Finally, the UAE Insurance Authority has implemented the BOD49 regulations on life insurance with effect from 16 October 2020 after a particularly long gestation period.
For anyone who has been living under a rock for the past few years; BOD49 covers insurance companies incorporated in the UAE and foreign branches of insurance companies licensed to carry out insurance operations either through a branch or an insurance agent.
The regulations address the most important issues relating to mis-selling, overall commission payouts, upfront payments to agents/brokers by insurers, fees and charges associated with investment products, the free-look period and mandatory benefit illustrations.
Commission structure
Insurance brokers know the game-changing regulations will greatly affect their business, triggering the exit of smaller brokers from the market.
They will take a big hit on their revenues with the new commission payment structure coming into effect.
No indemnity commission — a sum paid upfront to advisers on the full value of an insurance policy — is allowed for regular premium policies and the commissions paid should be based on the annualised premium collected.
First year commissions must be capped at 50% of the annualised premium or 50% of the total commissions payable under the product, whichever is lower. The remaining commissions must be paid out linearly over the remaining premium payment term of the policy.
The first year commission is subject to commission claw-back during the first five years of the policy, at a minimum.
Adverse impact
“Most insurance brokers are unhappy with the regulatory development,” said Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates.
“Their view is that the new regulations are not sustainable and that if the distribution channel is not sufficiently incentivised, they would lose the motivation to sell these products and therefore have an adverse impact on the life insurance market.”
The revised products and rates in the market point to the fact that the products are going to get costlier for policyholders, thereby raising a concern whether the regulation can achieve what it intended to, he added.
DJ Sengupta, co-founder and managing partner of Capstone Insurance and Bankonus, added: “Any regulatory change forces rethinking of existing business models. The insurance distribution model in UAE has remained largely unchanged for over a decade.
“The new regulations will mean less revenues upfront for the brokers. This will force them to look at reducing their existing cost base, increasing productivity and adopting digital technologies. All changes are difficult in the beginning, messy in the middle and good for the industry at the end. This is not going to be different in the present case.
“Of course, insurance brokers will take a big hit on their revenues with the new commission payment structure coming into effect. From a cash flow perspective brokers will receive roughly 40% of what they used to receive. However, in the long run these changes should bring back confidence in the insurance industry and sales should increase. This will also force brokers to make changes that are long overdue,” Sengupta said.
Exodus or no exodus?
It is feared that there will be sharp decline in the number of advisers in the UAE insurance sector.
It is not an unfounded fear because the brokers who have not changed their business model in time and who continue to operate the brick and mortar brokerages will find it difficult to survive now that the regulations have been implemented.
As it is, these brokerages rely on individual advisers to add new customers and maintain relationship with existing clients for renewals.
But Sengupta does not expect such an exodus, even though the change will affect a large number of advisers.
“This will make the good advisers stand out and survive for the long run. Advisers who only think of short term benefits and have been selling products solely based on the commission they make will struggle to survive,” he said.
In the whole bargain, customers are going to be benefited in the long run and Sengupta is of the view that the regulations will benefit customers in the long run, the industry will stabilise and there will always be a place for qualified advisers.
Another threat
There is yet another threat looming for the brokerages as insurance companies look to strengthen their direct sales channels if there is resistance from the broker distribution network, thus stoking competition.
Failing to change their business models could put the survival of some businesses at risk.
Brokers need to look at more efficient models for distributing life insurance products.
Selling products online could be one way and promoting small-ticket life insurance as an add-on to other lines of business could be another. To be able to retain customers, the brokers need to demonstrate more transparency to clients, and provide more bespoke solutions, rather than run of the mill products.
“Anyway, an insurance broker is an agent of the insured and therefore he should act in the best interest of his customers. This will help in long term sustenance and growth of the life insurance sector in the UAE,” Singh said.
Change or perish
Advisers will have to change their thinking.
Advice has to bear in mind the long-term benefit that the products provide and suitability of sales will be the most important thing.
Since revenues will accrue over a longer term, advisers will have to start focusing on servicing the customers for a longer period.
They will also have to adopt digital tools.
Insurance as an industry has been a laggard in adopting digital tools but that will change now. The financial benefit will be in the long term and in the form of annuity income streams that advisers will create for themselves.
