United Arab Emirates: Life insurance in the UAE – Paving the way for a level playing field

Last Updated: 21 August 2017
Article by Kennedys


Further to our article, " United Arab Emirates moves closer to insurance safety net", published in March 2017, Kennedys' Corporate Insurance team looks at the requirements under the new draft life insurance regulations in the United Arab Emirates (UAE).

The UAE Insurance Authority (IA) carried out extensive research into life insurance practices and products that are currently offered in the UAE and were surprised to discover the excessive commissions and upfront fees being charged to customers. There were also a signficant number of complaints from customers that they are provided with no value if they cancel the policy in the early years.

With the aim of creating a level playing field for life insurers, as well as effectively regulating the market, the IA issued Circular No. 33 of 2016 as the first draft of the Regulations for Life Insurance and Family Takaful Business on 14 November 2016 (First Draft).  A second draft, Circular No. 12 of 2017, was issued on 25 April 2017 (Second Draft) and the IA requested comments from stakeholders on the Second Draft.

Capping commission

Payments to intermediaries is a major concern, and as the first major change, these regulations aim to provide a cap on the fees that can be paid to intermediaries for solicitation of clients and the distribution of the products.

For pure term policies, which have no savings component, the maximum annual commission has been capped at 10% of the annual premium, with an overall cap of 160% of the annual premium over the life of the policy.

For single premium policies, the maximum commission for such policies has been capped at 10% of the total premium.

For policies with a savings component, the Second Draft suggests a unique formula.  The insurance component has the same cap as a pure term policy and the savings component has an annual cap of 4% of the annual premium with an overall cap of 90% of the annual premium.

Intermediary payouts

These regulations also recognise the concept of "Indemnity Commission" and "Initial Access Fee" that are commonplace in the life insurance market.  Indemnity Commission is an advance payment of commission to an intermediary based on the future value of the policy, whereas Initial Access Fee is an up-front payment made by insurer to the intermediary towards their cost of training, infrastructure etc. to start the relationship.

The IA noted that these payments are common in the UAE market, especially for bancassurance arrangements, as an incentive to start a new relationship, with or without any policy being sold.  While the First Draft recommended a blanket ban on all Indemnity Commissions, the IA revised the position after receiving comments from the stakeholders on the First Draft.

The Second Draft recognises the Indemnity Commission and provides that an insurer may pay an Indemnity Commission, but the upfront payment must be limited to 50% of the annual premium (irrespective of the premium frequency, the calculation must be on an annual basis) and the remainder of the commission must be spread out through the life of the policy.

Both the Indemnity Commission and the Initial Access Fee are not allowed to be financed from the policyholder's account.

With respect to the Initial Access Fee, the Second Draft states that such payments may be necessary to start the initial relationship, but they must be offset against the future receivables from the intermediary. While such payments are not prohibited per se, they must be borne by the insurer and not be charged to the policyholder, directly or indirectly.

The commission gap

The Second Draft also recognises that there may be other associated costs in relation to the distribution of products, such as payment to financial advisors for advice and management, but all these payments fall within the definition of "Commission/Total Commission" and must be within the overall commission cap.

This is a very good initiative, which may reduce insurers' expenses and stabilise the market in the long term. If the Second Draft is finalised and implemented, it will bring transparency to the market and create a level playing field, such that insurers can compete against each other based on the quality of their products and policy servicing, rather than on the basis of how deep the coffers of the insurer are.

Mandatory free-look period

The "free-look period" is the period from the issuance of the policy within which a policy may be surrendered for a refund of the premium. While it is an international practice and many insurers in the UAE already provide a free-look period to their customers, which ranges between 15 and 30 days, it is currently not a mandatory requirement.

The First Draft had proposed this period to be 20 days but the Second Draft has revised this period to a minimum of 30 days.  What this means is that a customer is entitled, within the first 30 days of the policy, to return the policy to the insurer and request a refund. The customer is not required to provide a reason for such a request, and depending on the type of the policy, the insurer must refund the entire premium, subject to deductions for the costs of medical tests in the case of medical underwriting or adjusting the premium against the net value, in the case of a savings product.

This move will reinstate the confidence of the insureds in the life insurance market, as the intermediaries/insurers will be forced to increase transparency and declare all the terms of the policy at the time of sale.

Increased disclosures and policyholder protection

The Second Draft provides a list of details that must be stated as a minimum in the illustrations that are generated by the insurance companies. The insurance companies are now required to obtain signatures on all the documents that are presented to the policyholders by the insurance companies to complete the sale. This must include a declaration from the customer that he/she understands that the non-guaranteed elements of the policy are subject to change depending on market conditions and a similar undertaking from the intermediary/insurer that he/she has explained these risks to the customer, including all charges and fund management fees.

To ensure that the insurers adhere to these requirements, increased responsibility has been placed on the insurers' Appointed Actuary, who will be required to certify profit illustrations and ensure that the savings products achieve profitability.

The way forward

Industry experts have mixed opinions on what the long-term impacts of these regulations are going to be on the life insurance market. Whilst some are of the view that this will act as a dampener for the already slow market and further reduce sales, the larger market feedback is positive and there is an expectation that that this will boost customers' confidence in the market.

It is expected that this will increase competition in the market and force insurers to bring new innovative products across all price bands, which will then reduce the over-reliance of the customers on offshore life insurance products, which is currently propelled by a shortage of good quality onshore life insurance solutions.

For insurers who rely heavily on their broker distribution networks to sell their products, these regulations should serve as a wake-up call as the broking community is unlikely to welcome the commission caps.  Insurers must consider how they will restructure their distribution channels if the broker network is not ready to work within the revised commission caps.

The good news

While the regulations are still in draft form, this is a good opportunity for insurance companies to consider aligning their operations and practices with the life regulations.

The good news is that while some of the provisions will become effective from the date of finalisation of the life regulations, such as the regulation of the commission structure and the Initial Access Fee, some provisions will only come into effect after one year from date of publication.  The remainder of the provisions will be effective after two years from the date of publication in the official gazette, once finalised.

A version of this article was first published in the June 2017 issue of the Middle East Insurance Review.

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.

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