In this article, which is the first of three in a series, Kennedys' Corporate Insurance team looks at the new proposed commission structures under the new draft life regulations in the United Arab Emirates (UAE).
The UAE Insurance Authority (IA) is working towards providing better protection to consumers who want to buy life insurance products, and maturity benefits attached to life insurance products, in the UAE. In order to achieve this protection, the IA published Circular No. (33) of 2016, which sets out the new draft regulations (the "Regulations") for the UAE's life insurance industry.
What was the IA's motivation to draft the Regulations?
After some extensive research, the IA found that high commissions and up-front fees were being charged to consumers on various life products. This is perceived to provide poor policy value to consumers in the early years of the policy. The results of the IA's research also found that there was a large number of complaints from consumers that they are provided with no value if they cancel in the early years of the policy.
Given the results of the IA's research, the IA wants to create a level playing field between life insurance companies in the market and raise the bar of regulation in the UAE. Once finalised, the Regulations will shift life regulation in the UAE into alignment with other developed Western markets such as the United Kingdom1 and Hong Kong2, which have introduced stronger protection for consumers and strict prudential oversight.
What are the key changes to commission structures?
No indemnity commission
Typically, indemnity commission refers to the upfront commission that is paid by an insurance company to an insurance intermediary, for the entire term of the policy in question, based on all future receivable premiums. This type of commission poses significant risk to insurance companies, as the commission amount may be much higher than the premium that the company receives from the consumer in the first few years of the policy. Given the transient nature of the UAE market and the risk that consumers may not continue the policy, this poses a significant challenge to insurance companies' balance sheets and solvency requirements. The Regulations ban indemnity commission altogether. The ban on indemnity commission may also add in a strong element in consumer protection, in that it will mitigate the risk of misselling life insurance products that would otherwise be inappropriate for consumers. On the other hand, the ban on indemnity commission may reduce the sale of life insurance products if distributors become less inclined to take on new commission structures because this may reduce their profits.
In a step that could be revolutionary for the life insurance industry in the UAE, the Regulations specify limits on "Total Commissions" that can be paid out to the distribution channels. The Regulations provide a very wide definition of Total Commissions, which includes all amounts paid to sales representatives as compensation related to selling and/or maintaining life insurance products. Commissions can be paid in a variety of ways (e.g. a percentage of the premium, fixed amounts, bonuses, incentives etc), but irrespective of what they are called and how they are paid, these payments must be combined and counted as part of the Total Commissions. The proposed limits on Total Commissions are as follows:
- Savings products (i.e. any
insurance product that has a maturity benefit attached to
- For regular premium policies, the overall cap on commission has been fixed at 90% of the annual premium. The maximum commission is limited to 4.5% of the periodic premium throughout the life of the policy. Irrespective of the premium frequency, the commission should be deducted as a monthly charge from the policyholder's account over a period of not less than 5 years;
- For single premium policies, the maximum commission paid must not be more than 4.5%. The commission paid should be deducted, as a monthly charge, over a period of at least 12 months. It is not clear from the Regulations whether the monthly charge is to be deducted from the policyholder's account.
- Term products i.e. any
insurance product that does not have a maturity benefit attached to
- For regular premium policies, the overall cap on the commission has been fixed at 160% of the annual premium. The maximum commission is limited to 10% of the periodic premium throughout the life of the policy. Irrespective of the premium frequency, the commission should be deducted as a monthly charge from the policyholder's account over a period of not less than 5 years;
- For single premium policies, the maximum commission must not be more than 10%. The commission paid should be deducted, as a monthly charge, over a period of at least 12 months. It is not clear from the Regulations whether the monthly charge is to be deducted from the policyholder's account.
The overall cap on commission is a positive step towards providing better consumer value and protection. However, requiring all premiums to be paid monthly, instead of one lump sum payment at the beginning of the policy period, may lead to stagnation of the market where newcomers to the market are locked out, or smaller providers end up leaving the market due to their inability to cover the initial costs of offering new policies. Further clarity needs to be provided as to how the new commission structure will work in practice.
The Regulations remain in draft and in a consultation process with the IA. If the Regulations are not implemented, consumers will continue to have lack of protection and standards will be deficient with possible misspelling, as there are no equivalent rules around market conduct and "treating customers fairly" as in the UK and European markets. Further, while the Regulations introduce restrictions on capped commissions, which provides consumer protection, there is still a situation in which market conduct regulation needs to be addressed immediately as the distribution and selling of life insurance products by insurance intermediaries is overseen by different regulators with different sets of rules and regulations. For example, the IA regulates insurance brokers and the UAE Central Bank and the Securities and Commodities Authority regulates independent financial advisers.
Overall, the Regulations represent a positive move to regulate the way in which life insurance products are sold and marketed in the UAE, which will provide a safety net for consumers. Life insurance companies should start thinking about addressing their terms of business agreements with their appointed insurance intermediaries, in order to structure commission payments in compliance with the Regulations. Insurance intermediaries should consider a financial audit of their income and cash flow in order to assess any risk associated with reduced commissions and the potential loss of future indemnity commissions.
1. Consumer Insurance (Disclosure and Representations) Act 2012.
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