The UAE Insurance Authority (IA) has issued draft regulations for life insurance and family takaful business that, among other measures, ban upfront commissions and cross-subsidisation of the costs of multiple sales channels.
In a statement, the IA said that it had carried out a study of the current market practices with respect to distribution channel compensation, charges on products as well as disclosures in place in the market.
The IA said that the study revealed that “both the conventional and takaful operators charge heavy commissions and upfront fees to policyholders which are perceived to provide poor policy value to customers in the early years of the policy.
“This is in addition to poor disclosures in place that do not meet global best practices.
“The IA has also noticed an alarming amount of complaints from the policyholders that they are provided with no value if they surrender in the early years of the policy.”
Proposed regulatory changes
International law firm Clyde & Co said that the proposed regulations would be “potentially game-changing” for the UAE’s life insurance industry.
“The Life Regulations have the potential to fundamentally change the way life products are priced and sold in the UAE, and represent a long overdue move to regulate the manner in which life insurance investment contracts have been sold and marketed in the UAE.”
Clyde & Co summarises the proposed changes as follows: ban on indemnity commission; cap on commissions payable for savings, term, short-term and bancassurance life products; minimum death benefits; a 20 working-day “free look period” following purchase; and compulsory disclosure regime setting out detailed requirements around commission and fees disclosure, as well as product performance criteria.
Distribution
Clyde & Co said that the IA’s proposal to restrict the ability of insurers to cross-subsidise distribution channels “represents a particularly burdensome obligation on insurers as presumably they would have to be able to break down expenses on a per-distribution channel basis, which could be near impossible given the various costs incurred on a business-wide basis”.
As an alternative, this provision could be limited to only applying to commissions across distribution channels rather than general expenses of the insurer, said the law firm.
Disclosure
Under the proposed regulations, customers must be given comprehensive disclosure from the outset with product illustrations providing an itemisation of all fees and charges payable for the life of the policy (ie, premium, commission, surrender charges, administration fees, investment management/fund management fees, etc).
A minimum of two scenarios of the performance of the product must be provided; and importantly these projections must not use a rate of return greater than EIBOR +3% and one of them must show performance based on a 0% return. Customers must then sign a declaration to the effect that they have received the illustration and understand that the performance is subject to change.
Minimum protection
The draft regulations also stipulate the minimum protection benefits for policyholders. The IA said: “Currently, some of the life insurance policies are sold at 101% of cash value, that means only 1% additional death benefit is provided to the customer. These policies are sold as life insurance policies whereas the actual cover provided is minimal.”
The minimum protection benefits being proposed are: (i) 25% for those below 45 years old and 10% for those aged over 45 single-premium products: and (ii) 10 times annualised premium for those below 45 years old and seven times for those aged over 45 for regular premium products.
The insurance industry had been given a two-week period ended 30 November within which to submit feedback on the proposed regulations.