A few truisms about the insurance market in the United Arab Emirates:
- The regulation of the insurance sector in the United Arab Emirates is under-developed.
- The Insurance Authority needs greater powers to regulate the insurance market and to enforce its regulations.
- Federal Law No. 6 of 2007 (the Insurance Law) and the regulations issued by the Insurance Authority need to be the subject of wholesale overhaul.
Ok, so the last of these points is not actually a truism. There are legitimate arguments over the extent of the revisions required to the Insurance Law and regulations. In a series of articles over the next months, we will explore the issues in the Insurance Law and regulations in the UAE and areas for development.
Those favouring an evolutionary approach will point to the fact that the Insurance Law is less than seven years old and together with the regulations issued by the Insurance Authority, many of the core issues facing the market have been addressed (eg licensing, minimum capital requirements and conduct of business for insurers and reinsurers, intermediaries and insurance sector service providers).
Evolutionists will also point to studies conducted in the region which demonstrate that regulatory clarity and stability are a key concern for insurance sector entities. Too many changes in a short period are detrimental to the industry. An incremental approach to regulation is therefore more readily absorbed. Such an approach has historically been used in the Kingdom of Saudi Arabia and Oman.
Those favouring a more revolutionary overhaul of the regulations observe that there are significant aspects of the insurance sector for which there is little or no regulation and that the Insurance Law and regulations are insufficiently developed or detailed to address key concerns of the market. More generally, there are material inconsistencies in the way in which insurance is regulated compared to other financial services (a particular concern where the life insurance industry crosses over into savings and investment business). The revolutionists argue that the UAE is falling behind the more developed regulatory regimes of Bahrain, the Dubai International Financial Centre and, shortly, Qatar which have established, or are in the process of establishing rulebooks for the insurance sector.
Distribution is an area which we will explore in more detail in the forthcoming months. However, it is apparent that this is an area in which the laws and regulations have not kept pace with market developments. Many of the issues in this regard stem from the erroneous assumption that insurance transactions take place on a face-to-face basis. Thus, for example, Article 28 of the Insurance Law requires exclusion clauses to be initialled by the insured. This raises material issues in relation to telemarketing and the online sale of insurance products. There are also difficulties in complying with other aspects of the regulations. For example, Insurance Authority Board of Directors Resolution No. 3 of 2009 (the Code of Conduct) prohibits an insurer’s staff from completing an application form on behalf of an applicant and therefore creates a further technical issue for telemarketing. There are other questions arising in the context of direct sales such as whether insurers can use customer data to cold call or email potential customers, how often such communications may take place and the right of the potential customer to request that the insurer cease to contact him / her. These types of issues will only be resolved with specific regulation.
Price comparison websites and the white labelling of insurance products are other areas which are simply not addressed in the regulations. It is unclear whether comparison websites will be considered to be undertaking insurance broking activities or, alternatively, if they are merely an IT solution for insurers. The concept of issuing insurance products branded under the name of the distributor (so called “white-labelling”) is simply not addressed in the legislation.
In contrast, there is a greater volume of material relating to marketing of insurance products via banks and intermediation by insurance brokers, including the recently issued Board of Directors Resolutions No.15 and No. 58 of 2013 in respect of insurance brokers and the recent draft resolutions in respect of bancassurance. Sadly, there remain aspects of these regulations which give rise to further questions and concerns. For example, the limits for insurance brokers’ professional indemnity insurance (AED 2 million for a locally incorporated broker and AED3m for a branch of a foreign broker) is widely considered to be too low. Furthermore, the regulations provide that the policy should be in favour of the chairman of the Insurance Authority which potentially raises questions as to the loss that is indemnifiable.
Prudential regulation is also currently lacking with relatively limited requirements in the Insurance Law on minimum capital and reserving. This area is under consideration and the Draft Combined Regulations are expected to materially change this aspect of the law once enacted so as to provide for a risk-based capital model. Unlike under the Solvency II framework in Europe, there is no scope for insurers to develop their own capital model. The investment restrictions on insurers are also potentially problematic, in that they restrict the amount of investments that can be made outside of the UAE.
At a more general level, there is a lack of harmony between the requirements for insurance and other financial products. There are currently three different regulators addressing different financial services and financial products: the Emirates Securities & Commodities Authority (the SCA) with primary responsibility for funds products, the Insurance Authority, with primary responsibility for insurance products and the Central Bank, with responsibility for other financial products and services. Whether such a structure is necessary or suitable is a question that we will explore further in future articles. However, from the perspective of the insurance market, the discrepancies between the three regimes create scope for regulatory arbitrage. When, for example, does a life insurance policy cease to be an insurance product and start to be an investment product? Unit-linked products can be written with or without an insurance wrapper.
Finally, the Insurance Authority must have teeth in order to regulate and supervise the sector. In this regard, the Insurance Authority should have the power to issue regulations that are recognised and enforced by the courts and have the power to impose sanctions directly on those industry players which flout the regulations. These powers must include the ability to sanction, or cause to be sanctioned, entities established in the Free Zones which seek to conduct business in the wider UAE without the requisite licences.
The Insurance Authority remains in its infancy as a financial services regulator and there is clearly some way to go before the insurance regulations of the UAE are fully developed. However, even at this early stage in its development, the Insurance Authority faces some tough decisions. Is it appropriate to continue down the current path of the incremental and evolutionary development of regulations? Alternatively, should it take the revolutionary road, seek broader powers to issue and enforce regulations and tear up the existing regulations?