The New Qatar Financial Centre Insurance Mediation Regime

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Following its recently published consultation papers in respect of captive insurance and insurance intermediaries, the Qatar Financial Centre Regulatory Authority ("QFCRA") circulated the new Insurance Mediation Business Rulebook ("IMEB") on 27 June 2011.
Qatar Insurance
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Following its recently published consultation papers in respect of captive insurance and insurance intermediaries, the Qatar Financial Centre Regulatory Authority ("QFCRA") circulated the new Insurance Mediation Business Rulebook ("IMEB") on 27 June 2011. The IMEB, came into effect on 1 July 2011 addresses issues associated with insurance mediation business in the QFC, and sets out a new bespoke regulatory regime for intermediaries.

Insurance as an investment?

Historically, the QFCRA defined "insurance mediation" as advising on, dealing in, and arranging deals in investments with respect to contracts of insurance. Although this definition was in line with the terms utilised in the QFC Financial Services Regulations, it did not differentiate between general insurance intermediaries and financial advisers. IMEB addresses this issue by introducing a revised definition for "insurance mediation", describing it as:

  • giving advice to other persons about the merits of entering into contracts of insurance, whether as principal or agent;
  • acting as agent for other persons in relation to the buying or selling of contracts of insurance for them;
  • making arrangements with a view to other persons buying contracts of insurance, whether as principal or agent;
  • assisting in the administration or performance of contracts of insurance for or on behalf of policyholders.

Insurance mediation business also includes statements or opinions made to another person if such conduct is intended to influence a person in making a decision to select a particular contract of insurance, or could reasonably be regarding as having that purpose. Item (d) above suggests that the activities of third party administrators ("TPAs") will be categorised as insurance mediation (a regulated activity) and accordingly may require TPAs to be authorised by the QFCRA and meet the minimum capital requirements as set out in IMEB.

Client Money Rules

IMEB provides new rules in respect of client money as they relate to insurance mediation business, removing such provisions from the Asset Rulebook. In order for an insurance intermediary to accept client money, it must first establish at least one client bank account with an eligible bank. Prior to paying client money into the client account, the insurance intermediary must first confirm the suitability of the eligible bank by considering among other things:

  • the bank's credit rating, capital and financial resources;
  • the regulatory and insolvency regimes of the jurisdiction in which the bank is located;
  • the bank's reputation; and
  • the bank's regulatory status and history.

Once the intermediary has determined that the bank is suitable, it must receive written confirmation from the eligible bank that:

  • all money standing to the credit of the account is held by the firm as trustee; and
  • that the bank is not entitled—
    • to combine the account with any other account; or
    • to exercise any right of set-off or counterclaim or any security interest against money in the account for any debt or other obligation owed to it on any other account of the firm; and
    • that the name of the account includes the words 'client bank account' and sufficiently distinguishes it from any other account holding money belonging to the firm.

In addition to obtaining written confirmation from the eligible bank, an insurance intermediary intending to pay money into a client account with a bank in a jurisdiction outside the QFC must also obtain the following from the client:

  • consent; or
  • notify, and adequately explain in writing, to the client—
    • that client money may be paid into a client bank account in a jurisdiction outside the QFC; and
    • that the legal, insolvency and regulatory regimes applicable to the client bank account in the particular jurisdiction may be different from those applicable in the QFC; and
    • that, in the event of failure of the bank with which the account is maintained, the client money may be treated differently from the way it would have been treated in the QFC.

Taken together, these provisions introduce significant administrative and practical hurdles for insurance intermediaries seeking to hold client money.

Capital Requirements

Compared with other regulatory jurisdictions, such as the UK FSA, the Dubai International Financial Centre, and the Monetary Authority of Singapore, the QFC capital requirements in relation to insurance intermediaries are considerably higher than those of its counterparts.

The minimum required capital for insurance intermediaries varies depending on whether such firms intend to hold client money. Firms that do not hold client money are required to have a minimum capital of US$250,000, while firms that hold client money must maintain a minimum capital of US$500,000.

In addition to the current minimum capital levels, the IMEB now requires firms to ensure that their net asset value is at least 50% of the minimum capital requirement, meaning that an insurance intermediary not holding client money will be required to have a minimum capital of US$250,000, and a net asset value of US$125,000. IMEB defines "net asset value" as that amount by which the value of the firm's total assets exceeds the total amount of its liabilities.

The rationale for including such a high net asset value is unclear, as most claims against an insurance intermediary would be resolved through the firm's professional indemnity coverage, rather than directly from its assets.

Professional Indemnity Insurance Coverage

IMEB has introduced significant changes in respect of professional indemnity insurance ("PII") coverage. The minimum PII cover for an insurance intermediary will be (i) US$1 million for a single claim, and (2) with respect to total claims the greater of US$10 million or 10% of the firm's annual income. The previous PII threshold for firms was US$500,000 for a single claim and the greater of US$1 million or 10% of the firm's annual income.

Although the PII levels have increased, the applicable deductibles remain unchanged. Accordingly, IMEB requires insurance intermediaries to have a deductible of US$5,000 or 1.5% of the firm's annual income for firms that do not hold client money, and a deductible of US$10,000 or 3% of the firm's annual income for firms that hold client money.

Potential Issues

Whilst IMEB is certainly a positive step toward better differentiating insurance mediations business from other types of regulated activities, the new rules introduce several significant concerns.

The relatively high minimum capital requirements, combined with the net asset value requirement and low deductible level of PII cover are likely to significantly increase operating costs for such entities, potentially dissuading new intermediaries from entering the market, and indeed increasing costs for existing intermediaries already established in the QFC.

Furthermore, the rules relating to client bank accounts and handling client money place a significant burden on insurance intermediaries, requiring them to not only vet banks, but to also receive confirmation in writing from extra-jurisdictional banks that they comply with the requirements of the QFCRA. Obtaining bank confirmation that the client account is subject to a trust is likely to be challenging as the legal concept of a trust is virtually non-existent in the State of Qatar.

Although the IMEB rules came into force on 1 July 2011, existing QFCRA authorised insurance intermediaries are permitted to continue operating pursuant to their current authorisation until 31 March 2012.

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.

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