The following article was originally published for BSA by IFC Review.
The disruption caused by COVID-19 has had a wide-ranging effect on the world economy and the overall economic slowdown and disruption in the market has impacted the insurance sector as well, but the UAE insurance market seems to have emerged resilient and is continuing to grow year on year. Market reports state that Loss Ratios continue to present a positive outlook and the total comprehensive income for the first quarter of 2021 shows an increase of 200 per cent for the corresponding period from the year 2020.
Insurance in the UAE is primarily regulated under Federal Law no. 6 of 2007 concerning the Establishment of the Insurance Authority and Regulation of Insurance Operations (the Insurance Law). The Insurance Law sets out the requirement for an entity to be able to carry out insurance business in UAE and sets out that such entity must be either a UAE public stock company, with at least 51 per cent of capital held by UAE or GCC Nationals, or legal entities fully controlled by UAE or GCC Nationals; or a branch of a foreign insurer. While no official announcements have been made, there has been a moratorium on the issuance of new licenses, whether for a locally incorporated company or a branch for the last few years.
The Insurance Law established the UAE Insurance Authority which was the Federal regulator for insurance across the different Emirates in the UAE. This has recently changed, with the insurance regulator merging with the UAE Central Bank (the Authority), creating a unified regulator for entities across the financial sector, banks, financial institutions, and the insurance sector. There are currently 62 registered and regulated insurance companies, of which 35 are national and 27 are branches of foreign insurance companies. Within the 62 companies, 17 companies (15 national and 2 foreign companies) are licensed to carry out all insurance activities (including life, property, and liability insurance); 32 companies (15 national and 17 foreign) are licensed for property and liability only; and 12 companies (3 national and 9 foreign) are licensed to provide life insurance only. With the population of the country at around 9 to 10 million, there are way too many insurance companies and the Authority has now and again stated the need for consolidation in the market.
Within UAE there are also financial freezones, Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), which allow insurance/reinsurance intermediaries and companies to be set up, but these freezones are considered as foreign jurisdiction and as such, entities based in DIFC and ADGM are not allowed to carry out any direct insurance business in the UAE. DIFC and ADGM have their own Insurance framework and regulator – the Dubai Financial Services Authority (DFSA) and Financial Services Regulatory Authority (FSRA). The regulations in these jurisdictions are modelled on the previous United Kingdom Financial regulator, the Financial Services Authority, and the insurers and reinsurers operating in these financial freezones must be authorised by the home regulator. Such insurers can only write (directly) insurance for entities situated or risks arising within the financial freezone and/or outside the UAE. The reinsurers based in these freezones are allowed to provide reinsurance capacity for UAE onshore risk as is the case for the overseas reinsurance market.
As with the trend across the region, the UAE insurance market is led by the compulsory classes of insurance, motor, and health, the latter of which is compulsory across Dubai and Abu Dhabi and the former compulsory in all UAE. Health insurance is also regulated by the health regulator of the respective Emirate, the Dubai Health Authority (DHA) and the Department of Health Abu Dhabi (DOH), which set out its own regulatory regime which every insurer and insurance intermediary must adhere to when dealing with health insurance in these Emirates. As a COVID relief measure, the insurance regulator instructed insurers to offer discount on motor insurance premiums, specifically to those belonging to critical sectors and who continued to serve the wider population even during the lockdown. In spite of the discounted premiums, the lockdown resulted in a lower number of accidents on the road, thus increasing profitability of the motor insurance book. Similarly, during the lockdown, except for COVID related cases, only emergency cases were allowed to visit or be admitted to hospitals and clinics, leading to lower utilisation of the medical policies and increased overall profitability.
