Lower margins will drive some advisers and distribution channels out of the UAE life insurance market when the BOD49 regulations come into force on 16 October 2020.
Industry watchers have warned that the rules may lead to shortage of distribution channel support.
Many firms have already taken action by changing their structure and turning online to cut cost and stay afloat.
“This could also mean increase in direct sales and opportunity for players with long-term vision to enter the market,” said Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates.
BOD49
The Insurance Authority Decision No. 49/2019 on the Life Insurance Regulations issued by the UAE Insurance Authority has had an especially long gestation periods.
The first draft was issued in November 2016 and after multiple rounds of revisions and delays the regulations are finally coming into effect on 16 October 2020.
The UAE insurance industry, already reeling from the declining market size and increased reinsurance rates, was expecting the regulator to grant another extention.
But the authority recently issued an alert to stakeholders confirming that insurers, distribution channels and other stakeholders must adjust their position by the middle of October.
The regulations cover insurance companies incorporated in the UAE and foreign branches of insurance companies licensed to carry out insurance operations either through a branch or an insurance agent.
They also include companies engaged in the operations of Takaful (Islamic insurance), reinsurance and bancassurance.
Revolutionary rules
The regulations are revolutionary to a large extent, as they address the most important issues relating to mis-selling; including overall commission payouts, upfront payments to agents/brokers by insurers, fees and charges associated with investment products, the free-look period and mandatory benefit illustrations.
“They will certainly redefine the industry in a positive manner,” Singh said.
The regulator has set a cap on commissions for lump sum investments and fixed-term contractual plans and issued guidelines on selling insurance and investment products to safeguard the interest of customers.
The measures include a cap of 4.5% on the sale of lump sum portfolio bonds or offshore bonds by advisers from financial companies.
This is in place of commission up to 10% paid by some insurers to the advisers on the sale of their products.
Mis-selling set to end
“Customers have always complained of mis-selling. As there are now limits on commissions and the manner it is paid out, mis-selling of life insurance will reduce by a large extent,” said DJ Sengupta, co-founder and managing partner of Capstone Insurance and Bankonus.
The new rules say that no indemnity commission — a sum paid upfront to advisers on the full value of an insurance policy — is allowed for regular premium policies and the commissions paid should be based on the annualised premium collected.
First year commissions must be capped at 50% of the annualised premium or 50% of the total commissions payable under the product, whichever is lower.
The remaining commissions must be paid out linearly over the remaining premium payment term of the policy.
The first year commission is subject to commission claw-back during the first five years of the policy, at a minimum.
If the fees are fully disclosed separately from all other charges and the customer is fully aware of the fees and services at policy inception, then the fees are not part of total commissions.
Advisers to come clean
Sales advisers are required to come clean as they should provide customers with a detailed schedule of fees and commissions for the entirety of a policy’s life cycle and customers have the option to cancel a policy within 30 days.
The regulations stipulate that the fees paid to an investment adviser for providing investment related advice will be considered part of the total commission if the fees are not fully disclosed separately from all other charges or if the customer is not fully aware of the fees and services at policy inception.
“The free-look period will provide a respite to a policyholder who was wrongly sold a policy or who purchased it by mistake. The transparency in charges and costs will increase the policyholder confidence in the market,” Singh said.
