Released on 9 November 2015, Consultation Paper No. 103 – Proposals Relating to the Insurance Regime (CP 103) represents the first comprehensive review of the DIFC's insurance regime since 2003. CP 103 proposes amendments and seeks comments for regulations dealing with 'Insurance Business', 'Insurance Intermediation' and 'Insurance Management'.
The proposed changes represent a clarification of certain key concepts, an alignment with a risk-based approach to regulation and an attempt to address certain regulatory gaps that have arisen in the DFSA's insurance regime. In addition, the introduction this year of the EU's new Insurance Distribution Directive has led the DFSA to consider as part of its review what areas may need to be updated to maintain alignment with the UK/EU regime. Comments on CP103 are invited by the DFSA until 11 February 2016.
The ambit of CP103 is fairly broad, and provides a useful overview and explanation of the DFSA's regulatory approach with respect to insurance activities in the DIFC. The proposals will be of special interest to the following categories of insurance businesses already established in or looking to enter the DIFC:
- DIFC Insurers: the proposals expand on the scope of activities that an Insurer in the DIFC can provide e.g. giving advice to other Group companies;
- Insurance Intermediaries: CP103 advocates new definitions and duties applying to Insurance Brokers and Insurance Agents; and
- Insurance Managers: a more detailed definition of Insurance Management is proposed setting out what this category of Financial Services covers, and how it is to be conducted.
Authorised Firms operating in these categories would be well-advised to consider the proposals set out in CP103 carefully.
Authorisations for Insurance Business
'Insurance Business' includes separate authorisations for 'Effecting Contracts of Insurance' and 'Carrying Out Contracts of Insurance'. With the exception of the UK, other jurisdictions have not delineated between the two activities. The DFSA clarifies that its intent is to allow for an insurer to go into 'run-off' at which point the 'Effecting Contracts of Insurance' authorisation is removed from the Insurer's licence. Whilst comment is sought on the separation of these activities no changes are being proposed by the DFSA.
Provision of advice by Insurers
Whilst generally considered to be within the scope of an Insurer's authorised activities, in fact, the provision of advice is not strictly included an Insurer's authorisation or as part of the list of ancillary activities that can be carried out. The DFSA proposes either to (i) authorise Insurers to advise on their own products, (ii) authorise Insurer's to advise on their own products and those of their Group members or (iii) authorise Insurer's to advise in a 'standalone' manner pursuant to them holding a separate intermediation authorisation. In seeking to ensure flexibility and create certainty, the DFSA proposes option (ii) with the DFSA then assessing whether the insurer has the requisite skills, experience and resources to provide advice.
Gaps in the regulation of Insurance Intermediation activities
CP 103 addresses a number of new concepts and perimeter issues with respect to activities of Insurance Intermediaries, the key items are as follows.
- Web-based distribution through aggregator sites. Despite its main focus as a wholesale financial market, the DFSA recognises that it permits retail activities. The DFSA proposes to introduce the concept of an 'Insurance Aggregation Site' given the growing trend in the sale of insurance products through aggregator/comparator websites.
- Exclusion for professionals. Currently, the DFSA allows for professionals to conduct arranging activities provided they are not separately remunerated. To align with the more restrictive treatment of the EU's Insurance Distribution Directive, the DFSA proposes to restrict professionals from performing any activities that could amount to assisting in the conclusion of placing insurance contracts.
- Exclusion for intermediation related to Long Term Insurance. Firms authorised to advise and arrange in respect of financial, investment and credit products are allowed to act in respect of Long Term Insurance products without also needing an Insurance Intermediation licence. Whilst this exemption will remain in place, the Financial Service of 'Arranging credit or deals in Investments' does not encompass Long Term Insurance so there is arguably a regulatory lacuna with respect to the application of Conduct Of Business requirements to Long Term Insurance. The DFSA proposes to explicitly include reference to Long Term Insurance products within the scope of 'Arranging credit or deals in Investments'.
- Exclusion for the ancillary activity of Insurance Intermediation. To align with the EU's Insurance Distribution Directive, the DFSA proposes to introduce an exclusion to allow non-financial services professionals the ability to distribute insurance provided it is complementary to their core business (e.g. travel agencies supplying travel insurance).
- Exclusion of activities carried on by insurance managers. To avoid firms that are largely focussed on insurance management from applying for the intermediation authorisation simply because they engage in minor, ancillary intermediation the DFSA proposes to carve out such activities where they are undertaken by an authorised Insurance Manager.
- Exclusion for management of claims, loss adjusting and claims assessment. Whilst not strictly caught under the current definition of insurance intermediation, the DFSA proposes to carve outs for claims management and loss adjusting-related service providers.
Clarity around the different roles of Insurance Intermediaries
Currently, Insurance Intermediaries are authorised to act on behalf of Insurers and Policyholders, however, there is no separate treatment of the two roles. The DFSA proposes the introduction of definitions of 'Insurance Agent' (when acting on behalf of Insurers) and 'Insurance Broker' (when acting on behalf of Policyholders). Specifically, the DFSA proposes additional guidance around how an intermediary goes about evidencing its independence when acting as an Insurance Broker.
