UAE’s new life insurance regulations to increase policyholder number and help grow the Dh9.5 billion sector

Although the new life and family insurance regulations that came into effect on October 15, 2020, are more transparent and holds insurance brokers accountable, a drastic reduction in brokerage commission might force many life insurance agents out of work

Date: Dubai, UAE, November 3, 2020

News Highlights

  1. Gross total written life, group life, individual life and group credit life insurance premium in the UAE reached Dh9.51 billion in 2018;
  1. Gross written premium in the individual life insurance in the UAE crossed Dh7.52 billion in 2018;
  1. New regulations cut life insurance commission drastically, that will make selling life insurance policies unattractive to brokers;
  1. The new regulations are good for the insured people as the policies have now become more transparent to stay customer centric and Term Insurance cheaper while all other plans become expensive.

A new set of regulations governing the UAE’s life insurance market, effective from October 15, 2020, that drastically reduces brokers’ commission from 40-70 percent in the first year to 10 percent, might be good for the insured person and his beneficiaries, and help the Dh9.5 billion life insurance premium market to expand in the coming months.

The new regulation makes the Term Life Insurance more attractive for expatriates to buy the product from UAE insurers than from the insurers in their home country. This way, the UAE might see an increase in the Term Life Insurance policies, therefore raising the insurance penetration level in the coming years.

However, the new regulations might severely affect the overall life insurance sector as most brokers might find themselves out of business due to a fall in their earnings.

The new regulations, known as UAE Insurance Authorities’ Board of Directors Decision 49 (BOD 49) of 2019, will make the new life insurance policies more transparent and cheaper while making insurance companies more accountable and responsible to the customers.

The UAE has 62 active insurance companies, including 35 national and 27 foreign insurance companies. Only 12 of them are involved in selling life insurance-related products. There are 163 insurance brokers, 20 insurance agents, 25 insurance consultants and surveyors and loss adjustors in the UAE, who collectively managed to generate total Gross Written Premium (GWP) of Dh43.71 billion in 2018, including Dh19.08 billion in Health Insurance and Dh15.12 in Property and Liability Insurance, according to UAE Insurance Authority.

GWP in life, group life, individual life and group credit life insurance in the UAE reached Dh9.51 billion in 2018 while GWP in the individual life insurance in the UAE crossed Dh7.52 billion in 2018.

The new regulations seeks greater information on the policy outlay and risks covered over the insurance terms as well as commissions and fees that are charged by the insurance company and the brokers.

“The maximum commissions paid is 10 percent of the periodic annualised premium times the number of years in the policy term. For a Single Premium Policy and Ad-hoc Premium, the maximum commissions paid must not be more than 10 percent,” said Insurance Authority, the UAE’s insurance regulator.

“From October 15, when the BOD 49 regulations came into effect, the Term Life Insurance products might become 15-30 percent cheaper – which is good for the insured person – as he or she will be able to insure his life for the same coverage with 15-30 percent less premium,” Leena Parwani, Founder and Chief Executive Officer of LPH Financial Services.

“The new regulations obviously intend to increase policyholder protection by enforcing better disclosures, thus expected to increase the life insurance penetration in the UAE, which is quite low at 0.7 percent of the UAE population.

“Consumers will benefit from greater transparency with less chances of malpractice. The new regulations will make the UAE’s life insurance sector more organised, more professional and more competitive.”

Life insurance is one of the most misunderstood subjects. Industry sources say, the new set of regulations come following allegations of alleged mis-selling of life insurance products and misguiding clients.

“Mis-selling can’t be stopped just by eliminating commission of brokers,” Leena Parwani, an expert financial planner and advisor, says. “To stop miss-selling, our collective focus should be on educating client and sharing as much as knowledge possible.

“Changes are vital and most of the regulated countries have experiences drastic changes in Life Insurance industry, name it Australia, UK, USA and eventually we get used to of it the way water makes its way same way humans finds way to happily live with it.

“However, the downside of the new regulation is that it has some adverse conditions such as 5 year claw back, which is not helping anyone, neither client nor advisor neither insurance companies, especially if you see Term Insurance which has hardly any chances of miss-selling, and not seen such conditions in any other market globally.

“Until today, life insurance clients are force to buy policy to open a bank account and the client sometimes doesn’t even know what kind of policy he is getting in to it. So, we need to educate the clients and make aware of the salient features of each product for their proper understanding and help them decide on their choices and preferences.

