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DIFC Insurance Regulations – Proposed Amendments

The Dubai Financial Services Authority (DFSA), which regulates all Financial Services within the Dubai International Financial Center (DIFC), in November, 2015, issued its Consultation Paper No. 103 (CP103), proposing changes in how entities engaged in providing insurance related products and services will be regulated. This is of keen interest to all entities that provide such products and services within the DIFC, as well as to those that are considering establishing an insurance business presence within the DIFC.

With respect to insurance related products and services, the DFSA regulates DIFC based companies that are engaged in the Insurance Business (effecting, or carrying out, contracts of insurance), Insurance Intermediation (advising on, or arranging, contracts of insurance), Insurance Management (underwriting and managing claims as an agent of an insurer), and with respect to an Investment Business, advising or arranging long term contracts of insurance. The new proposals deal primarily with the first three categories of insurance products or services, as long term products are considered by the DFSA as more investment oriented.

These amendments represent the first substantial review of the DFSA regulatory regime since 2003, and are intended to, among other things, ensure that the DFSA remains in line with current international standards, particularly as such are defined by the Insurance Core Principles (ICP), which form guideposts for the International Monetary Fund and the World Bank.

The proposals put forth in CP103 represent important changes and clarifications to how the various market participants may conduct business and warrant careful review. Generally, the bulk of the new proposals relate to Intermediaries and Managers, rather than to Insurers. Some of the important changes are as follows.
Insurance Business
Under the current regime, there is some ambiguity as to whether Insurers are prohibited from giving advice relating to their products. CP103 proposes explicitly allowing Insurers to give advice relating to their own products - and those of group members – provided that the insurer has appropriate measures in place to ensure that the entity granting such advice has the appropriate skills, competencies, and resources to do so.

Further, Insurers are currently prohibited from carrying on certain Insurance Intermediation activities unless Insurers are engaging in these activities as a principal and through their own employees. CP103 proposes that Insurers be granted greater flexibility, allowing them to undertake in such excluded Insurance Intermediation activities in relation to their own products or the products of their group members.
Insurance Intermediary
The current definition of Insurance Intermediation does not cover web-based selling of insurance using aggregation sites where potential policy holders can conclude contracts of insurance using a website or other media. CP103 proposes to expand the definition of Insurance Intermediation to cover operators of aggregation sites.

Provisions in the current regime allow professionals to provide advice to potential policyholders and to assist them in the conclusion of insurance contracts without being regarded as carrying on Insurance Intermediation activities, if such services are provided as a “necessary part” of any other service the professional provides. CP103 narrows the scope of such exclusion by adding a new criterion, whereby professionals cannot assist in the conclusion or performance of contracts of insurance, and is thus intended to alleviate any conflict of interest.

The activity of arranging Long-Term Insurance is excluded under the Insurance Intermediation definition and Insurers are prohibited from carrying on insurance business relating to Long-Term Insurance; thus Long-Term Insurance is not regulated under the current regime. CP103 proposes to allow Insurers to carry out advising and arranging activities in relation to their own Contracts of Insurance, and those of their Group members.

Additionally, CP103 proposes to include a new exclusion whereby certain limited classes of service providers, such as travel agents and suppliers of goods in the DIFC, are allowed to sell insurance cover as complementary to their principal activities without being regulated as Insurance Intermediaries.

Further, in order to avoid unnecessary dual regulation, CP103 proposes to include a new exclusion to Insurance Intermediation for any activity carried out as an integral part of the activities permitted under Insurance Management. The new proposal would remove the need for an Insurance Manager to also hold an Insurance Intermediation License for activities which can be undertaken under both types of Licenses.

CP103 also proposes to incorporate a new exclusion to the Insurance Intermediation definition, whereby the following three activities are expressly excluded from the definition: 1) managing claims for Insurers on a professional basis, 2) loss adjusting, and 3) expert appraisal of claims.

Insurance Intermediaries can act in different capacities under the current regime; however, the terms “Insurance Agent” and “Insurance Broker” are not clearly defined and the difference in their capacity is not stated. CP103 proposes to clearly define such terms and to include guidance on how to demonstrate independence when acting for or on behalf of a policyholder.

It is also proposed that reinsurance intermediaries – and reinsurers - conduct of business (COB) requirements be streamlined to eliminate certain obligations when the Intermediary is acting on behalf of a ceding insurer.

In addition, the current regime does not require the Insurance Intermediary to disclose to the policyholder whether it is a related party of the Insurer whose insurance product it sells or advises on. CP103 opines that a 10% or more ownership link between an Insurer and an Insurance Intermediary gives rise to a material conflict of interest that needs to be disclosed. In relation to reinsurance, CP103 proposes new guidelines to provide clarity on the proper conduct when an Insurance Intermediary is acting for both parties to a contract of reinsurance.

As for the capital requirement applicable to Insurance Intermediaries, CP103 proposes to lower the current capital requirement from 18 weeks of operational expenditure to 9 weeks. The current requirement of 18 weeks was considered onerous and not in line with practice in other jurisdictions.
Insurance Management
The activities of Insurance Management, ‘underwriting’ and ‘administration’, are not clearly defined under the current regime and are often a source of confusion. CP103 proposes a non-exhaustive definition of these terms to provide greater clarity to the market. In addition, CP103 proposes to exclude from Insurance Management the services of independent third party service providers who provide actuarial, insurance loss adjustment, and risk related advice to regulated firms.

Under the current regime, Non-DIFC Insurers can access DIFC markets through Insurance Managers without the degree of due diligence or regulatory oversight that would apply if they had registered with the DIFC. CP103 proposes a number of measures intended to provide the DFSA with the regulatory oversight needed to ensure proper reporting. In Summary, CP103 requires full disclosure of non-DIFC insurers, the jurisdiction which they operate in, a declaration of their annual return and an undertaking of due diligence in assessing the fiscal and regulatory standing of the Non-DIFC Insurer.

In addition, CP103 proposes to impose on Insurance Managers similar reporting obligations as are imposed on a DIFC Branch of non-DIFC Insurer such as annual and quarterly statements relating to premiums, reinsurance, claims, recoveries, movements in insurance reserves, underwriting performance, and claims developments. These amendments are intended to bring the level of oversight of non DIFC insurers doing business through a Manager into parity with that imposed on a DIFC branch of a non-DIFC insurer.

For the same reason as discussed with regard to Insurance Intermediaries, CP103 states that a 10% or more ownership link between an Insurer (other than a ceding insurer) and an Insurance Manager gives rise to a material conflict of interest that must be disclosed to any policyholder or prospective policy holder.

In contrast to its handling of capital requirements for Intermediaries, CB103 does not propose a similar lessening of these requirements for Insurance Managers.

The DFSA is accepting comment on these proposals until 11 February, 2016, and intends to thereafter issue the final revisions to its Rulebook. All interested parties, including those who conduct business in the DIFC or are considering such, should remain abreast with these latest developments.
Published: February 2016
Title: DIFC Insurance Regulations – proposed amendments
Publication: Middle East Insurance Review (MEIR)
Authors: Barry Greenberg,Doumit Ishak, Michael Kortbawi.
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