New Draft UAE Intermediary Regulations: An Opportunity Missed?

In May 2012, the UAE Insurance Authority (the Authority) issued a consultation document outlining a new regime for the regulation of insurance intermediaries (the Draft Regulations), which would replace the current regulations that date back to December 2006. Few would disagree with the need for regulatory overhaul of the distribution channels and roles played by insurance intermediaries, but do the new Draft Regulations meet the need for the UAE insurance industry? This article looks at some of the industry requirements and whether the new Draft Regulations measure up.

What does the UAE insurance market require?

As one of the pillars of a strong economy, the insurance sector needs to provide effective services in the management of risk, of which the distribution network provides a key part.  Insurance intermediaries are a key part of that supply chain.  Whilst the UAE economy has been rapidly developing with the emergence of Dubai and Abu Dhabi as world-class cities, regulation in the UAE insurance market has battled to keep pace.  The existing intermediary regulations were updated in 2006, but still follow a framework that was established in the early 1980s, which most in the industry recognise is outdated and ineffective for the modern market.  Further reform is urgently required.

By way of a 'wishlist' for what new regulations dealing with the distribution of insurance products through intermediaries should contain, we would suggest the following:

1. A move away from the current one-dimensional approach to intermediaries which is based on a conventional, general insurance (specifically property and liability) broker distribution model. However,modern regulation needs to take into account the diversity of the insurance distribution chain, including the need to facilitate alternative distribution channels through, for example, banks, travel agents, freight forwarders and the like.  There is no scope for a 'one size fits all' model, and the current intermediary regulations do not cater for alternative methods of distribution; 
2. Developing regulations that are appropriate for and fit the needs of the entire market.  Intermediary regulations should take into account, for example, the specific needs in relation to life insurance, quasi-investment products, tied agents, and recognise the diverse nature of the principal / agency relationship that exists in a modern insurance market;
3. Allowing the effective regulation of modern distribution channels, which include online marketing and sales, together with 'white labelling' of insurance products;
4. Providing clear conduct of business standards to ensure that insurance buyers receive proper advice, are protected from unscrupulous (or incompetent) agents, have clear and accessible mechanisms to redress complaints, and that thorny modern issues such as transparency of commissions and disclosure of fees are adequately dealt with;
5. Ensuring that adequate structures and procedures are in place to protect client money through a mandatory client account requirement, underpinned by adequate capital requirements;
6. Promoting professionalism through adequate and workable 'fit and proper' requirements for individuals operating as intermediaries, backed up by a requirement to have adequate professional indemnity insurance;
7. Encouraging the development of the insurance market through effective registration and corporate formation procedures, which interface with other regulators in the country; 
8. Eradicating some of the worst practices in the intermediary market, which include a disregard for client money, inadequate disclosure, lack of accountability, and access to suitable redress for shoddy performance; and
9. Allowing the industry to function smoothly and efficiently through modernised registration and licensing procedures.

All of the above represent areas where the current broker regulations are severely lacking in content and have been responsible for some of the problems experienced in the market over the years.

How well do the new intermediary regulations address these concerns?

What are the key provisions of the new Draft Regulations?

The Draft Regulations circulated by the Authority provide, in summary, for the following:

1. The abolition of insurance broking "establishments". Locally established brokerage firms will need to be registered either as limited liability companies or private joint stock companies, both of which still require a majority Emirati shareholding;
2. Increased capital requirements. The minimum capital for UAE insurance brokers will be raised from AED 1 million (around USD 272,000) to AED 5 million (USD 1.36 million), and for foreign insurance brokers from AED 1 million to AED 10 million (USD 2.72 million);
3. Greater financial guarantees. For UAE firms, the current bank guarantee of AED 1 million for head office and AED 500,000 (USD 136,127)  for each local branch will be increased to AED 2 million (USD 544,500) for head office and AED 1 million for each local branch. The requirements for foreign firms are raised to AED 3 million for head office and AED 2 million for each local branch;
4. Increased professional indemnity insurance: AED 3 million (USD 817,000) for UAE firms (previously AED 1.5 million) and AED 5 million (USD 1.36 million) for foreign firms;
5. New educational and technical requirements, which envisage the Authority introducing new minimum standards accompanied by tests covering the legal, technical and financial aspects of insurance and brokerage;
6. Further regulation of relationships between insurance buyers and insurance companies. A written agreement will be required to govern the relationship (specifically covering financial and technical matters) between insurance companies and brokers. Between the client and the broker, a requirement to obtain written delegation of authority, which is required to be signed before brokerage can proceed, and made available to the Authority;
7. Rules concerning the financial relationship between the parties. Insurance payments must be paid by the client directly to the insurance company. Broker commissions to be paid within seven days of receipt of premium, and payment of claims to be made directly to the policyholder and not via the intermediary;
8. Further penalties for breach of the Draft Regulations, including deregistration for repeat offenders; and
9. A prohibition on transferral of insurance broker licences.

