COVID-19's disruption has had a wide-ranging influence on the global economy, and the overall economic slowdown and market turbulence has hurt the insurance sector as well, although the UAE insurance market appears to be resilient and is growing year on year. According to market projections, Loss Ratios are expected to remain positive, and overall comprehensive income for the first quarter of 2021 is expected to climb by 200 percent over the same time in 2020.
In the United Arab Emirates, insurance is largely governed by Federal Law No. 6 of 2007 on the Establishment of the Insurance Authority and the Regulation of Insurance Operations (the Insurance Law). The Insurance Law stipulates that an entity wishing to conduct insurance business in the UAE must be either a UAE public stock company with at least 51 percent of capital held by UAE or GCC nationals, or legal entities entirely controlled by UAE or GCC nationals; or a branch of a foreign insurer. There has been an embargo on the issue of new permits in the last few years, whether for a locally established company or a branch, but no official statements have been made.
The Insurance Law established the UAE Insurance Authority, which served as the federal insurance regulator for all of the UAE's emirates. The insurance regulator recently merged with the UAE Central Bank (the Authority), resulting in a consolidated regulator for businesses in the financial sector, including banks, financial institutions, and the insurance sector. There are currently 62 insurance companies that are registered and regulated, 35 of which are national and 27 of which are branches of international insurance companies. 17 companies (15 national and 2 foreign) are licenced to conduct all insurance activities (including life, property, and liability insurance); 32 companies (15 national and 17 foreign) are licenced to conduct only property and liability insurance; and 12 companies (3 national and 9 foreign) are licenced to conduct only life insurance. With a population of about 9 to 10 million people, there are far too many insurance businesses, and the Authority has often highlighted the necessity for market consolidation.
The UAE insurance industry, like the rest of the area, is dominated by the mandatory classes of insurance, such as vehicle and health, the latter of which is required in Dubai and Abu Dhabi and the former in the whole UAE. The Dubai Health Authority (DHA) and the Department of Health Abu Dhabi (DOH), respectively, oversee health insurance. Each Emirate has its own regulatory framework that every insurer and insurance intermediary must follow while dealing with health insurance in these Emirates. As a COVID relief measure, the insurance regulator directed insurers to grant discounts on vehicle insurance premiums to people working in key industries and who continued to serve the general public even while the lockdown was in effect. Despite the decreased premiums, the lockdown reduced the frequency of traffic accidents, boosting the profitability of the motor insurance book. Similarly, during the lockdown, only emergency cases were permitted to visit or be admitted to hospitals and clinics, with the exception of COVID-related situations, resulting in lesser utilisation of medical plans and greater overall profitability.
Brief Summary of important changes in Life Insurance Regulations
- With the adoption of the "New Life Insurance and Family Takaful Regulations", the life insurance industry in the United Arab Emirates is scheduled to undergo significant changes. The Insurance Authority of the United Arab Emirates (“IA”) issued Decision No. (49) of 2019 Concerning Instructions for Life Insurance and Family Takaful Insurance (the “Regulations”), which affects all market participants, including insurers/reinsurers, intermediaries, policyholders, and other related parties such as banks and actuaries.
The Regulations contain 22 articles that address issues such as commission caps for intermediaries selling life products, including investment-related products, expanded disclosure obligations for insurers, intermediaries, and other distribution channels like banks, as well as product filing obligations with the IA, cooling-off periods, and policy churning protection for potential policyholders.
- Another key law passed in the UAE insurance sector was the Insurance Authority Board of Directors Decision No. (18) of 2020 concerning the Electronic Insurance Regulations (Electronic Regulations). The Electronic Regulations went into effect in November 2020, requiring every insurer and insurance intermediary that conducts, or intends to conduct, any online insurance business to have a plan in place and to obtain prior approval from the Authority before conducting any electronic insurance business. The Electronic Regulations also ban any online or electronic transactions involving investment-linked life insurance, however plans that do not require individual underwriting can be marketed online.
- Insurance producers are recognised as a distinct kind of insurance intermediary under the Insurance Authority Board of Directors Decision No. (27) of 2020 Regarding Regulations for Licensing Insurance Producers (Producers Regulations). Under the Producers Regulations, insurance producers are not allowed to work in the interests of insurance brokers, agents, or other insurance professionals, nor are they allowed to delegate their responsibilities to another company. Only insurance businesses are permitted to employ licenced insurance producers for the purpose of soliciting and procuring insurance business.
- The UAE Central Bank issued the Consumer Protection Regulation and Consumer Protection Standards (collectively, Consumer Protection Guidance) in November 2020, which laid out the basic structure that a Licensed Financial Institution must follow (LFI). The Consumer Protection Guidance prescribes heightened disclosure requirements for insurance/takaful products supplied by an LFI (aimed at bancassurance business, especially credit life). Customer consent is now required when such plans are presented with other financial goods, and the consumer must be given a minimum of three insurance/takaful providers for any such insurance product.
