Mid-size insurance brokers in the UAE have been offered some capital relief after the Insurance Authority amended its rules to reduce the value of bank guarantees.
This will help alleviate pressure on capital and unlock more funds to ease liquidity at a time when businesses are down following the spread of covid-19 and its adverse impact on the economy in general.
Make a request
In a letter posted on its website dated 30 March, the UAE Insurance Authority notified the industry of a revision.
It stipulates that an insurance broker must submit a request to the regulator to reduce the amount of the letter of guarantee issued by a bank by AED1m ($272,295; £216,387; €248,179).
The current bank guarantee values are AED3m for companies incorporated in the UAE, AED1m for any branch thereof; AED5m for the branch of a foreign company or companies incorporated in any financial free zone; and AED3m for any additional branch thereof.
Following the reduction, the new values are AED2m for companies incorporated in the UAE, AED1m for any branch thereof; AED4m for the branch of a foreign company or companies incorporated in any financial free zone; and AED2m for any additional branch thereof.
“The new amendment will benefit the mid-size brokers to improve their liquidity and cash flow of the company during the time of covid-19 when business at all levels are suffering drastically due to low productivity while most of the companies are working from home,” said Aftab Hasan, chief executive of Arya Insurance Brokerage Co, chairman of Risk Exchange (DIFC) Limited, and secretary-general of Insurance Business Group.
“AED1m coming in the company from the reduction of bank guarantee value will ease some pressure on the capital adequacy of the company. As it is, many mid-size brokers have no provision available financially to meet their operating expenses, forcing them to resort to staff layoffs, sending them on unpaid leave or salary cut for an unlimited period of time until the situation improves and life comes back to normal,” he said.
Are there any criteria?
The regulator has set three criteria to be fulfilled by the brokers to qualify for the reduction.
The insurance broker shall provide the audited annual financial statements and reports and quarterly financial statements and reports within the dates specified in the regulations and instructions.
The net equity in the last annual audited financial statements submitted to the IA shall not be less than 100% of the minimum capital required.
The absence of executive judicial rulings submitted to the IA against the broker.
Hasan added: “Once audited financials of 2019 and in-house financials for Q1 of 2020 are submitted on the IA portal, brokers have to approach IA by filling an application to submit their request to approve a reduction of the bank guarantee.
“On receipt of this request from the brokers, IA will assess each case and once they are qualified for releasing the fund from the bank guarantee the authority will issue ‘No Objection’ and instruction to the bank to release AED1m.”
As NRI Adviser reported last week, the Insurance Authority has postponed the implementation of new regulations for life insurance and family takaful (Islamic) insurance for six months.
This was done to support insurers and brokers facing mounting claims in the wake of the rapid spread of covid-19 in the region.
“Like in the case of the postponement of the new regulations, the reduced bank guarantee structure will add liquidity and cashflow for brokers, which will enable them to tide over the present crisis triggered by the spread of covid-19 and the resultant business losses,” said Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, Dubai.