On 14 November 2016, the UAE Insurance Authority (“the Authority”) issued Circular No. 33 of 2016 as the first draft of the Regulations for Life Insurance and Family Takaful Business (“the Life Regulations”), which came as a surprise to the loosely regulated life insurance and linked investment market. The first draft of the Life Insurance Regulations would have had a radical effect on the market if implemented, as it proposed commission caps, a ban on indemnity commission, mandatory free look, increased disclosures and policyholder protection. After inviting comments and feedback from stakeholders, the Authority then published a slightly watered-down version of the regulations, Circular No. 12 of 2017, published on 25 April 2017.
The Authority published the third draft of the Life Regulations on 31 January 2019 and while the basic premise remains the same, some provisions have been fine-tuned. Set out below are the key observations of the draft and the outlook for the life insurance sector in the wake of this development.
The Authority in its brief of the drafts has time and again mentioned that the irregularity in commissions and payments in the name of commissions on life insurance products is what led to the development of the proposed regulations. It is therefore not surprising that most of the discussions and proposed amendments to the Life Regulations are focused around the pay-outs to intermediaries. Notable amongst these in the latest draft are:
• Following the issuance of draft regulations on insurance producers (a new category of insurance intermediary recognised by the Authority), they have been included within the provisions of the draft i.e. payment to insurance producers is included within the overall cap on commission for intermediaries on a product;
• The commission cap for pure protection policies has been retained as those proposed in the earlier draft at 10% of the annual premium for each year over the term of policy, subject to a cap of 160% of the annualised premium, which for single premium policies must be limited to 10% of the premium;
• To calculate the maximum commission payable under savings product (i.e. a combination of insurance and savings component) a formula has been prescribed which takes into account the savings component vs the protection component, compliance of which is a responsibility of the pricing actuary of the Insurer. The current draft provides further clarity on how premium for riders, add-on coverage etc which are added subsequently are to be considered for the purpose of calculating the maximum commission caps;
• Further, the draft emphasises that the total commission caps apply to all insurance producers in aggregate, i.e. if there is more than one Insurance producer involved or if the producer changes during the period of policy, then the total commission caps specified shall apply as if there was only one insurance producer;
• In case of cancellation during the free look period, the insurance producers must return all commission back in full and if the cancellation is during the remainder part of the year, pro rated first year commission must be refunded back to the Insurer.
Indemnity commissions or advance commission on sales to intermediaries to be based on annualised premium only and if the mode of premium payment is such that the premium is not paid upfront, then such indemnity commission must not be financed from policyholder account. For this purpose, the first year commission has been capped at 50% of the annual premium or 50% of the total commission payable under the product, whichever is less, with the remaining commission paid out uniformly over the remaining premium paying term when such term is less than 20 years. The current draft proposes that if the premium payment term is over 20 years, the pricing actuary of the Insurer may propose a pay-out plan. Such plan should be proposed at the time of obtaining prior approval on the product.
Multiple Distribution Channel
The current draft states that if the Insurer is selling a policy through multiple distribution channels, then the total costs, including commissions, expenses etc should be allocated to the customer within such channel. Therefore, the policyholder should only bear the costs associated with their distribution channel and not be disadvantaged by sharing the costs of other distribution channels. In case the expenses are shared, the expense allocation should be performed by the pricing actuary.
Fees in Other Forms
The current draft allows payment of a fee to the insurance producer and/or investment advisor, provided that such fees are not set-off from the funds in the product, there is upfront disclosure to the customer and the fees do not exceed the overall commission cap stated above. Also, the draft also recognises that a separate fee may be charged to the customer by the advisor for the investment advice, but unless upfront disclosure is made to the customer about such fees at policy inception, such fees will be considered part of the overall commission and the cap shall apply.
Under the new draft, there are increased disclosure requirements which aim to enhance transparency in the sector, notable requirements include:
• The insurer and also the intermediary must not ask for confidential details such as passport, bank account, visa etc to produce the illustrations;
• The sale will be complete only once the customer has signed (physically or electronically) all the relevant documents and a copy is shared with customer;
• Free look period has been retained at 30 days, which commences on the the later date of policy issuance, date of commencement of coverage or the date when policy documents are signed;
• Only the insurance company has the right to contact the customer to determine the reason for cancellation of the policy, not the intermediary;
• All existing policyholders must be sent revised illustration tables either when requested or in the case of certain trigger events specified in the draft;
• When the policy is sold, the surrender charges and surrender value at the end of each policy year must be provided in a separate document from the overall pack, and should be in red colour, requesting the client to sign it separately;
• There are a number of other disclosure requirements that have been specified, with respect to the charges, passing of rebates back to customer and other relevant matters, which must be looked into in detail by the Insurers.
Insurance Producers and Investment Advisors
Insurance producers have been introduced as a new line of insurance intermediary under this draft of the regulation. The license of an insurance producer is limited to individuals (and not entities!) who fulfil the criteria prescribed under the regulations. However, to be able to sell investment products, such a person must be licensed and registered as an “Investment Advisor”. The licensing of an investment advisor falls within the purview of the Emirates Securities and Commodities Authority (ESCA). The Life Regulations go on to state that an investment advisor cannot sell a life insurance product unless they have obtained an “Insurance Producer” license from the Authority. Further, the commission caps prescribed in the Life Regulations apply to investment advisors as well.
The Authority has also taken a prudential approach to the enforcement of commission caps as it has directed insurers to initiate market conduct practices to determine commission abuse by insurance producers. These include, random audits of the insurance producers and detailed questionnaires signifying a shift in the Authority’s approach.In the coming months, we can expect to have the final Life Regulations implemented most likely with minor changes to the current draft, if any at all. While the current draft states that the industry can expect an alignment period of 1 to 2 years depending on the provision, given the rampant miss-selling and abuse in the life insurance market, it is highly recommended that the insurers start bringing the house to order.