“The new regulations make clear provisions for making these clear to the client, and tells the insurance brokers and companies to illustrate the full cycle of the policy and how it works. We now have a greater clarity, which is good for new clients.”

Life insurance market is usually run by brokers and brokerage firms – the majority of whom are not salaried employees and live on commission only. The earlier practice allowed the brokers to receive a higher percent of the first-year premium as commission and 2-5 percent more every year on the annual premium collected from the second year onward till maturity of the policy.

Most life insurance brokers usually make money than other insurance sales persons per month and those who earn a certain amount of brokerage commission by selling life insurance policies in a year, are entitled to join the annual Million Dollar Round Table (MDRT) and those who generate six times the commission in a single year, are selected for the Top-of-The-Table – making them part of the most successful life insurance advisors.

Leena Parwani, who started her financial services practice in 2013, has qualified for both MDRT and the Top-of-The-Table honours from her first year in the profession and continued the performance for the last seven consecutive years, making her one of the most successful in the insurance industry in the UAE.

“Since we deal with people’s life, their life-earnings, savings, their estate planning, succession and their future, it requires a certain level of qualification, trust and professionalism. People trust us with their intimate financial information and this requires strict professional discipline,” she says.

“So, it is of paramount importance that they remain honest, sincere and true to our professional obligations to help the clients. If we can do this professionally, the insurance penetration will increase in the UAE in future, from the current level of 0.7 percent.”

The new regulations include what it calls a 30-day ‘Free Look Period’ during which time a new policy-holder could exit the life insurance policy and the insurance company is liable to pay back the premium in full, without any deduction.

“The insurance company, or a distribution channel (insurance agents, insurance brokers) representative not directly involved in the sale process, has the right to contact the policyholder to identify the reasons for the cancellation,” Insurance Authority said.

“However, any abuse of this right, such as applying pressure on the policyholder, will be considered a breach of the code of professional conduct. The insurance company should have a policy to refund the full premium in case of surrender within the Free Look Period.”

However, the maximum cap of brokers’ commission might adversely affect the brokers many of whom might find themselves out of business due to a drastic fall in commission.

“However, the downside of the new regulation is that it will drastically reduce the brokers’ income and due to this many brokers might go out of business within a few years,” Leena Parwani says.

Insurance offers financial protection to individuals and companies against various kinds of loss or damage. Insurance providers evaluate the risks of insuring someone or something and issue clients with a policy based on their assessment.

The insurance policy is a legal contract between the insurance provider and the policyholder. Average insurance penetration worldwide was around six percent in 2018, but this looks set to increase in the coming years and will be mostly driven by emerging markets.

There are two broad types of insurance: life and non-life. With life insurance, the policyholder keeps the plan active by paying premiums to the insurance company. When the policyholder passes away, the insurer pays a lump sum to the designated beneficiary.

The life insurance penetration in the UAE is already low – only 0.7 percent of the UAE population has some sort of life insurance protection.

About LPH Financial Services

LPH Financial Services is a Dubai-based leading financial services and insurance advisory that specialises in cost-effective risk assessment, family estate planning, wealth preservation, wealth creation solutions to corporations, small and medium enterprises as well as high networth individuals – in their estate planning, financial planning and business continuity plans.

LPH has a strong and well-balanced portfolio of business covering health, estate planning, life insurance and education policy coverage. It’s health insurance portfolio covers more than 17,000 lives and keeps growing.

LPH Financial Services is run by a team of dedicated financial planners and insurance professionals who are here to ensure that the clients make the right choices when it comes to their financial plan. It aims to become the most trusted and reputed financial consulting firm in the Middle East by leveraging on the collective expertise of its professional team and always delivering excellence.

Simultaneously, the company intends to build long-term value in the insurance and investment industry through alliances with established global partners. It’s team is also deeply focused on helping create abundance in health and wealth for expatriates living in the Middle East. LPH believes in setting realistic goals, achieving them in a timely manner with coordinated efforts, and living its vision through every milestone.

Established in 2013 by Ms Leena Parwani, Founder and CEO, LPH Financial Services helps businesses, business owners and high-networth individuals with effective, customised financial planning that solutions are of great value and helps them manage their business, life and financial future better.