What happens when strict regulation is imposed onto a market that had until that time been barely regulated? Think of Wyatt Earp and his brothers riding into Tombstone, Arizona in the early 1880’s, looking to impose order on the until that time lawless town. The outlaws were forced to flee, but at the same time respectable businessmen had to reform their practices as well, to conform to the requirements of the new “Sheriff”.
We need only to look to the UAE Insurance Brokers marketplace to find a more modern, albeit non violent, example of the disruption this causes. The enactment in late 2013 of new stricter UAE Insurance Brokerage Regulations¹ represented a significant change in how brokers are regulated, with the well meaning intent having been to professionalize the market, weed out the weaker brokers, and thus protect both policyholders and insurers.
However, the new Regulations have also created difficulties for even the most steadfast traditionally professionalized brokers. The 2013 Regulations replace those issued in 2006, and have now been in effect for close to two years. The brokerage industry has therefore had to adjust its business practices accordingly, often with great challenges.
Everyone agrees that the UAE Insurance Brokerage market had been, prior to the new Regulations, a free-wheeling, anything goes, under-regulated enterprise, where dodgy players competed with well established brokers possessing international experience, in what was essentially the free market figurative equivalent of a gladiatorial arena. The Brokerage landscape in the UAE had long been criticized for the presence of too many brokers that were undercapitalized, unprofessional, not knowledgeable as to the products that they offer, unscrupulous, or exhibited some combination of these less than admirable characteristics.
Something had to be done, so the Insurance Authority issued its new Regulations.
This has created several challenges to brokers; and also means that the days where the “fly-by-night” brokers could set up shop in the UAE are over. Some Brokers have ceased their operations as a result of their inability to meet these new requirements. Additionally, the IA has cancelled some brokers’ licenses under the provisions of the Regulations that permit it to do so.
One of the biggest challenges is the new, increased capital requirements and solvency restrictions.
The brokerage company must have at least AED 3,000,000 paid in capital, if a UAE incorporated company, or AED 10,000,000 if a branch of a free zone or foreign company. The brokerage must also provide the IA with an unconditional and unrestricted Letter of Guarantee from a UAE bank in the amount of AED 3,000,000 for a UAE company (or AED 1,000,000 for a branch thereof), and AED 5,000,000 for a branch of a foreign or free zone company, and maintain a professional liability insurance policy with limits of no less than AED 2,000,000 for a UAE company and AED 3,000,000 for a branch of a foreign or free zone company.
These replace prior capital requirements of AED 1,000,000. The PI insurance requirements were formerly AED 1,500,000, and the bank guarantee requirements were also lower (AED 1,000,000 for a local company and AED 500,000 for a foreign/free zone company branch), so each of these increases is significant.
It is notable that the capital level, bank guarantee, and PI cover requirements for a free zone broker are much higher than for the onshore broker. While this may favor the locally situated broker, it also ensures that free zone establishments must have both the solvency and capacity to sustain their operations on a long term basis. This is also a priority of the DFSA, which internally regulates DIFC entities. The DIFC broker therefore faces scrutiny from two Regulators.
Once licensed, the brokerage is regulated as to the manner its bank accounts are operated, its financial solvency levels (liquid assets must be sufficient to meet 100% of its short term requirements within two weeks at all times, total assets must never be less than its liabilities, and available capital may never be less than the minimum capital prescribed in the Regulations), the manner it enters into contracts with insurance companies and report such to the IA, how it maintains proper data keeping and retention practices, and the quarterly and annual reports it is required to submit to the IA with respect to its business and accounts, among other things.
This has created confusion as to the precise obligation as to asset management and solvency requirements, as the differentiation in the obligation to generally remain solvent yet maintain enough cash convertible capital to cover all short term liabilities creates a compliance challenge.
Another challenge that looms large relates to the brokers key employees qualifications. Previously, those who deemed themselves qualified went unquestioned. Now, however, management must demonstrate its credentials, to the satisfaction of the Regulator.
