Back to basics: The industry is moving towards implementing improved risk assessment and regulation

With new leadership and a slate of reforms under discussion, the insurance regulator is ramping up efforts to manage and support the insurance sector. Since 2007, when the UAE’s Insurance Authority (IA) was established, the local industry has expanded at a steady clip. Gross written premiums (GWPs) for general insurance grew 37.9% in 2007, 30.7% in 2008, and between 5% and 7% each year since, according to IA data. In the life segment, GWPs increased 23% in 2009, 23.2% in 2010, 16.4% in 2011 and 27% in 2012. As a side-effect of such rapid expansion, “regulation in the UAE insurance market has battled to keep pace,” legal firm Clyde & Co stated in a 2012 report.

New Turn

But in a move welcome to local stakeholders, the government appointed Ibrahim Al Zaabi to the position of acting director-general in September 2013. “Now that he’s appointed, he will definitely find the right people,” Fareed Lutfi, the secretary-general of the Emirates Insurance Association, told OBG. Lutfi also anticipated that the director-general would soon hire the necessary staff, including an auditor and a compliance officer. After his appointment, Al Zaabi signalled his intentions to act when he released draft legislation to standardise motor insurance, a top regulatory priority. “We need to introduce new laws and regulations to regulate the whole sector. This is continuous. It doesn’t stop,” he told media in September 2013. He has also called for consolidation in the industry and said a framework to administer mergers between insurers and brokers would be forthcoming.

The announcements were received warmly by a sector that has seen increased competition and falling premiums shrink margins. Top concerns include improved financial reporting, a unified motor policy, asset class limits and regulation of brokers.

Intermediary Regulations

The most immediate shift in the regulatory landscape will be the implementation of new requirements for insurance brokers. While draft regulations were first introduced in 2012, they are likely to be enacted in 2014 after meetings with key stakeholders and several amendments. Brokers currently operate under a regime drafted in 2006, and industry players are eager for new rules to rationalise the unwieldy market. A total of 14 agents and 170 brokers served the market in 2012, according to the IA’s annual report. However, not all brokerage firms are equal. “The number of active brokers do not exceed 40. There are around 20 that are really professional and only 10 major players that offer quality of risk management,” said Rasha Moukayed, manager at Guardian Insurance Brokers.

The new regulation will certainly accelerate the professionalisation of brokers and put pressure on the ones focusing only on price, notably those in the motor and medical segments. “The broker market is mainly competing on price, and brokerage firms are driving premiums lower while they should focus more on ensuring customers get the level of protection they need,”

Mahdi Attya, the Abu Dhabi branch manager for AXA Insurance, told OBG. “Regulation on the brokerage side is very important.” While there is consensus on the need to professionalise the market, the IA has offered stakeholders the opportunity to weigh in on specific stipulations. Fawaz Moukayed, CEO at Guardian Insurance Broker, told OBG that he had spoken with officials from the IA on behalf of brokers and that they agreed on most of the new regulations’ content. “It is just some of the details that need working out,” he said.

High Standards

A key piece of the package will increase capital requirements for national brokers from Dh1m ($272,200) to Dh5m ($1.36m), and from Dh1m ($272,200) to Dh10m ($2.7m) for foreign firms.

While Moukayed told OBG that the capital requirements make sense, Clyde & Co reported that the reforms include “no prudential test as to what capital a broker needs to have available based on volume and type of business undertaken, nor any attempt to require the broker to monitor this”.

The new regulations also require more rigorous qualifications for intermediary staff. Clyde & Co expressed concern about the nature of qualifications and the capacity for enforcement. For example, educational requirements requiring certain kinds of degrees or certification in specific field may be difficult to implement. Under the new rules the directors of some well-regarded professional firms may not qualify, despite their breadth of experience.

A potential loophole is that the IA’s regulations do not thus far address the rise of new distribution channels like bancassurance. Bancassurance and firms such as travel agencies that provide insurance as an ancillary product are playing a valuable role in the under-penetrated market and will need to be covered by the regulatory framework. Provisions in the new reform plans deal with credit facility agreements and most stakeholders are generally grateful for any measures that seek to address current concerns.

Many in the industry feel, however, that the reforms simply do not go far enough. Clyde & Co echoed the local consensus when describing the draft regulations as insufficient “for the industry which requires a root and branch reform of the way in which intermediaries are regulated”. Indeed, several industry players have called for regulatory reform across the sector to manage insurers as well as brokers.

Industry Reform

The IA has issued a number of regulations that were received positively, but later delayed. Despite the prolonged implementation process, the standards have set milestones toward which the industry is moving. As part of a 2012 reform package, the IA released guidelines on investment class limits to encourage diversification from equities and property, but no deadline for implementation was established to avoid triggering a major selloff and disrupting the local markets. Nonetheless, local firms have been diversifying their portfolios and increasing investment in less volatile asset classes. According to an Alpen Capital report, UAE insurers’ investments in shares and bonds fell to an average of 45% of their portfolio in 2011 from 57% in 2007. During the same period, real estate investments jumped from 13% to 20% and investments in deposits rose from 30% to 35%.

One of the areas of concern that is a priority in terms of improvement is financial reporting. It is anticipated that stricter financial reporting will be made mandatory in 2015. “The industry would benefit from improved financial reporting,” Walid Sidani, the Abu Dhabi National Insurance Company’s CEO, told OBG. “It would put us on an even level with international insurers and reinsurers. Additionally, the health of the industry would be improved with greater levels of transparency, governance and sector equity whereby all companies are on equal footing.”

Delays

 The Federal Law No. 6 of 2007 set a 2012 deadline for UAE insurers to separate life and non-life businesses and cease trading as composite insurers. However, implementation was ultimately delayed until 2015 to allow the regulator time to provide clearer guidance to firms. Only 13 of the UAE’s 61 insurers operate in both the life and non-life markets, but these 13 include some of the nation’s most important players. Oman Insurance Company, the largest UAE insurer by assets and GWPs, and the Orient Insurance Company, the third-largest firm, both trade as composite insurers. Separation will require increased capitalisation and entail higher operating costs, and Clyde & Co identified further obstacles as well.

“The fact that locally established insurance companies are also required to be listed companies, further exacerbates the practical difficulties associated with splitting a composite insurer, which is a public company, into two separate entities,” according to a June 2012 report by the law firm.

The IA’s other priority is implementation of a unified motor policy for the UAE. The current regime does not require adequate third-party liability coverage, according to Lutfi. “Insurers should be putting aside $0.70 for every $1 in motor premiums,” he told OBG. “Their failure to do so is a serious threat to solvency.”

Indeed, the IA’s call for a unified policy has been echoed by industry watchers such as Clyde & Co and AM Best, and Al Zaabi referred a draft policy addressing this concern to the UAE Cabinet in September 2013. Stakeholders welcome the prospect of a more robust regulatory agency and the IA has shown an eagerness to seek industry input. In the next few years the UAE is likely to see the insurance sector transform as new regulations take effect with the aim of improving transparency, risk management and governance.