Life insurance remains a largely untapped market. A lot of blame for this is generally attributed to the population demography, more than 90 per cent of the population being expatriates who are, by and large, considered a transient population with little appetite for long term insurance contracts. However, the international life insurance market has more recently seen a number of new products being developed, some specifically for expatriates who move between countries, and the demand for life insurance both from the international markets and from the local UAE based insurers is growing. What has, however, hampered the otherwise traditional life and investment insurance market are the spate of regulatory changes in recent years, focused on the life insurance market. We are setting out below a brief summary of some of these important changes, in chronological order:
- The Insurance Authority issued the Board of Directors’ Decision No. (49) of 2019 Concerning Instructions for Life Insurance and Family Takaful Insurance (Life Regulations) in October 2019 with an implementation date six months from the date of gazette of the Life Regulations which were due to come into force effective 16 April 2020. Aimed as a measure to cut down on the frequent mis-selling in the life insurance market, the Life Regulations were finally implemented in October 2020 after over two years of discussion on the draft regulations and brought forth drastic measures, such as caps on commissions and indemnity commissions; a mandatory free-look period of 30 days; enhanced disclosures to customers; and complete transparency in terms of other charges and fees. While the Life Regulations bring about the much-required structure and transparency to the life insurance business in UAE for the insured, the market stakeholders have conflicting views on it, with a number of intermediaries even suggesting that the regulator dictating the commission limits is sign of an “over-regulated” market and that commissions should be left open for determination by market factors.
- The Insurance Authority Board of Directors Decision No. (18) of 2020 concerning the Electronic Insurance Regulations (Electronic Regulations) was another important legislation promulgated in the UAE insurance market. The Electronic Regulations came into effect in November 2020 and requires every insurer and insurance intermediary that is carrying out, or that intends to carry out any online insurance business, to have a plan for the electronic insurance business and to obtain prior approval from the Authority before carrying out any electronic insurance business. The Electronic Regulations also prohibit any transactions related to investment-linked life insurance to be carried out online or through electronic means, but policies which do not require individual underwriting may be sold online.
- The Insurance Authority Board of Directors Decision No. (27) of 2020 Regarding Regulations for Licensing Insurance Producers (Producers Regulations) recognises insurance producers as a separate category of insurance intermediary. Insurance Producers under the Producers Regulations are not permitted to work in the interest of insurance brokers or agents or such other insurance professionals nor are they permitted to sub-contract their responsibility to another company. Only the insurance companies are allowed to engage the services of licensed insurance producers for solicitation and procurement of insurance business.
- In November 2020, the UAE Central Bank issued the Consumer Protection Regulation and the Consumer Protection Standards (together, Consumer Protection Guidance) which set out the broad framework applicable to a Licensed Financial Institution (LFI). With respect to insurance/takaful products being sold by an LFI (aimed at bancassurance business, primarily credit life), the Consumer Protection Guidance prescribe enhanced disclosure requirements. It is now mandatory to obtain customer consent for such policies being sold alongside other financial products and for each such insurance product the consumer must be provided with a minimum of three insurance/takaful providers. The insurance product must only be sold by the trained staff of the LFI, the products must be optional in nature, and the LFI must disclose the additional cost for the insurance, including commission being earned by the LFI. These instructions completely change the manner in which LFIs such as banks currently operate when selling insurance complementary to the credit products of the bank. Enhanced transparency and giving the customer the power to choose between products and between insurers is a welcome change for customers.
- On 13 June 2021, the UAE Central Bank issued a circular addressed to LFIs offering structured conventional life insurance and takaful investment and saving products (the Products). In May 2017, the UAE Central Bank had stopped financial institutions from offering savings and investment and non-capital guaranteed products until the Central Bank issued a governance policy around the issuance of such products. The circular now provides that subject to fulfilling the requirements laid down by the Central Bank, and after having obtained a no objection letter from the Central Bank, these institutions can resume selling such Products. Some of the requirements include them carrying out appropriateness and suitability assessment for each customer (based on income, investment experience, knowledge, and net worth) to whom the Products are offered by the LFI, and the customer must attest by signature that the appropriateness and suitability assessment was performed.
Unlike other mature markets, the products currently being offered in UAE by the local insurance companies are the traditional products that are structured with heavy pay-outs for the intermediaries at the beginning of the policy itself; the customer feels the repercussion of this practice as such commissions undermine the performance of the product. The UAE Law provides that UAE-based risks must be insured only by a locally licensed insurer, but it is common practice in UAE for international life insurance companies licensed in overseas markets to sell life insurance/investment in the UAE. While they continue to operate in the grey area, the bigger question to be asked is: can the locally licensed insurers step up and provide similar products/pricing to the customers?
There is a need for a complete overhaul of the current offerings in the market and the manner in which these products are sold. The regulatory changes are a step in the right direction for driving this change, but the market forces need to come together to make UAE a destination for attractive investment and life insurance products.
Authored by Anand Singh, Senior Associate, Insurance/Reinsurance