What the UAE’s new life regulations mean for advisers and customers
The mis-selling of financial services products has affected many economies around the world where disposable income is relatively high. In the UAE, to safeguard existing and potential customers, regulators have taken active steps to curb it with the issuance of directions from the Central Bank in May 2017 and the recent enactment of the UAE Insurance Authority’s Board of Directors’ Decision No (49) of 2019 Concerning Instructions for Life Insurance and Family Takaful Insurance.
The latest life regulations introduce a cap on all fees and payments to insurance intermediaries – those selling the products, such as independent financial advisers – for life insurance policies, whether pure insurance policies or investment policies. At the moment, intermediary payments are generally not disclosed to customers and are directly or indirectly built into the pricing of the products, thereby affecting performance and leaving the customer feeling cheated.
While the first draft of these regulations was published in early 2017, the final regulations were published by the UAE Insurance Authority on October 9 and will become applicable six months after their publication in the Official Gazette.
The new rules set out multiple changes, with the most important the overall cap on commission – any payments made to distribution channels
– that can be paid to the insurance intermediaries. Such caps depend on the nature of the insurance product and its tenure. For example, pure protection products, more commonly known as term policies, only provide an indemnity linked to the life of the insured, but no other cash value return.
Under the new regulations, the commission limit for such policies is capped at 10 per cent of the annual premium, but with an overall cap of 160 per cent of the premium across the life cycle of the product.
In simpler terms, if the insurance premium for Dh1 million cover is Dh10,000, the yearly commission payout can be no more than Dh1,000. And if the policy period is 25 years – over which you pay a premium of Dh10,000 multiplied by 25, which = Dh250,000 – the overall commission limit capped at Dh1,000 multiplied by 16 = Dh16,000.
Additionally, savings products, commonly termed as investment products, have a cash or return value attached. For these, the cap limit is a combination of the cap limit for the insurance portion of the premium and the investment portion of the premium.
Under the new rules, the insurer is required to provide a benefit illustration which provides details of the plan. It must also detail the benefits under the policy, including the insurance, protection and cash value or return on investment, and the premiums towards each component. Most importantly, it must list full details of all the applicable fees and charges.
There can be no hidden charges. So this illustration document sets out the applicable premium a customer will pay under the policy, including what portion of the premium forms the commission.
As an end customer, you are only required to pay the premium specified under the proposed policy. All fees and charges towards commissions, payouts, administration and management of the product are part of the premium and these charges must be stated clearly in the benefit illustration.
The life regulations state the adviser can request an additional fee from the customer towards advice and management of the product. This would not be considered part of the commission caps if the customer is separately informed about these fees. However, it is not customary for advisers selling these types of products to request additional fees, as their payment is built into the commission.
The new rules set out multiple changes, with the most important the overall cap on commission