The UAE Insurance Authority (IA) is insisting that brokers maintain 100% of the required minimum paid-up capital or face suspension, a move which could force small insurance brokers out of business, said media reports.
The IA issued a decision in late July strengthening its capital adequacy regulations and which read: “The insurance broker shall not resume its business, unless it achieves 100% of the paid-up capital required to practise the activity.”
The decision is related to rules issued by the IA in December 2013, requiring an insurance broker, incorporated in the UAE, to maintain a minimum paid-up capital of AED3 million (US$816,614). An insurance broker which operates as a branch of a foreign company, or as branch of a company established in a financial free zone in UAE, should maintain a paid-up capital of AED10 million. These replace prior capital requirements of AED1,000,000 for both types of brokers.
Mr Peter Hodgins, an insurance lawyer at Clyde & Co in the UAE, told The National that the decision makes clear that any reduction in capital must be approved by the IA and where this figure falls below the minimum level of AED3 million, a corrective plan must be submitted by the broker.
“If the capital falls to below 80% of the minimum, the regulator has power to intervene. And if it falls below 50%, it can suspend the activities of the broker until such time as the capital is returned to above the minimum required,” he said. “Importantly, the shareholders in the broker may not receive dividends until the minimum capital requirement is satisfied.”
This regulatory intervention comes at a time when the IA is already pushing ahead with tough new rules on the remuneration of agents, particularly those working in the life insurance space, where it is looking to restrict commissions.
Mr Steven Downey, a Chartered Financial Analyst at Holborn Assets, said: “This will put pressure on brokers that do not have a large equity buffer on their balance sheet, which could lead to smaller firms shutting down, industry consolidation and potentially less competition.”
Mr Hodgins said: “The decision has to be viewed as part of a drive by the IA to protect the consumer and to strengthen the industry as a whole.
“By trying to ensure that the minimum capital requirements are satisfied, the risk of insolvency of an insurance broker is reduced and therefore the risk to entities dealing with the insurance broker, both consumers and insurers, should also be reduced.” M
AED1 = US$0.27