Last week a consultation paper for a potentially game-changing regulation for the UAE’s life insurance industry, Circular No. (33) of 2016 (Life Regulations), was released by the UAE Insurance Authority (IA).
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.
The introduction of comprehensive consumer protections to the life market represent an explicit move on the part of the IA to shift life regulation into alignment with developments in other markets, such as the UK and Hong Kong, which have introduced strong consumer-orientated changes.
- Ban on indemnity commission;
- Cap on commissions payable for savings, term, short-term and bancassurance life products;
- Minimum death benefits, for example 25% of the value of the product for single premium products held by under 45 year olds;
- 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.
Restrictions on commission and fees structures
Both product providers and distributors will be concerned with the proposed measures prescribing new limitations on commission, which will fundamentally affect the manner in which most life insurance in the UAE is currently sold.
Firstly, it is proposed that commissions paid up-front based on the full value of the policy (i.e. indemnity commissions) be banned outright.
The rationale for this, which is a common theme throughout the Life Regulations, is that commission should track premium collected rather than being calculated based on projected premium over the life of the policy.
This obviously represents a dramatic shift in the way advisers have traditionally been remunerated. The ability for a product manufacturer to pay large upfront fees (albeit with the ability to clawback in the event of cancellation) has been one of the most important means for incentivising and thus driving product sales.
In addition to the ban on indemnity commissions, the IA is proposing the following commission restrictions:
The IA has also identified payment of fund management fees as an area for reform. Categorising management fees as either explicit (fees charged for removal of fund units) or implicit (fees charged by an adjustment of the unit price), the IA has stated that insurers can no longer charge both categories of fees to product holders.
In addition, where the product manufacturer receives any form of rebate or refund from the fund manager they must now pass 100% of this through to the product holder.
What is also interesting is the IA’s proposal to restrict the ability of insurers to cross-subsidise distribution channels. The intent being to avoid customers paying for expenses that did not arise directly from their purchase.
This represents a particularly burdensome obligation on insurers as presumably they would have to be able to breakdown 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.
It will be interesting to see if the IA is open to any phasing in of these restrictions. In any event, it seems clear that the IA is no longer content to let commission rates be purely dictated by the market.
We recommend both product providers and advisers consider their terms of business and product literature to determine how they are going to align their practices going forward with what is a more long term model for commission payments.
The IA is proposing a raft of new protections for product holders. The key takeaways of these protections are that customers must be given comprehensive disclosure from the out-set (without any corresponding commitment to purchase the product) along with a 20-working day cancellation period following purchase.
The ‘Illustration’ of the product must set out all key details of the product will full 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 projections of the performance of the product must be provided; 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.
These requirements should represent a welcome change for all market participants, not just product holders. For the first time, the IA has explicitly recognised the investment-focus of most modern life products.
Proper standards around the disclosure and advice of the financial benefits of life products is essential to moving the UAE financial services market into the 21st Century.
The measures proposed also serve to address the historical lack of certainty around the role brokers and financial advisers play in advising on the financial performance of life products, and introduce important and long overdue conduct of business rules.
Product providers are now given comfort that advisers must take prescribed steps to properly explain the inherent uncertainty of the investment performance of products whilst advisers have clear criteria around their obligations to customers.
Minimum death benefits
The IA has taken issue with product manufacturers using a low value death benefit as a ‘wrapper’ to ensure classification of the product as an insurance product rather than a general investment product.
The IA’s view is that the level of benefit provided by these types of products (ie in some cases as low as 1% of the value of the product) does not represent adequate protection for the insured.
Minimum death benefits are now being proposed in the form of:
- 25% for below 45 year olds and 10% for over 45 year olds for single premium products: and
- 10x annualised premium for below 45 year olds and 7x for over 45 year olds for regular premium products.
It is arguable that this change sits at odds with the wider recognition of a life product as being first and foremost an investment vehicle.
Whilst a ‘token’ death benefit may well not represent adequate protection to the average customer, this is surely something for the customer to determine themselves, with their ability to choose another product with a higher benefit being the market-based solution.
The minimum death benefit effectively takes away an important option to the customer given the ‘investment component’ of the life product will be correspondingly reduced to allow for this.
Calculation of surrender changes
Actuaries are required to ensure there is an ‘equitable surrender structure’ in place. Importantly, the insurer’s profit derived from the product should not be greater at the surrender date than it would have been had the product not been surrendered.
Surrender charges cannot take the form of a penalty to dis-incentivise the product holder from cancelling the product; rather they must be limited to mitigating the expenses incurred by the insurer from the surrender.
Whilst there have been several iterations of the draft bancassurance regulations released over the last few years, the Life Regulations now also introduce a number of provisions dealing with Group Credit Life products sold through banks.
Commission rates payable to banks are proposed to be capped at 25%.
In terms of disclosure, separate documentation for the credit life product needs to be provided to the customer with the bank and insurer not being able to rely on the bank’s product literature for the corresponding credit product.
Finally, banks are not allowed to enter into exclusive arrangements with insurers for the sale of credit life products; instead they are required to provide customers with multiple options at the point of sale.