The fragmented regulatory landscape in the Gulf Co-operation Council (GCC) countries is often cited as a challenge for the insurance sector in the region. As international insurers, reinsurers, brokers and insurance sector players seek to expand their operations, we are often asked to advise on the regimes across the region. However, the regulatory regimes across the GCC countries are consistent in their prohibition of unlicensed entities carrying on insurance business in those countries even if the enforcement differs in practice. We consider in this article the regional requirements and the structures that can be utilised to ensure continued compliance with the regulations.

Taking the United Arab Emirates (UAE) as an example, a licence from the UAE Insurance Authority (or, in the case of other (non-insurance) financial products and services, from the Central Bank of the UAE and the UAE Securities and Commodities Authority) is required for the following activities:

  • Direct insurance of risks located in the UAE;
  • Insurance and reinsurance broking in the UAE;
  • Risk management / insurance and/or financial consultancy;
  • Insurance agency;
  • Third party administration of health insurance policies;
  • Loss adjusters; and
  • Actuaries.

Prohibitions on non-admitted insurance

For insurers, the primary restriction is set out in Article 26 of Federal Law No. 6 of 2007 (the Insurance Law). This provides that:

"Insurance may not be arranged from outside of the State for funds or properties located in the State or liabilities arising therein. Only insurance companies registered in accordance with the provisions of [the Insurance Law] shall be entitled to mediate in the insurance of such properties or liabilities."

Although Article 26 refers to "funds and properties... or liabilities arising therein", in practice, the UAE Insurance Authority, the regulator of the insurance sector, prohibits any insurance products from being provided by foreign insurers (Non-Admitted Insurers) irrespective of the type of risk being insured. Thus, for example, health insurance or life insurance are equally prohibited by the UAE Insurance Authority. However, there are no restrictions under UAE law on the reinsurance of UAE risks by foreign reinsurers; a pragmatic recognition of the limited available reinsurance capacity within the State. Substantially similar prohibitions on non-admitted insurance apply in the other GCC countries. In the case of Saudi Arabia, there are also restrictions on the reinsurance of risks by foreign reinsurers.

Some GCC States, such as Saudi Arabia, include exceptions to the prohibition on non-admitted insurance in cases where coverage is not commercially available in the local insurance market. In practice, such exceptions are rarely applied as the industry develops and coverage becomes available.

Prohibitions on unlicensed insurance broking activities

A similar prohibition on unlicensed insurance broking activities also exists in UAE law. By Article 70 of the Insurance Law:

"No person shall carry out the activity of an Insurance Broker, reinsurance broker, Loss Adjuster, Insurance Consultant or Actuary, unless he is registered in the Register maintained for this purpose in accordance with the regulations issued by the Board..."

The requirements to register insurance brokers are currently set out in the UAE Ministerial Decision No. 24 of 1985 (the Brokers Regulations) (although new regulations in this area are expected to be implemented shortly). Further, under the Insurance Authority's Board of Directors Resolution No. 3 of 2009 (the Code of Conduct), locally licensed insurers are obliged to deal only with locally licensed insurance intermediaries and insurance sector service providers. Local intermediaries are similarly required to deal only with locally licensed insurance companies. Terms of business agreements between insurers and intermediaries are mandatory. 

Additional regulation in the health insurance sector

The health insurance sector deserves special mention as it is subject to additional regulation in some GCC countries, with the regulations in Abu Dhabi and Saudi Arabia being the most advanced in the region.  Health insurers, health insurance brokers and third party administrators (TPAs) are all required to be licensed by the local health insurance regulators – the Health Authority of Abu Dhabi (HAAD) and in Saudi, the Council of Cooperative Health Insurance (CCHI). The HAAD health insurance scheme is limited to health insurance policies issued in Abu Dhabi and at present, there are no equivalent health insurance schemes in the other Emirates in the UAE.  The long-awaited Dubai health insurance scheme is yet to be implemented, although recent announcements suggest that its implementation is imminent. 

In the other GCC countries, Qatar is implementing a compulsory health insurance scheme with the first phase of implementation to commence in the next few months.  Bahrain and Kuwait have announced that they too will implement compulsory health insurance schemes. However how these schemes will operate and the role the private health insurance market will play remains to be seen.

Insurance activities in and from freezones

When it comes to regulatory challenges, the UAE has an additional complexity not found in the other GCC countries – the freezones1. Broadly speaking, the insurance market in the UAE is divided into two sectors:

  • The Dubai International Financial Centre (DIFC) market which is regulated by the DIFC Authority and the DFSA – this sector is largely a wholesale reinsurance market in relation to UAE-based risks; and
  • The wider UAE market in which insurers and insurance intermediaries are required to register with the UAE Insurance Authority – this sector is primarily concerned with direct insurance of retail customers/risks located in the UAE. 

This balance is achieved by restrictions in respect of business that may be conducted in or from the DIFC which are contained in the DFSA Rulebook, the UAE Federal laws establishing the framework for the DIFC and free zones in general.  For the insurance market, an entity licensed in the DIFC (or any other freezone2) may not enter into, or act as an intermediary for, any direct contract of insurance in respect of any risk based in the UAE, that is, outside the designated DIFC (or relevant freezone) geographical area.