Do the Draft Regulations meet market requirements?

The Draft Regulations appear at a time when a number of regional regulators have overhauled their regulations in recognition that change is needed.  Some regulators, notably the various financial centres (QFC, DIFC and CBB) have implemented wide-ranging reforms that follow standards set in modern financial services authorities around the world.  Others, such as Jordan and SAMA in Saudi Arabia have promulgated legislation that seeks to recognise the multi-faceted nature of the intermediary in the industry.  Progress is being made in these jurisdictions.

Unfortunately, in our view the Draft Regulations  do not fulfil the requirements of the market and fall some way short of filling the regulatory lacuna that currently exists.  In many ways, the Draft Regulations appear to be a 'knee-jerk' reaction to recent market events that have seen a prominent Dubai insurance broker misappropriate large sums of money that ought to have been held in a designated client account.  The Draft Regulations appear to be an attempt to plaster over the wounds without dealing with the root cause of the injury.  In their present form the Draft Regulations simply appear to be a revision of the 1984 and 2006 models, with a few new adaptations.  This is unlikely to be sufficient for the industry which requires a root and branch reform of the way in which intermediaries are regulated.

Areas of particular concern in the Draft Regulations include:

1. A failure to recognise the different roles that agents may occupy in the market landscape.  There is no scope for anything other than a general insurance broker who is appointed by and acts on behalf of the policyholder.  The Draft Regulations do not permit tied agencies, nor is there any reform to the insurance agency regime.  The Draft Regulations are particularly inadequate when dealing with intermediaries' duties and roles in arranging and advising on life and long-term insurance;
2. The Draft Regulations do not envisage any broader distribution channels, including bancassurance and the manner in which insurance products may be offered as ancillary products by, for example, travel agents, freight forwarders or motor dealers, nor is there any any regulation of the manner in which referrals and introductions may be dealt with in this regard;
3. The Draft Regulations do not take into account nor deal with the manner in which insurance products can be sold and marketed online, or through white-labelled products;
4. The Draft Regulations do not introduce a comprehensive set of risk-based principles for the conduct of business by intermediaries.  The Code of Conduct that has been separately issued by the Authority is equally lacking in depth to deal with the manner in which intermediaries ought to conduct their business;
5. Whilst the Draft Regulations seek to enhance capital requirements, there appears to be no prudential test as to what capital a broker needs to have available, based on volume and type of business undertaken, nor any attempt to require the broker to monitor this.  Professional indemnity limits are rudimentary in instances where brokers are placing multi-million dollar exposures.
6. Whilst the efforts to implement local tests of competence for insurance intermediaries' staff are commendable, without suitable resources these efforts are likely to prove difficult.   There is no indication given as to what competency tests will take, nor who will run them.  As an alternative, there are many internationally qualified competency tests which ought to be sufficient to satisfy the need for professional standard in the market.  Furthermore, it is difficult to see how the Authority will be able to supervise mandatory ongoing education requirements, when it is short on personnel and expertise itself.
7. There is no indication from the Regulators that they have been actively engaging with other UAE regulators (eg UAE Central Bank and the various Emirate-level health authorities, many of whom are responsible for regulation of healthcare insurance, when it is clear from the nature of the financial services industry that insurance products have close links with many other streams of financial services;
8. Unfortunately, the measures that appear to be introduced in the Draft Regulations to promote transparency, fair dealing, and an eradication of suspect market practices in the intermediary market, does not appear to have been addressed; and
9. Company formation, branch licensing and ongoing corporate requirements have not been streamlined in the Draft Regulations, at a time when UAE corporate laws themselves are in desperate need of their own updating and modification.

The way forward

All of the above leads us to conclude that the Draft Regulations do not provide much by way of an advance on the position that currently applies under the 1984 / 2006 legislation.  More needs to be done.  The solution is also not, in our view, simply to expand on the current regime.  Rather, a root-and-branch review of the manner in which intermediaries are regulated, based on what their role is in the market, is required.

We would hope to see proper consultation with the industry to obtain input form a range of market participants, in a transparent and strategic manner in order to take steps to creating a vibrant but well-regulated intermediary platform in the region.   

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.