Just days after the Insurance Authority (IA) was combined with the Securities and Commodities Authority (SCA), the government has decided to merge the IA with the Central Bank of the UAE and transfer all operational and executive powers to it.
The objective is to bring efficiency and competitiveness in the financial markets and the economy at large.
While the market is yet to fathom the rationale behind the surprise move; the industry has more or less welcomed it, saying there will be more transparency in policies that will help the fragmented industry consolidate.
The argument being that, with predominately small companies competing against each other, the industry needs more M&A to help create stronger companies.
Global practice
Bringing the insurance regulator under the central bank is in line with a global practice.
“There is a trend during the past few years in most of the developed markets where the implementation of consolidated financial services regulation is taking place primarily in banking and insurance and often securities within several countries,” said Aftab Hasan, secretary general, Insurance Business Group, and chairman, Risk Exchange DIFC.
“We often observe that similar insurance products and services are offered by the banking sector in the name of bancassurance or insurance bonds through the security market in the same market space whereby these institutions in one sector create systemic risk exposure for another sector.
“All these institutions in competing sectors have similar strategies for growth and development in the market which is combining in ways that make it difficult to distinguish between a bank and an insurance company.
“All these institutions coming under one regulation will have a candid clear legislation for the functionalities of offering their individual products and services in order not to stand on each other toes, which are counterproductive and also against the notion of this exercise of bringing all financial sectors under one roof,” said Hasan.
“The issue is how integrated this financial service fits into this evolution and we have to wait and watch whether it poses unacceptable risks to consumers and the financial system,” he added.
Solvency requirements
Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, said: “A consolidated regulator, if properly implemented, could mean streamlining of the processes and supervision of the financial services sector. The Central Bank being the centralised regulator could also ease the regulatory burden on the sector and therefore make it more attractive for new players to enter the market.
“While we can expect the Central Bank to be more stringent with the solvency requirements and therefore add pressure on the insurers who are currently not fulfilling the requirements, it could lead to consolidation in the overcrowded insurance space and therefore a positive outcome for the UAE insurance sector, he said.
Echoing that view, Muhamood Ahammed, executive director, Al Manarah Insurance Services Co., said the UAE’s insurance market “will now be more regulated with more transparency and higher levels of reporting standards and corporate governance”.
Level-playing field
Sajith Marakar, managing director, Consolidated Services Bureau, surveyors based in Abu Dhabi, UAE, says these administrative changes may bring more changes in policies.
“If we want to develop the sector, a level-playing field should be made available for healthy competition. Insurance intermediaries like insurance brokers should be supported and licensing requirements be made liberal. Let us hope this consolidation will lead to framing of such policies.”
The market will determine whether financial regulatory integration makes good business sense and if so, the optimum operational structure is achieved or not as one size does not fit for all.
Hasan added: “We have to wait and watch whether this integration or merger under the Central Bank will lead to economies of scale or scope or greater efficiencies.
“These are some questions which cannot be answered with certainty at this time. We are observing that the financial volatility has migrated to the insurance market where investments and capital reserves have been eroded.
“Hopefully coming under tougher regulation, the Central Bank will compel insurance companies to review and restructure their businesses and ultimately undergo mergers and acquisitions if they fail to pass through the litmus test under the new financial solvency law,” Hasan said.
