The insurance authority (the authority) has issued Circular No. 33 of 2016 as the first draft (the first draft) of the Regulations for Life Insurance and Family Takaful Business (the life regulations) on 14 November 2016.
The insurance authority (the authority) has issued Circular No. 33 of 2016 as the first draft (the first draft) of the Regulations for Life Insurance and Family Takaful Business (the life regulations) on 14 November 2016.
The authority requested comments from the various stakeholders on the extensive changes that these draft regulations intend to bring to the life insurance sector in the UAE. Kennedys Dubai LLP is a member of the DIFC Insurance Association working group, which is one of the many consultative forums where the life regulations are being discussed. A comprehensive list of comments was submitted to the authority from the DIFC Insurance Association.
After considering comments from the various stakeholders, the authority has now published a second draft of the life regulations dated 25 April 2017 in the form of Circular No. 12 of 2017 (the second draft), a copy which can be found on the authority’s website. The authority has requested further comments on the new draft by no later than 11 May 2017. Please see a brief of some of the major changes in the life regulations, which will impact the sector, and how they differ from the first draft (if at all!) as follows:
1) For pure term policies (policies with no saving component), maximum annual commission has been capped at 10% of the annual premium, with an overall cap of 160% of the annual premium over the life of the policy. In case of single premium for such policies, the maximum commission has been capped at 10% of the premium. The authority has now removed the other conditions such as the commission to be deducted as monthly charges, for regular premium and over a period of twelve months for single premium policies which were part of the first draft.
2) For the savings policies, the first draft of the life regulations capped the commission at 4.5% of the annualized premium with maximum commission at 90% for the life of the policy. In the second draft of the life regulations, the authority has now devised a formula per which the commission needs to be calculated on such policies on the basis of ratio between the savings component and the protection component (i.e. the pure life insurance component). The calculation which is to be performed per the formula prescribed, essentially states that for the savings component of the policy the commission shall be 4% of the annual premium (with an overall cap of 90%) and for the protection component the commission shall be 10% of the annual premium (with an overall cap of 160%).
3) The first draft of the life regulations provided a blanket ban on all indemnity commission (upfront payment of commission to the intermediary for the life cycle of the policy), whereas the second draft has revised this position. The second draft provides that the insurance company may pay indemnity commission but the upfront payment must be limited to 50% of the annualised premium (irrespective of the premium frequency, the calculation must be on an annualised basis) and the remainder commission must be spread out through the life of the policy. Also, such payments must not be financed from the policyholder’s account.
4) Payment of any fees by the insurer towards the policy, whether as up-front, management fee, fee for advice etc. are allowed but these must not be deducted from customers' payment towards the policy and will be considered part of the “total commission”, which must be within the commission limits specified by the life regulations. If any “initial access fee” is paid by an insurer to an intermediary, such fees must be borne completely by the insurer and must also be offset against the commission payable by the insurer to the intermediary.
5) The authority has now provided that all policies issued by the insurers must have a free look period of at least 30 days. The first draft fixed this period at a minimum of 20 days.
6) Savings policies should usually have a protection benefit ratio of at least 10%. Any policies which do not fulfil this requirement must state clearly in their disclosures, in bold red text, that “the policy has a limited or no life protection benefit”.
7) The life regulations also provide additional disclosure requirements which are aimed at protection of the policyholders, and specific requirements that apply to banks, which are dealing with credit life and other similar policies.
8) In addition, the life regulations now specify that all policies must be certified by the pricing actuary and submitted to the authority for prior approval. The list of documents that need to be approved by the authority include – policy contract or wording, policy schedule, application form, sample illustrations, policy brochures and other sales material, information regarding reinsurance arrangements, any other document prescribed by the authority and all other documents that the actuary deems relevant. These documents must be provided in both Arabic and English.
While the regulations are still in a draft form, this is a good opportunity for insurance companies to consider aligning their operations and practices with the life regulations. The good news being that while some of the provisions will become effective from the date of finalisation of the life regulations, such as commission structure and the Initial Access Fee, some provisions will only come into effect after one year from date of publication and the remainder provisions will be effective only after two years from the date of publication in the official gazette, once finalised.
