EIA SeminarThe Status of Insurance Regulation in the UAE

Peter Hodgins, Partner

1

1. The current regulations

2. What is missing?

3. The Broker Regulations

4. The Combined regulations

Agenda

2

The Current Regulations

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Federal Law No. 6 of 2007 (the Insurance Law)

Cabinet resolution No. 23 of 2009 concerning charges of supervision, control and transactions of insurance

Cabinet Resolution No. 42 regarding the Minimum Capital of Insurance Companies

Board Resolution No. 2 of 2009 – the Executive Regulations

Board Resolution No. 3 of 2009 – the Code of Conduct

Board Resolution No. 16 of 2013 – the Anti-Money Laundering Regulations

Board Resolution No. 4 of 2009 – the Takaful Regulation

Board Resolution No. 8 – the Insurance Agents Regulation

Board Resolution No. 9 – the Third Party Administrators Regulation

Board Resolution No. 15 of 2013 – the Brokers Regulations

Board Resolution No. 58 of 2013 – Implementing Regulations to the Broker Regulations

Key Current Regulations

4

Bancassurance (subject to Circular from September 2011)

Combined Regulations

DHA Health Insurance Regulations

Draft Regulations

5

The State of Play – The moratorium on new licences

– Enforcement of regulations

– Greater awareness of activities in Free Zones

– Increasing activity of other regulators

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What is missing?

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The pieces of the puzzle – part 1

Distribution:

– Telemarketing

– The Internet

– Aggregator websites

– Independent Financial Advisors

– Banks

– Kiosks

– White labelling

Conduct of Business

Prudential Regulation

– Solvency II

– Investment

– Enterprise Risk Management

– Actuarial review

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The pieces of the puzzle – part 2

Life Insurance:

– Interaction with SCA Funds Regulations

– Scrutiny of Unit Linked Products

– Independent Financial Advisors

Outsourcing

Composite insurers

Mergers and acquisitions

Reinsurance

Education and training

Publication of licensed entities’ details

9

The Broker Regulations

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Replacement of Cabinet Decision No. 543 of 2006

Follows draft regulations issued in May 2012

Implemented in two parts:

– Board Resolution No. 15 of 2015

– Board Resolution No. 58 of 2013

Effective from 8 December 2013

Overview

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Insurance Authority will accept new applications for insurance broker licences.

Materially increased financial requirements:

– Minimum paid up share capital of AED3 million for LLCs and AED10 million for branches of foreign brokers (including brokers established in the free zones)

– Resolution No. 58 clarifies that this is “available capital”

– Bank guarantees of AED3 million for LLCs plus AED1 million for each regional office

– Bank guarantees of AED5 million for branches plus AED3 million for each regional office

PI Insurance of AED2 million for an LLC and AED 3 million for a branch

Applicants for new branches must show AED3 million of premium income in the previous financial year

Licensing

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No cross-over between consultants, IFAs, banks or insurance agents

Life and general business may be conducted subject to “complete separation of activities”

Reinsurance broking and direct broking on the same transaction prohibited

Separation of functions

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No requirement for direct payment of premium to insurers save in respect of:

– Life insurance

– Marine and aviation

– Hull

– Petroleum

Premium to be paid into segregated client account

Premium to be paid to insurer without deduction

– No provision for binding of risk

– No guidance as to passage of risk in the premium

– No provision as to time period in which insurers have to pay commissions

Claims may not be paid via brokers

IA Scope to audit

Insurance Broker Accounts

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Brokers must have terms of business agreements with each insurer with whom they deal

The agreement must:

– be in Arabic

– signed by both parties

– Notarised

– Address specific matters listed in the Regulations

– Prohibit the broker from issuing or amending policies

Terms of Business Agreements

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IA to be provided with:

– Internal by-laws and procedures

– Organisational structure

– Record keeping

– Compliants

Technical cadre:

– CEO, Operations Manager and competent employee for each branch / division

– Qualifications

– Notification of vacancies

Administration and People

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The Draft Combined Regulations

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The wrong way

Solvency II – EU directive aimed at harmonising insurance regulation

3 Pillars:

– Pillar 1 consists of the quantitative requirements (for example, the amount of capital an insurer should hold).

– Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers.

– Pillar 3 focuses on disclosure and transparency requirements.