Application of Conduct of Business Module (COB)
Where an Insurance Intermediary acts on the placement of reinsurance it is proposed that the ceding insurer be deemed a 'Market Counterparty' thereby exempting the intermediary from the COB's client classification regime.
Currently, intermediaries are required to manage conflicts of interest including disclosing the same to their clients. The DFSA takes the view that a 10% or more holding in the intermediary by the Insurer or vice versa amounts to a material conflict of interest and proposes that such ownership links be disclosed by the intermediary.
Whilst not proposing a prohibition on an intermediary acting for both reinsurer and insurer, the DFSA does believe that such a situation can give rise to a 'difficult to manage' conflict of interest. The DFSA proposes guidance as to how an intermediary goes about managing the situation including disclosure to the parties and agreement to decline to act should a party express concern over the conflict.
Capital requirements are currently expenditure based with intermediaries being required to have the greater of either USD 10,000 or 6 or 18 weeks of annual audited expenditure (depending on whether they handle Insurance Monies or not). Concerns have been raised as expenditure includes expenses arising from the management of other group entities in the region, not just expenses arising from intermediation activities of the DIFC entity. The DFSA proposes that (i) a 'percentage of volume of insurance business' be used instead of an expenditure based calculation (in the UK it is the higher of GBP 5,000 and 2.5% of annual income/GBP 10,000 and 5% of annual income, depending on whether intermediary handles insurance monies), (ii) reduce the 18 week period for expenditure calculation to a shorter period or (iii) make no change. The DFSA considers option (i) as untenable as it will result in the separating out of insurance intermediaries from the wider Category 4 prudential regime and instead suggests that option (ii) be put in place, with a reduction in the expenditure period to nine weeks.
No proposed restriction on authorisation for Insurance Management
Whilst there had been speculation that the DFSA may be considering re-aligning its treatment of insurance managers so as to encourage international firms to set up in the DIFC as fully authorised risk carriers, CP 103 makes clear this is not on the cards at the moment. Indeed, the DFSA has stated it is not exploring options to install a moratorium on the granting of new insurance manager licenses, nor will it require insurance managers to migrate over to risk carrier status or otherwise restrict their ability to underwrite on behalf of their Group members.
Gaps between regulation of Insurance Managers and non-DIFC insurers
Instead, the main area of change for Insurance Managers arises from the differing regulatory treatment between Insurance Managers and branches of non-DIFC insurers in light of both having relatively similar business writing capabilities. The DFSA's concern is that without comparative due diligence and reporting obligations being applied to non-DIFC insurers acting through Insurance Managers, these insurers can effectively write business in the DIFC market without the degree of supervision that would apply if they registered as DIFC branches. The DFSA is proposing that Insurance Managers, at application stage, provide comprehensive information around the non-DIFC insurers they will be working with and submit periodic declarations around their fitness and propriety. The DFSA also proposes to align the reporting requirements of Insurance Managers with those that apply to branches so as to capture data on premium, reinsurance, reserving, underwriting performance, claims and geographic location of risk on a quarterly basis.
Clarification of activities of Insurance Manager
'Insurance Management' is currently defined to encompass activities of underwriting and administration as agent for an insurer. The DFSA notes that these terms have caused some confusion, particularly for EU and Asian market participants who are not used to these activities being carried on by an agent of the insurer. The DFSA proposes to define 'underwriting' and 'administration' in a non-exhaustive manner as well as include the term 'agent' to clarify the role of Insurance Manager.
The DFSA also confirms that third party administrators in or from the DIFC will fall within the Insurance Management authorisation. However, the DFSA proposes to carve out certain specialist service providers such as risk consultants, actuaries and loss adjustors as the DFSA views them as more appropriately regulated outside of a financial services regime.
Application of Conduct of Business
Essentially, the DFSA proposes to introduce the same changes to the COB requirements that are to apply to Insurance Intermediaries to Insurance Managers. Insurance Managers will be exempt from client classification requirements where clients are reinsurers (ie they will be deemed Market Counterparties). Furthermore, Insurance Managers will be required to disclose and manage conflicts of interest where 10% or more of the Insurance Manager is held by the Insurer they are acting for.
The DFSA does not propose to make any changes to reduce the capital requirements for Insurance Managers based on the view that the business model of Insurance Managers, particularly around the processing of insurance monies, is more complicated than that of Insurance Intermediaries.
Currently, insurance monies must be held in an eligible UAE bank account. The DFSA proposes to expand the eligibility requirements to include a DFSA authorised bank, a UAE Central Bank authorised bank or a bank outside of the UAE with at least an AA- rating (providing certain disclosure requirements are met).
Transition and deadline for submissions
The DFSA is seeking submissions regarding which of the proposed changes will require transitional arrangements to be put in place for affected parties and how long a transition period is needed. The due date for submissions has been extended to 11 February 2016.