Practical ramifications of the regulatory regimes

The restrictions on the ability of Non-Admitted Insurers and unlicensed intermediaries to operate in the local insurance markets in the GCC without the necessary local licence are clear.  However, historically, these restrictions/prohibitions have not been actively enforced in the region and this has led to confusion as to the requirements.  It has been quite common for Non-Admitted Insurers directly to insure risks or liabilities which are based in a GCC country and/or for unlicensed brokers to be involved in this position. However, as the regulators in the region become more proactive, it is unlikely that such breaches will continue to be tolerated.

So what solutions are available to insurance industry players?

  • Ignore the regulations and continue to do business: Err... Ok fine. But at least read the following section (the Cost of Non-Compliance) so that you are aware of the risks of this strategy.
  • Obtain a licence:   The obvious solution is also the easiest one. At least that's the theory. If the insurance regulations require that insurers and insurance intermediaries be established and licensed locally, then that is what industry players need to do. The difficulty with this solution is that regulators in the UAE and Saudi Arabia are increasingly reluctant to grant new licences.
  • Use your existing group entity:   For multinational groups, the other obvious solution is to ensure that your local entity acts as insurer or broker (as the case may be). However, this does require a cultural shift within the group to ensure that individuals are aware of their obligations and that compliant behaviour is appropriately rewarded.  
  • Fronting #1 (Reinsurance Structures): The moratorium on new licences in the UAE has led to the use of fronting arrangements for the insurance of risks. These arrangements vary in scope and complexity. In essence, they simply involve the Non-Admitted Insurer acting as reinsurer for the risks written in a GCC territory. However, models involving the "white-labeling" of products, the secondment of experienced staff to the local insurer, licensing of technology and intellectual property are increasingly being utilised. The challenge with such arrangements is ensuring that they are properly structured so as to satisfy the local regulatory regimes which rarely – if ever – have been drafted with such arrangements in mind.
  • Fronting #2 (Piggy back intermediation arrangements): In the context of insurance broking and financial advisors, the prohibition on unlicensed intermediaries is leading to a rise in "piggy-backing" or "umbrella" arrangements.  Under such arrangements, a licensed intermediary will allow a third party to utilise its licence to undertake business activities in the relevant GCC country. These arrangements should be viewed with caution. In recent years, regulators in the region have become increasingly active in monitoring compliance with licensing requirements.  As part of this general movement towards more stringent regulation, several jurisdictions have issued legislation, commonly referred to as anti-harbouring or anti-fronting legislation, which prohibits licensed entities from allowing unlicensed entities to use their licence to conduct economic or professional activities in the relevant jurisdiction.  Such legislation will typically impose significant sanctions on both the licensed and unlicensed entities, including imprisonment.
  • Get out of the insurance regime: A more radical solution is to restructure the product being offered so as to fall within the ambit of an alternative regime. This has been seen in the UAE through the offering of capital redemption products and alternative investment products that do not include a life insurance wrapper. Such offerings fall within the ambit of the UAE Central Bank / the Emirates Securities & Commodities regimes and can, potentially, be offered by foreign providers (subject to compliance with the relevant regimes).

The Cost of Non-Compliance

The range of sanctions for unlicensed activities varies in the GCC and typically include the power to impose fines and/or imprisonment on entities and individuals in breach of the insurance regulations.  Regulators in the region also generally have broad powers and may issue "cease and desist" orders. 

In practice, it can be difficult for regional regulators to impose these sanctions and therefore we have seen a number of alternative deterrents emerge:

  • Coverage declared void: the courts in the region have, in a number of cases, concluded that an insurance policy issued by a Non-Admitted Insurer is void. This approach is enshrined in the UAE Insurance Law which provides that an insured is entitled to a return of its premium and damages for any loss which it incurs as a consequence.
  • Complaints to home state regulators: some regional regulators have started to write to the home state regulator of a Non-Admitted Insurer or unlicensed intermediary to request that they intervene to prevent further unlicensed activity.
  • Instructions to the industry:  in the context of unlicensed intermediaries, some regulators have written to the local insurance industry to request that they cease their dealings with the unlicensed intermediary.

In addition to regulatory sanctions, there are commercial and business repercussions for those carrying out unlicensed insurance business and those allowing their licence to be used by unlicensed entities.  For example, such entities may suffer reputational damage and may also find it difficult to expand their operations in the region once they are known by a regulator to have contravened the relevant licensing laws. 

What can the insurance industry do?

In light of the increasing activity of regulators in the region and anti-harbouring legislation, it is becoming increasingly difficult for unlicensed activities to continue.  Unlicensed insurance market participants would be well advised to obtain the necessary licences from the regulator in the jurisdiction in which they are carrying on business activities.  In jurisdictions in which it is currently difficult to obtain such licences, (such as the UAE which currently has in place a moratorium on all new insurance licences and Saudi where the regulator is encouraging consolidation / acquisition of existing licensees), any existing arrangements ought to be restructured to ensure that all activities which are required under the relevant regulations to be undertaken by a licensed entity are, in fact, undertaken by a licensed entity.  There are various means to comply with laws and regulations in the relevant GCC country and market players should assess the most suitable means for their business.

Should you have any questions in relation to this update or the legal issues it covers, please contact Peter Hodgins.


1 Unlike the restrictions on insurance business from the DIFC, an authorised insurer in the Qatar Financial Centre (QFC) is permitted to act in relation to a contract of insurance where the contract is in relation to a risk situated "on-shore", i.e. in Qatar but outside the QFC.

2 The other free zones do not have enabling legislation that would permit them to allow the establishment of insurers, reinsurers or insurance intermediaries and do not have regulatory regimes designed to cater for such operations.

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.