The Regulations require that the brokerage have at least the following staffing levels: General Manager (or CEO), Operations Manager, Internal Auditor (Controller), and a specialized professional for each type of insurance the broker handles. These positions may not be combined into one role; each role must be held by a separate individual on a full time basis. Furthermore, each of these persons must meet strict educational and experiential requirements, which are set forth in Article 2 of the Resolution. These requirements generally consist of a University Degree or equivalent educational credentials depending on the role, and a minimal set amount of practical experience, again varying depending on the specific role and whether or not the person is a UAE national.
Demonstrating that these employees meet the educational and experiential requirements is often not an easy task, especially for those employees who are not UAE nationals. The employee must first obtain a Certificate of Equivalence from the Ministry of Higher Education, and the Ministry of Education as well for certain educational degrees, demonstrating that the foreign educational qualifications meet the requisite standards. This is often a very time consuming process, whereby these documents must be attested from their source through the level of the UAE Embassy in the foreign jurisdiction where such were initially granted, and then stamped by the Ministry of Foreign Affairs. Only at the point that the Certificate of Equivalence is issued by the Ministry of Higher Education can the educational credentials be submitted to the IA for their approval. Likewise, the IA requires submission of Certificates of Experience demonstrating the employees’ practical experience, which will require attestation if issued by a foreign source.
Additional Requirements and Challenges
It is clear that under the Regulations, business as usual has changed, and that the brokers established practices have faced a shock. There are new restrictions on collection of commissions and permitted activities that have proved to be particularly challenging.
Notably, a broker is also prohibited from managing or bearing any insurance risks, and may not rely on one company at any time to practice its activity in the UAE. Furthermore a broker may not also operate as an insurance agent, insurance consultant, loss inspector or adjuster, or actuary. Those brokers conducting these activities in tandem have had to change their business models accordingly.
The form of a broker’s contracts with each insurance company it deals with is also regulated, and these agreements must contain certain specific provisions as to term, scope, type of cover, and calculation of commissions. The contracts may not include certain provisions, such as allowing the broker to collect premiums directly from its clients for certain types of insurance or to receive compensation from an insurer on behalf of its clients. Additionally, the broker may not deduct its commissions from premiums even where it is permitted to receive such directly from the clients.
The inability of a broker to collect premiums directly for certain classes of cover or to deduct its commission from any premium payment has cause particular consternation among brokers, as such is not in accord with established practices elsewhere. It has also resulted in delays in when the broker receives their commission and has created additional record keeping and accounting hurdles.
The brokerage is also regulated as to how it interacts with its clients, must negotiate in favor of its clients and represent their interests before the insurance company, notify its clients of policy renewal dates and conditions thereof, and may not charge the client commission for its services. The brokerage must obtain written authorization from its clients allowing it to conduct its affairs on behalf of the client, and must advise its clients as to all details of the insurance policy that it obtains for the client, and, among other requirements, generally “deal in accordance with the principals of good faith and transparency and professional rules and ethics”.
The brokerage must also submit to the IA an Emiratization Plan, training manuals, and statements as to its technical systems and work procedures, among other items, with its license application. Once the license is granted, it must within three months submit to the IA written internal bylaws setting forth its documentary cycles, organizational structure, branch/headquarters relationship (where applicable), correspondences recording system, internal record keeping system, and client complaint recording system. The brokerage is also required to develop an operational guide for risk management, professional code of conduct, and systems for cooperation and coordination with its internal controller, who also may not be dismissed without 30 days prior notice to the IA and controller.
What it Means for Brokers and the Marketplace
Those brokers now conducting business in the UAE, as well as any that are considering establishing inside the UAE, should carefully review the Regulations to ensure that they possess the capabilities to either continue to operate or establish themselves according to the legal requirements. This is not surprising, given that the new Regulations, particularly the increased capital requirements, impose significant roadblocks on brokers that only the most fiscally solvent and organizationally prepared can surmount.
It is now very clear that the Sheriff means business.
¹The requirements are collectively set forth in Insurance Authority (IA) Board of Directors Resolution No. 15 of 2013 Concerning Insurance Brokerage Regulations, and Decision No (58) of 2013 Concerning the Implementation of Insurance Authority Board of Directors Resolution No. 15 of 2013.