The Financial Regulatory Authority (FRA) has issued a decision to compel insurance companies to include all commissions, rewards or incentives for the insurance broker in the insurance contract, to improve transparency. The decision followed complaints from several insurance companies and policyholders about malpractices.
Brokers' commissions range from 30% to 60%. The broker receives his commission right away without bearing the risk of erratic payment of premiums by customers. In addition, some executives of insurance companies share the commission with brokers.
To resolve the problems, the FRA conducted a study in neighbouring markets to ascertain how brokers' commissions are computed and managed in other places. It was found that some countries, such as Saudi Arabia, set a ceiling on the commission rate while most other countries require the commission to be disclosed in the insurance contract.
The FRA issued its decision last month, which was originally to be implemented immediately, a move which led to protests from the industry.
After lengthy discussions involving the FRA, intermediaries and insurance companies, the regulator agreed to form a committee that is charged with two tasks.
The first is to set a date for implementation of the FRA decision and to grant time to insurers to clarify the percentage of the commission in the insurance contract. Insurers had protested that they needed time to reprogram their computer system and to include the commissions in insurance policies which are issued electronically,
The second is to study how to calculate the commission for disclosure in the insurance contract and minimise room for manipulation, because a broker receives more than one type of remuneration from the insurance company, including a commission for the policy, a production incentive if premiums are collected on time, and an annual bonus.