "Instructions Concerning Marketing Insurance Policies Through Banks" (the Draft Resolution). The Draft Resolution provides welcome clarity in this important area for the distribution of insurance products. However, insurance companies and the banks with whom they deal would be well advised to review their existing arrangements in order to ensure that they comply with the requirements of the Draft Resolution. All such arrangements will need to be approved by the Insurance Authority and the Central Bank and the bancassurance contract registered with the Insurance Authority.
In this article, Peter Hodgins, a partner in Clyde & Co LLP's Insurance and Reinsurance team outlines the provisions of the Draft Resolution.
Scope of the Draft Resolution
The Draft Resolution applies to all insurance companies operating onshore in the UAE as well as to banks that market or intend to market insurance policies onshore in the UAE. It applies to both conventional and Islamic insurance companies. The Draft Resolution does not apply to companies that operate in the Free Zones; albeit, pursuant to Article 26 of UAE Federal Law No. 6 of 2007 (the Insurance Law) such companies are not permitted to insure risks in the UAE.
The primary purpose of the Draft Resolution is to regulate the relationship between insurance companies and banks when insurance policies are marketed through banks.
The Draft Resolution includes a number of restrictions in relation to the scope of bancassurance activities, including in relation to the types of insurance products that may be marketed by the bank, the locations in which the insurance products may be marketed and the manner in which such products may be marketed.
Only the following types of insurance may be marketed through banks:
- life insurance and family takaful insurance.
- health insurance.
- fund accumulation and savings.
- motor insurance and related liability insurance.
- personal accident insurance.
- home insurance.
- insurance associated to housing loans, credit insurance, personal loans, credit cars and similar insurances.
- travel insurance.
Insurance companies are not permitted to market other types of insurance products through UAE banks.
In order for a bank to market the products of an insurance company in a particular Emirate, the insurance company must have a branch in that Emirate. Such branch must also be authorised to settle claims. This is likely to restrict the scope of bancassurance arrangements for many insurers who do not have branch operations in every Emirate. It is not permitted for banks to market the products of foreign insurance companies or companies domiciled in the free zones.
The bank must market insurance products separately from their other products. Where the purchase of an insurance product is a pre-condition to the provision of other of the bank's services or products, this must be disclosed to the customer.
Before an insurance company and a bank can arrange to have insurance policies marketed via the bank, the bank must obtain the Central Bank's initial approval. Both the insurance company and the bank must then apply for the Insurance Authority's approval. If all the documents are in order and the application is accepted, the Director General of the Insurance Authority will issue a resolution approving the application. If the documents are not satisfactory or sufficient, the director general shall request both parties to rectify any lacking conditions within 30 days. If this is not done, the director general will decline the application. Both parties have the right to appeal this decision within 30 days of being notified of the director general's decision.
After obtaining the Insurance Authority's approval, the bank must submit this approval to the Central Bank for its final approval. The bank must register such approval with the Insurance Authority (such registration must be renewed on a yearly basis).
The relationship between the insurance company and the bank
The Draft Resolution permits an insurance company to contract with several banks in the marketing of its insurance products. At the same time, it permits a bank to contract with several insurance companies. However, a bank is only permitted to market insurance policies to customers who have accounts at the bank.
The Draft Resolution is clear that no relationship of insurance agent or broker will be established should a bank market an insurance company's products. This avoids the need for the bank to establish a separate subsidiary to obtain an insurance agent or insurance broker licence.
The contract between an insurance company and a bank should make clear the fact that it is the insurance company that the insurance company is issuing the policy and that is responsible for settling all claims. In this regard, the insurance company is not permitted to delegate to the bank with which it contracts the following powers:
- issuing the insurance policies;
- settling claims; or
- payment of compensation (i.e claims payments).
The contract must also provide that the parties will comply with the relevant Anti-Money Laundering and Counter-Terrorism Financing legislation in the UAE, including the provisions of The Insurance Authority Board Resolution No.(1) of 2009.
The dispute resolution provisions of the contract should also provide for disputes to be initially referred to the Insurance Authority and the Central Bank before any legal proceedings are commenced.
Technical and financial duties of insurance companies and banks
The Draft Resolution permits employees of an insurance company to be seconded to a bank to provide information and technical support to customers, as well as to receive their applications. Should no employee be seconded to the bank, the bank must appoint an insurance qualified person to perform these duties. The insurance company must then provide training to the employee appointed by the bank. This may well result in increasing competition for skilled staff with knowledge of insurance products.
Records must be maintained by the bank of any correspondence or conversations between its insurance employee(s) and its customers. Moreover, a separate account must be opened by the bank for the insurance company so that all funds received from its customers relating to the insurance policies can be placed in it, and so that all payments made to the insurance company are made from it. This account may be audited by the Insurance Authority upon receiving the Central Bank's approval.
The Draft Resolution requires that the bank provide details of the insurance company to the customer. In addition, details of the commission generated by the bank on the insurance products marketed must also be disclosed to the customer. It is irrelevant for these purposes whether the commission is payable by the customer or the insurance company.
Such requirements effectively prevent the "White-labelling" of insurance products. That is to say that the practice of products being designed for use by a bank in its own name, with limited reference to the insurance company, as is common elsewhere in the world, is not permitted.
Disputes between a bank and an insurance company arising out of their bancassurance arrangements are to be referred to the Insurance Authority and the Central Bank before any legal proceedings are commenced. No details of the procedures that will be applied by the regulators for such disputes have been published. It therefore remains to be seen what effect such referrals will have.
Effect of the directives and coming into force
The Draft Resolution will come into force six months after being published in the Gazette. At present, no details are available as to when the Draft Resolution is to be published. The Draft Resolution stipulates that any pre-existing contract between insurance companies and banks shall remain valid until either their expiry or the passing of 12 months from the date the Resolution comes into effect, whichever is earlier. Accordingly, it will be important for insurance companies and banks to review their existing arrangements in order to ensure that they are in compliance with the requirements of the Draft Resolution.