United Arab Emirates: Recent Changes And Future Considerations For Brokers In The UAE

Last Updated: 16 May 2012
Article by Mark Beswetherick and Laura Chicken

"It doesn't make sense." This was what Lloyd's CEO, Richard Ward, had to say last year on the topic of how, in the UK, brokers are generally remunerated by underwriters rather than their clients. Ward's comments sparked some debate in the industry on best practice for broker remuneration. In this article we explore recent developments in both the UK and UAE surrounding remuneration issues and broking practices.

New Lloyd's bulletin on broker remuneration

On 1 March 2012, Lloyd's Market Bulletin Y4567 in respect of distribution costs, broker remuneration and additional charges came into effect, aimed at Lloyd's Managing Agents and affecting the brokers with whom they deal.

Interestingly, despite Ward's comments on broker remuneration practices, the bulletin stresses that "Lloyd's does not seek to interfere with the agreement of commercial arrangements in the market...", but acknowledges that as remuneration arrangements are constantly evolving, then so too must the methods to reduce the associated legal and regulatory risks.

This bulletin is aimed at ensuring that high standards are maintained when it comes to broker remuneration arrangements, particularly in light of the UK Bribery Act 2010, which came into force on 1 July 2011. According to the bulletin, there is a concern that additional payments by insurers (for example, contingent commissions) might be seen as inducing or influencing the broker to place business with the insurer contrary to the broker's client's best interests, or which might otherwise cause improper performance by the broker of its duties. Such concerns are elevated where the additional payments are calculated by reference to the amount of business underwritten by the insurer or the profitability of the business.

Consequently, Lloyd's now expects Managing Agents to consider a series of questions in order to determine whether an additional payment should be approved, or whether the commercial motivation behind the additional payment is not appropriate in the circumstances. The bulletin also stresses the need for full records to be kept by Managing Agents, and also outlines the reporting requirements where additional payments are approved.

Although Lloyd's-centric, the new guidance will, no doubt, be of interest to brokers operating in the local market, particularly given the UK Bribery Act connotations and the lead taken by Lloyd's in driving international best practice.

Changes to premium collection regime in the UAE

In the past 18 months, the UAE insurance market has been the victim of a number of scandals, the most high profile of which concerned a brokerage firm in Dubai being found to have used premiums collected from its clients as working capital of the business (and even for investment in property) rather than keeping it in a segregated client account. This left a number of Insurers without payment and important consequences for the insured customers whose premiums had not been passed on.

The UAE Insurance Authority's initial response was to issue a Circular in April 2011, requiring premiums collected by brokers to be deposited in a separate account to the one used for their day-to-day working capital needs. For many brokers in the UAE, particularly those set up in accordance with international best practice, this requirement was nothing new and was already in place. However, for some it presented more of a challenge. Historically, premiums collected in the UAE were often used for the brokers' own short-term working capital requirements, with arrangements in place whereby the broker would make payments to Insurers at the end of a specified period.

The Insurance Authority continued its reforms with the issuance of Circular No. 3 of 2012. This Circular requires that, from 1 March 2012 onwards, cheques issued by the Insured customer for the payment of insurance premiums must be issued directly in the name of the Insurer. However, Insurers often do not have the systems in place to process broker commissions in a timely manner upon receiving these payments, resulting in delays in brokers receiving their remuneration. This also causes problems where premiums are paid in instalments rather than one up front lump sum.

This sudden change to existing practice caused some consternation within the local market, resulting in the broking community approaching the Insurance Authority to ask them to reconsider their position. We shall have to wait and see whether the Insurance Authority bows to pressure, or whether it stands firm on this issue.

Other areas for reform

There are a number of areas which will require greater scrutiny by regulators in the UAE in due course, including the practice of "grossing up" of premiums. Grossing up occurs where the Insurer obtains reinsurance terms from Reinsurers, but passes on a significant increase in price (even on a proportional placement) to the customer. It is not unknown for premiums to be grossed up by as much as 80% or more in some cases. Such practices are typically not transparent and do not serve the customer's best interests.

The future for broker remuneration

It is arguable that the controversy surrounding existing broker remuneration practices could largely be avoided by moving to a fee-based structure whereby brokers are paid for services provided to their clients, rather than underwriters accounting for acquisition costs. This is in line with most other professional services providers who charge their clients for time spent on a particular matter, according to set hourly (or fixed) rates. The FSA in the UK has signalled its intention to require the financial adviser community to move towards fee-based remuneration and it is seemingly a matter of time before it turns its attention to the broking community to require similar changes.

Moving away from the commission-based approach (which lacks transparency and can lead to conflicts of interest) to a time-spent basis should ensure that brokers are properly remunerated for the value that they add. At present there is a danger that brokers either charge too little, resulting in a request for extra fees to cover the shortfall (e.g. when providing a claims service), or take a hit in the hope of obtaining commissions on future placements. Such an approach may give clients a distorted view of the value that brokers provide, since underwriters are left to pick up the tab.

Whether there is an appetite for such a shift is another matter, particularly so in the UAE, where the Insurance Authority has to date focussed more on the handling of premiums, rather than tackling underlying issues such as broker remuneration practices and grossing up. We understand that a new law for brokers is in the pipeline and so it remains to be seen what regulatory requirements this will introduce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark Beswetherick
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.