The Central Bank of the United Arab Emirates (UAE) (Central Bank) has recently implemented the new insurance brokerage regulations vide Circular No. 1/2024 on 25/07/2024 (New Regulation) which will be effective from 15/02/2025 (Effective Date). The New Regulation repeals the Insurance Authority Board of Directors Resolution No. 15 of 2013 concerning insurance brokerage regulations (Old Regulations). All insurance brokers that are licensed with the Central Bank, as per the Old Regulation, are now obliged to adjust their operations in accordance with the New Regulation before the Effective Date.
The New Regulation covers:
- conditions of licensing insurance brokers;
- rights and obligations of insurance brokers;
- prudential requirements addressing financial soundness, risk management, internal controls, reporting and disclosure; and
- powers of the Central Bank with regard to the supervision of insurance brokers.
Expansion of the Definition of Insurance Brokerage
The New Regulation expands the insurance brokerage’s scope by including activities such as soliciting, negotiating or selling insurance/reinsurance contracts of an insurance company to a natural/juridical person, through any medium in exchange of a remuneration.
Licensing requirements
1. A juridical person can engage in an insurance brokerage activity, provided they are licensed by the Central Bank to practice insurance brokerage. Such juridical person must be a:
- company incorporated under the federal law no. 32 of 2021 of commercial companies act; (or)
- a branch of a company incorporated in a financial free zone with the presence in the UAE; (or)
- a branch of a foreign company which has a presence in the UAE provided such companies are licensed to practice insurance brokerage in the said financial free zone or in the country of origin in the same insurance type and was subjected to control of the respective supervisory authority,
with a minimum period of five (5) years of practice in insurance brokerage and should be subject to the controls and conditions of the Central Bank.
2. When compared with the Old Regulations, the New Regulation classifies the insurance activities into three categories:
- Category I licensing: Primary insurance operations
- Category II licensing: Reinsurance operations
- Category III licensing: Primary insurance operations and reinsurance operations
The New Regulation retains the same minimum capital requirement, bank guarantee requirement and the professional indemnity policy as the Old Regulations, for an insurance broker established in the UAE and for the insurance broker established in a financial free zone in the UAE or a foreign branch.
In addition to meeting with the minimum capital requirements, the applicant must also provide a bank guarantee, in favour of the Central Bank, from a bank that is licensed in the UAE. It is also pertinent to note that if the Central Bank deems it necessary, an insurance broker must increase the value of the bank guarantee. The Central Bank shall intimate the requirement for additional bank guarantee through a letter and the insurance broker must comply with the deadline stipulated in the letter.
The insurance broker must avail professional indemnity insurance from an insurance company that is licensed by the Central Bank, wherein the insurance broker is the insured and the Central Bank is the beneficiary, subject to the Central Bank’s written approval. This indemnity insurance is valid through the license term of the insurance broker and is subject to be renewed annually.
Insurance Brokerage Agreements
The Old Regulation had specifically mentioned that the insurance broker must conclude at least two (2) insurance brokerage agreements with insurance companies within a period of sixty (60) working days from the date of issuance of their license. However, in the New Regulation, the Central Bank mandates that the insurance broker must enter and maintain valid insurance brokerage agreements with at least two (2) insurance companies, but currently there is a lack of clarity on the period within which the insurance broker must comply with this requirement.
Treatment of Premium Collections, Claim settlements and Premium refunds
The New Regulation overturns the provision in the Old Regulation that authorizes insurance brokers to receive premiums on behalf of the insurance company. The New Regulation clearly states that the responsibility for premium collections lies solely with the insurance company, explicitly prohibiting insurance brokers from collecting premiums. To this effect, the insurance broker must give necessary instructions to clients to pay the premiums to the insurance company directly. Insurance brokers are also prohibited from collecting claim settlements or premium refunds. Although the Central Bank has instructed all insurance brokers and insurance companies to adjust their operations to comply with the New Regulation within a six-month period, this is not the current practice in the market and is anticipated to be adopted from the Effective Date.
Insurance Broker’s remuneration
The New Regulation introduces “Remuneration” as the monetary compensation payable to the insurance brokers by the insurance companies. Unlike the “commissions” permitted under the Old Regulations, the New Regulation expands the scope of remuneration that insurance brokers are entitled to receive. This shift allows for greater flexibility and potential for brokers in their compensation structure. This includes any commission, fee, charge or other payment, including an economic benefit of any kind, or any other financial or non-financial advantage or incentive offered, or given in respect of the insurance brokerage activities. However, it is worth noting that the computation of the Remuneration does not involve a percentage of the premium that is paid by a client to an insurance company.
Under the New Regulation, an insurance company must pay Remuneration to the insurance broker within the time specified in the insurance brokerage agreement, which in all cases must not exceed ten (10) business days from the date of receipt of such payment(s) of premium(s) by the insurance company. In case the client pays the premium in installments, the insurance broker’s share of proportionate remuneration must be paid in a similar manner.
Corporate Governance, audit and risk governance framework
The New Regulation requires the insurance broker to have:
- a robust corporate governance mechanism;
- policies in place to ensure transparency, accountability and long-term growth;
- a compliance officer to help meet regulatory requirements, prevent any illegal activities, and follow laws related to anti-money laundering, combating the financing of terrorism and the financing of illegal organisations; and
- an external auditor approved by the Central Bank.
The Central Bank mandates the insurance broker to submit quarterly interim financial statements reviewed by the external auditor. Additionally, the New Regulation also stipulates that the insurance broker to have appropriate risk governance framework that includes policies, processes, procedures, to mitigate material sources of risk on a timely basis.
Conclusion
The changes proposed by the Central Bank through the New Regulation showcases the Central Bank’s aim to foster reliable and efficient insurance brokers, ultimately highlighting its constant strive to build a robust insurance brokerage sector.
This article has been written by the experts at OH LLP.
*It reflects the personal opinion of the law firm and does not constitute legal advice*
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