The UAE’s insurance regulator is considering a request on the part of a number of major multi-national insurance companies to give them more time to comment on plans to ban indemnity commissions, and to prepare for them coming into force, International Investment understands.
It is not known when the ban on these up-front commissions is proposed to take effect, but industry sources believe the regulator is keen for it to happen soon, as the UAE seeks to align itself with other jurisdictions, including Hong Kong and the UK, which have changed their regulations in recent years to phase them out.
The insurance companies in question, which are understood to include such well-known names in the international arena as Zurich, Generali, Metlife and Friends Provident International (FPI), have formally asked the United Arab Emirates Insurance Authority (IA) to “extend the consultation period from [its original] 30th of November deadline to the end of 2016”, a source told International Investment.
The source said the IA yesterday agreed to a two-week extension only. This, he noted, suggested the IA’s agenda was “to move to the new rules as soon as possible.”
The Insurance Authority did not reply to requests for comment.
Circular No. 33 a ‘game changer’
Indemnity commissions are paid by life companies to the financial adviser or insurance broker who recommends the policy to a client, and are based on the full value of the product, which, in the case of life insurance-based products and offshore bonds, typically run for 20 years or more. The Insurance Authority is proposing to require the total commission charged to be spread out over the life of the policy, with commissions to be paid based on the premium collected, and paid out in equal monthly instalments.
A recent report on the Middle East investment marketplace by Dubai-based Insight Discovery, citing industry observers there, noted that the IA’s proposed regulations, contained in what is being called Circular No. 33, are seen as “a ‘game changer’ for the life insurance segment and for the UAE’s organised savings landscape generally”.
The insurance companies say that the first they were made aware of the IA’s plans to consult on plans to ban indemnity, or initial, commission on insurance products was in the middle of November.
They say that they need as long as 12 months, if not longer, to prepare new products to offer the market in place of the ones that are to be banned, in order to ensure that their clients – financial advisers in the UAE, with mainly expatriate clients – will have regular premium savings plans and offshore bonds to sell.
One such financial adviser, Robert Parker, chief executive of the Holborn Group, said larger firms like his would normally survive a transition period of this kind without a problem, but that “many small brokerages [could be put] out of business if the IA moves too quickly”.
“To move from an indemnity to non-indemnity model, for the smaller broker, requires eighteen months to two years,” Parker added.
“The worst scenario is that the UAE Insurance Authority is proposing to place protection products under the non-indemnity commission rules as well as life insurance products, which is what Hong Kong adopted – but which, of course, the UK did not, when it drew up its Retail Distribution Review reforms.”
Parker is referring to Hong Kong’s move to abolish upfront commissions on insurance products across the board, which took effect in 2015 and, by many accounts, caused significant hardship to certain types of companies doing business there. Those that already had a diversified income stream with an existing base of recurring income products fared better, as expected, than those that relied heavily on the indemnity commission model.
As reported here last week, one of that market’s largest financial advisory companies, Convoy Global, reported a loss of HK$467.26m (US$60.25m, £48.4m) in the year to the end of 2015, compared with a net profit the previous year of HK$246.17m (US$31.74m, £25.51m), which it attributed in part to “the regulatory changes in [the] ILAS [investment-linked assurance schemes]” market.
Also in 2015, Convoy’s end-of-year financial results showed, total investment commissions dropped around 85% from the previous year’s level.
Convoy has now made major changes to its business, including to become more international, and acquiring a UK financial platform, suggesting it is planning to move towards adopting a fintech model, at least in part, to replace those parts of its business that no longer work, in the wake of the regulatory changes.
FPI: ‘preparing response’
Friends Provident is one of the bigger and better-established life companies in the UAE. Philip Cernik, chief marketing officer for the company’s UAE operations, told International Investment that the company was “currently preparing its response to the proposed regulations”, alongside its fellow IA-authorised insurers.
“The intent behind the proposals are far-reaching, and impact both insurers and advisers as well as customers,” he said.
“The exact detail, however, will follow [only] after full consultation, and we also welcome therefore the opportunity to engage in shaping the future of the IA’s regulatory landscape.”
Many Dubai-based advisers, including Holborn’s Parker, share Cernik’s belief that the new regulations, once they come in, will be a good thing for the UAE’s insurance industry in the long run.
“The banning of indemnity commission in the UAE can’t come quickly enough,” said Sam Instone, chief executive of AES International, a London-based advisory firm with a sizeable outpost in Dubai.
As for the apparent speed with which the regulator appears to be wanting to move, Instone added: “This is the great thing about the UAE – change, when it comes, can be very rapid.”
There can be too much of a good thing too soon though, Tim Searle, founder and chairman of the Globaleye advisory business, insisted.
“It should come as no surprise to any company that has watched the trend of regulation in this sector that a model more aligned to that of the UK’s RDR was only inevitable,” he said.
“What is alarming is the pace at which implementation [in the UAE] is being suggested, and the lack of engagement from the various stakeholders.
“[Product] providers have not had sufficient dialogue to help create a workable solution, with agreed milestones, which we know in the complex insurance world cannot conceivably happen overnight.
“There is no doubting that change needs to happen in terms of transparency, product innovation, raising standards, consumer outcomes, compliance, qualification and regulation of the market, but the fear is that policy will be hastily forced through that is commercially, practically or regulatory not tenable for all stakeholders.
“Notwithstanding, change is coming, and there will be a period of consolidation – as Globaleye have already experienced in other regulated markets in which we operate.”