Criticised for creating unfair playing field, over reliance on credit risk ratings, concerns about spurious correlation between asset classes

Not a one size fits all regime

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Seven component parts (previously circulated in draft separately)

– Investments

– Solvency Margin and Minimum Guarantee Fund

– Calculation of Technical Reserves

– Asset Allocation

– Record Keeping

– Accounting Books

– Accounting Policies

Overview of Combined Regulations

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“The Company must ensure that the assets are diversified and adequately spread and allow the company to respond adequately to changing economic circumstances, in particular developments in financial markets and real estate markets or major catastrophic events; the Company must assess the impact of irregular market circumstances on its assets and must diversify its assets in such a way as to reduce such impact.” (Article 1.1)

Investment

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Investment function – board level investment committee

Investment Policy and Risk Management Policies

Stress testing frame work and testing on “regular” basis

Contingency Funding Plan

Risk appetite to be determined by the Board of Directors

Matching of assets and liabilities (exclusion for unit linked products)

Assessment of limits and counterparty risk

Application of limits specified by Regulations – higher requirements for overseas investments

Restriction on foreign assets of 20% (exception for assets held in custody at UAE Bank)

Derivatives permitted only for hedging

Investments

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Type of Assets Maximum Limits for

aggregate exposure in a

particular asset class

Sun-limit for exposure to a

single counterparty

Real Estate* 30% No Sub Limit

Equity instruments including units in funds in listed and not listed companies within UAE with strong or very strong

rating by a reputed and independent rating agency.

30% 10%

Equity instruments including units in funds issued by companies listed and not listed outside UAE with strong or very

strong rating by a reputed and independent rating agency.

7.5% 10%

Government securities/bonds (UAE) issued by individual emirates excluding quasi government securities/bonds

(UAE)

100% No Sub Limit

Government securities issued by (A) rated countries. 30% No Sub Limit

Cash and deposits with Banks (e.g. current account, call deposits, term deposits, notice deposits, certificates of

deposits, etc)

Minimum 10%, no

maximum limit

25%

Loans secured by life policies (excluding unit linked policies) of insurance issued by the Company. 30% for Life and 0% for

Properties

No Sub Limit

Derivatives or complex financial instruments 1% (Only to be used for

hedging purpose)

No Sub Limit

Secured loans, deposits, debentures, bonds & other debt instruments which are rated strong or very strong by

reputed and independent rating agency.

25% 20%

Other Assets including Investment in Subsidiaries and Associates 10% No Sub Limit

Investments – Asset Distribution and Allocation Limits

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Minimum Capital Requirement has remained (AED100m for insurance companies), but may not be less than 1/3rd of the solvency margin

Risk based Solvency Capital Requirement:

– to be calculated by reference to the model prepared by the IA

– Risk management system and frame work (including stress testing)

Own Funds to meet 100% of the MCR and 50% of the SCR

– OF = surplus and subordinated liabilities

Annual submission to IA

Solvency Margin and Minimum Guarantee Fund

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Technical provisions to be calculated in accordance with the regulations.

Technical provisions to be reported quarterly

Each insurer must appoint an actuary accredited by the IA (appointment and change to be notified to the IA)

Actuarial report to be provided to IA on “present immediate risks or future risks facing the company”

Audit report to comment on the risks identified in the actuarial report

In the event of “exceptional / significant risks” actuary to report to board and board to take corrective actions and notify the IA within 15 days

Actuarial methodology and changes to the methodology to be notified to the IA

Technical Provisions

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Asset valuation based on the prudent person principle

Records for business booked in the UAE to be maintained in the UAE and accessible

Back-up records at separate location

7 year record keeping obligation (including original paper documents)

Financial reporting to IA to be provided in Arabic and English on a quarterly and annual basis

Other points of note

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The AML Regulations

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Board Resolution No. 16 of 2003 replaced Board Resolution No. 1 of 2009

Key changes:

– Application to insurers and service providers in free zones

– “risk based approach”

– Obligations on board and employees to report suspicions

– Appointment of Emirati compliance officer

– Audit department to test compliance

– External audit department to test compliance

– Foreign Politically Exposed Persons to be identified and senior management approval required before entering into a business relationship

– High value insurance policies now deemed high risk. Definition is AED10,000 premium (one off) or AED5,000 (regular premium)

AML regulations

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