- The UAE Central Bank issued a circular to LFIs offering structured traditional life insurance and takaful investment and savings products on June 13, 2021. The UAE Central Bank banned financial institutions from issuing savings and investment products, as well as non-capital guaranteed products, until the Central Bank approved a governance policy around their issuance. The circular now states that, subject to meeting the Central Bank's standards and receiving a no objection letter from the Central Bank, these institutions can begin offering such products.
Implications for “Bancassurance” in terms of distribution channel for Life Insurance product in UAE
In addition to the influence of technology electronic/digital platforms, such as insurance market aggregators, bancassurance is one of the fastest-growing insurance distribution channels in the Gulf Cooperation Countries (GCC). In some cases, the GCC and their respective financial regulators have enacted laws and regulations governing insurance distribution through banks, with the goal of ensuring consumer protection. However, the markets and laws do not appear to be totally matched in terms of providing insurance companies unfettered market access and distribution, as well as giving consumers more options.
Bancassurance is based on a mutually beneficial relationship between a bank and an insurance provider that offers insurance products or benefits to the bank's clients, hence creating an alternative distribution channel for insurers. Commissions on sold products are frequently split between banks and insurance providers in many jurisdictions, and the bank serves as the client's point of contact, despite the fact that certain regulators do not allow such agreements.
Bancassurance isn't a new form of insurance distribution; it stretches back to the nineteenth century. Bancassurance's expansion is mostly due to European and European legislation in the form of Directives that allow banks to provide cross-border services within the European Union.
In contrast to the GCC and Middle East markets, which are still finding their feet, the European model and markets for bancassurance are well-developed mature markets. Nonetheless, as recently as 2018, considerable inroads were made to provide the GCC markets with regulatory frameworks for bancassurance development.
Historically, bancassurance in the UAE was unregulated, and clients were only protected by a few consumers protection legislation. Although contractual arrangements were put in place for the most part, but sometimes to the cost of the consumer, there was little regulatory control of banks' and insurance providers' connections.
In September 2011, the IA released a circular outlining guidelines and guidance for insurance providers to follow while awaiting the outcome of a proposed draught resolution governing the marketing of insurance plans by banks. IA issued Decision No. (13) of 2018 on May 23rd, 2018, governing bancassurance in the UAE (the "Circular").
The Circular is broad in scope, limiting the bank's ability to act as a "insurance agency, insurance brokerage, insurance consultancy, or any other insurance-related profession," and these regulatory requirements must be spelled out in the contractual language of the bank-insurance provider agreement. As a result, banks are limited as a pure marketing vehicle.
To engage in bancassurance activities, insurance companies and banks must be approved by the IA and the UAE Central Bank, respectively. This responsibility is stated in Article 2 of the Circular, and permits are available for a one-year period with the option to renew.
No insurance company will be authorised to implement bancassurance without first receiving clearance from the IA, according to Article 2 of the new IA instructions.
All insurance providers intending to market insurance policies through banks must be established in the UAE and licenced to operate there, according to the Circular (whether through a branch, foreign branch or an insurance agent). This will prevent foreign unlicensed insurance companies from forming business relationships with UAE banks, as has previously occurred.
In a formal agreement between the bank and the insurance provider, certain contractual requirements must be in place. These include commission arrangements, such as calculations, collection procedures, and payment dates; written statements demonstrating that the bank is authorised to receive insurance premiums; and the bank's obligation to transfer all premiums to the insurance provider and provide detailed statements on a regular basis.
Subject to the approval of the UAE Central Bank, the IA will be able to inspect and audit banks in relation to their bancassurance arrangements in order to enforce compliance requirements.
Despite the Circular's recent enactment, the UAE's bancassurance business is well-developed. However, it will take time for the laws to take effect and for present attitudes to shift, as banks and insurance companies will be required to adhere to the Circular's severe constraints.
The preamble to the Regulations mentions and prescribes Board of Directors Decision No. (13) of 2018 Instructions Concerning Marketing Insurance Policies via Banks. Given the sweeping changes to the life insurance market brought about by the Regulations, particularly the provisions relating to commission caps, policyholder fees, multiple distribution channels, and disclosures, it is likely that insurance companies will need to overhaul their internal compliance and oversight processes, and may even consider offering alternative products to comply with the Regulations. As a result, life insurance companies will almost certainly change the way they distribute their products to the market. This viewpoint is presented in terms of how the Regulations' legal provisions would interact with the Circular.
Given the limited role of banks as pure marketing channels and the extensive provisions that insurance companies must implement, at likely high costs, under the Regulations and Circular, discussions on who bears these costs will need to be facilitated if banks are to be used as distribution channels. Insurance businesses will likely turn to technology to explore direct sales channels due to limits on commission caps, policyholder fees, and distribution networks.
Conclusion
In certain ways, the Regulations provide potential for new distribution channels through technology, and banks are well positioned to investigate these opportunities through FinTech projects while continuing to be a key source of life product distribution in the UAE.
Both banks and insurance companies should immediately begin to evaluate their current arrangements and look to make the necessary modifications to their internal compliance processes in order to comply with the Regulations' technical and legal requirements. Insurance companies should conduct audits of their existing distribution channels and assess all contractual arrangements in place, which may not comply with the legislation or the Circular, as a starting point.