New UAE broker regulation become law 1
In May 2012, the UAE Insurance Authority (the Authority), produced proposals for the revision of the 2006 Insurance Broking Regulations (the 2006 Regulations). A number of commentators had previously remarked that this area of law, and the law on the distribution of insurance products generally, was in sore need of revision to reflect developments in areas like on-line marketing, bancassurance and changing retail distribution patterns. There was some disappointment that the draft did not tackle most of these areas. Following consultation over the draft, in October of last year the Authority issued the revised regulations (the Regulations) in their final form and they are now law. What changes have been made from the earlier draft, and how far will the Regulations change the insurance and reinsurance landscape here?
No dramatic surprises
The short answer to that question is that the revised text does bear evidence of lobbying by industry interests (most likely established ones), and detail has changed, but its overall scope and approach are mainly unchanged. The changes to the 2006 Regulations come mainly in tougher entry requirements which make life difficult for the mass of smaller UAE brokers.
Separation of functions
In line with the ‘no surprises’ theme, the Regulations do not contemplate crossover between financial intermediaries (for instance IFAs) and insurance brokers, nor do they provide for any widening of the existing regime which limits insurance distribution to licensed brokers and banks under the separate bancassurance regulations. Anyone hoping to see widening of distribution channels, for instance under an ‘appointed representative’ type framework, will be disappointed.
As with the 2012 draft, the Regulations permit brokers to conduct both life assurance and insurance related fund business and general insurance business, provided that a ‘complete separation’ is maintained, with no overlap of accounting, records or employees working on the two types of insurance. So no doubling up of jobs is permitted.
A broker cannot carry on business as an insurance agent, adviser, expert, actuary specialising in loss adjustment –neither can a broker act as agent or partner of another broker.
Insurance brokers can also undertake reinsurance broking, provided that the same broker cannot act as both an insurance and reinsurance broker for the same transaction and the same customer (a provision in the 2006 Regulations, although one which may not currently always be faithfully observed). For any person to deal in respect of insurance with a non-licensed broker is prohibited.
An applicant for a broking licence will have to submit, in addition to the existing requirements as to evidence of good character of management, a description of its ‘technical systems’ and ‘work procedures’ and a plan for the training and employment of UAE nationals in the business. In practice, then, these provisions amount to pre-approval of these aspects, which is new. As at present, licensing is on an annually renewable basis. The Authority is under an obligation to determine applications within 20 working days of submission.
As in the 2012 draft, entry requirements rise, although less steeply than previously proposed. The current requirement for a minimum paid up share capital of AED 1 million is increased to AED 3 million for UAE companies (previous proposal – AED 5 million) and AED 10 million for foreign incorporated entrants, the same as previously proposed. Paid up share capital of course is not the same as solvency, so it is difficult to see these new requirements as anything other than an incentive to get the smaller players out of the market and discourage foreign entrants.
Unlike the 2012 draft, the Regulations make provision for brokers incorporated in UAE financial free zones to branch onshore in the same way as those from foreign territories, at the same cost. How significant this will actually be is questionable. It appears the only eligible free zones will be those established under Federal Law number 8 of 2004 – in other words, the DIFC. Other free zones are not mentioned. It is difficult to see many existing free zone brokers taking this opportunity up, given its high cost.
As at present, unconditional on demand bank guarantees will be required, but the amount goes up to AED 3 million per company and AED 1 million for each regional branch (AED 5 million and AED 3 million for foreign companies). Because of this, it is suggested that the long running prohibition on brokers opening new branches will be lifted. An applicant for a new branch will have to show minimum premium income for the relevant applicant in the last fiscal year of AED 3 million (up from AED 1 million in the 2012 draft). These guarantees would be drawn down in whole or part by the Authority to assist clients if a broker ran into financial trouble. Finally, a broker will be required to maintain a AED 2 million PI policy (AED 3 million for a foreign branch), comparing with AED 1.5 million now.
Administration and people
The Regulations introduce a new concept of notification by the broker to the Authority of the internal administrative by-laws and procedures of the broker, covering documentation, organisational structure, correspondence registration, record keeping, complaints, internal records. Again, in practice this is likely to amount to approval by the authority of these aspects – or, at least, regulatory action if they are not satisfactory. There is a new provision creating a ‘technical cadre’ of management comprising a CEO, an Operations Manager and a ‘competent employee’ for each section of the business or branch. The broker is under an obligation to keep the Authority informed of vacancies arising and filled in these categories.
Insurance broker account
There are no big changes here, although more detail. As at present a broker must maintain an independent account, with no personal business interest in the account’s funds which by implication belong to the customers. As currently, the Authority will require an annual audit of the account. The use of these accounts will be further restricted by the new requirements as to premium and indemnity payments. Where a broker does receive premium, he cannot deduct commission due to him from the insurer before forwarding it – it must be paid to the insurer without deduction. Interestingly a provision in the 2012 Draft Regulations requiring insurers to pay commission to brokers within seven days of receiving premium is not included in the final version.
Agreements with insurers
As in the earlier draft Regulations, there is a requirement that the broker enters into a formal legal agreement with the insurer setting out its terms of business; there must be a minimum of two – brokers cannot be sole agents of one insurer. A new requirement is that the agreement be in Arabic, signed by both parties and notarised and covering terms under several specified headings like duration, types of insurance, premium collection (where permitted) commission, etc. The agreement must prohibit brokers from issuing or amending policies.
Premiums and claims payments
There are changes here in so far as the 2012 Draft Regulations prohibited payments of premiums via brokers, requiring them to be made direct to insurers (with an exception for motor cover). The final Regulations permit premium payments to brokers, provided that they have to be deposited in its broker account. Exceptions are made for life assurance, group health, insurance against risks of carriage by sea and air, hull insurance and petroleum insurances, where premiums are to be paid direct to the insurer. The prohibition on claims payments (‘due indemnities’) to beneficiaries via brokers which was introduced into the 2012 draft is repeated in the final version. The question of when risk in collected premiums passes is not addressed in the Regulations and by implication is left for agreement between the insurer and the broker to be addressed in the broker’s terms of business.
The Regulations mark a departure in that they incorporate the first comprehensive attempt to address and to some extent codify the duties of brokers towards their clients, building on the 2012 draft. Before acting, a broker will be required to obtain a signed authorisation from the customer, setting out its powers and responsibilities vis a vis that customer. A broker must give technical advice to customers, explaining products and sending documents to them without delay. It must not charge for negotiating on their behalf and expressly represent the customer’s interests, its advice not being dictated by amount of commission. It must inform the customer of impending renewal.
Perhaps anticipating a wave of reorganisations, the Regulations prescribe a procedure for merging brokers with the consent of the Insurance Authority and other consents required under the Commercial Companies Law. Each ‘interested party’ would have the right to object within three months of the proposal. Detailed procedure is awaited. In contrast, the transfer of a brokerage business to another broker can be accomplished only with the consent of the Authority but its customers and ‘beneficiaries’ including insurers with whom it has agreements.
Inspection and penalties
The Insurance Authority has the right, to inspect without notice any broker and its records, to check compliance with the Regulations and general legislation. Insurers, customers and other brokers can all complain about a broker to the Authority which can suspend or remove licences without prejudice to civil or criminal penalties.