If the Mayan prophecy is to be believed (or at least Hollywood's version of it in the movie 2012), 2012 will be a year of natural disasters, culminating in the end of days for planet Earth. The apocalypse represents the end of what is said to be a 5,125 cycle on 21 December 2012.1 Scenarios suggested for the end of the world include the arrival of the next solar maximum, or Earth's collision with a black hole, passing asteroid or a planet called "Nibiru".
Fortunately, the team at the international law firm of Clyde & Co LLP do not subscribe to such a pessimistic outlook for the year.2 However, there have been some seismic events in the insurance world in the UAE and wider Middle East region in 2011 including, the increasing inaccurately named "Arab Spring" losses, the change in management at the UAE's largest insurer, Oman Insurance Company, the conviction and sentencing of a number of UAE insurance professionals, the fall from grace of the UAE's award winning commercial broking firm of yesteryear, and the rumoured repositioning of the UAE Insurance Authority. Are these forbearers of yet greater events to come in 2012? We thought it might be an opportune moment to predict developments in the regional insurance market for the year (oh… and to comment on a few matters that even believers in Mayan prophecy may think far-fetched).
Regulation, regulation, regulation…
The insurance industry has already faced a substantial volume of new regulation in jurisdictions such as the Kingdom of Saudi Arabia and the United Arab Emirates. Insurers may be forgiven for feeling somewhat overwhelmed already. However, based upon the draft regulations currently in circulation, this trend is set to continue through 2012:
- The Saudi Arabian Monetary Agency (SAMA), for example, currently has published on its website five sets of draft regulations covering actuarial work, the structuring and operation of audit committees for insurers and reinsurers, investment regulations, on-line insurance activities of insurance and reinsurance companies and outsourcing of functions by insurers, reinsurers and insurance service providers.
- In the UAE, there is potentially even more far-reaching draft legislation in respect of insurance and reinsurance brokers, loss adjusters, insurers' financial matters (including investment regulations and regulations governing technical reserving, minimum capital and accounting regulations) and bancassurance.
The trend of these regulations is to require insurers and reinsurers to amend their existing policies and procedures (or prepare new ones) to reflect the evolving regulatory requirements. In many cases they require substantial reports to be made to the regulator and may also require the creation of new roles / departments to ensure compliance. For example, the draft Investment Regulation published by SAMA requires that that insurers and reinsurers seek approval from SAMA for their investment policy and any materials changes that they subsequently wish to make. It requires that an investment committee be established to "develop and assess the implementation of the investment policy." Similarly, the On-Line Insurance Activities Regulation requires that Saudi insurers develop a business plan specific to its on-line business activities for which the prior approval of SAMA is required. Such insurers must also establish a department to be "in charge of the website and its operational aspects…"
Under the draft Board Resolution Concerning the Marketing of Insurance Policies Through Banks (the Bancassurance Regulation), the UAE Insurance Authority is proposing a new regime for bancassurance activities in the Emirates. Banks and insurers wishing to participate in such activities will be required to obtain the prior approval of the UAE Central Bank and register the bancassurace agreement with the UAE Insurance Authority.
It is easy to overlook the practical impact of these regulations beyond the burden of ensuring regulatory compliance. The Bancassurance Regulation (many of the provisions of which have already been implemented through the issuance of a circular in September 2011) has very tangible effects on the manner in which the sale of insurance products can be undertaken by banks. The regulation significantly restricts the scope of the activities undertaken by the bank to pure marketing functions and limits the classes of insurance that may be marketed via banks (effectively limiting this distribution channel to personal lines business). Perhaps the most significant impact of the regulations is the requirement that the insurer have an office capable of handling claims in each Emirate in which the bank will be marketing its products. This will effectively restrict the use of bancassurance by smaller insurance operations.
The draft Investment Regulations also will have a significant impact on the industry in the UAE. As drafted, they include express asset distribution and allocation limits that restrict investments in units of foreign funds to not more than 10% of the insurance company's investments (in contrast 25% of the insurance company's investments may be in funds in the UAE). These regulations look set to be implemented shortly together with the UAE Insurance Authority's draft instructions in relation to the, solvency margin, accounting and technical reserving provisions of insurance companies. In a press statement published in early January 2012, the Deputy Director General of the Insurance Authority, indicated that these regulations are to be considered by the new Board of the Insurance Authority when it is constituted this year.
It is not just the insurance regulators that are impacting upon insurers in the region; the forthcoming regulations from the Emirates Securities & Commodities Authority (ESCA) appear likely to impact on UAE life insurance companies' fund investments. The draft Investment Fund Regulation published by ESCA for consultation on 6 January 2011 will, if implemented in its current format in 2012, require that all foreign funds to be licensed and approved by the UAE Central Bank and ESCA. Foreign funds may only be promoted if:
- the foreign fund is established and licensed by a regulator that is the equivalent of ESCA;
- the related parties of the foreign fund are licensed to perform their activities by a regulator that is the equivalent of ESCA;
- the fund is marketed by an ESCA-licensed distributor; and
- the fund has obtained UAE Central Bank approval to be marketed in the UAE.
This approval requirement is potentially problematic for UAE life insurance companies who offer to invest policyholder premiums via fund platforms that access dozens if not hundreds of different foreign funds. The clear danger for the industry is that much time may be taken up on registering funds that will only ever be utilised by a small number of investors. It is also unclear from the draft regulation as to who is responsible for obtaining UAE Central Bank approval (i.e. the insurance company or the fund manager) and whether life insurance companies authorised to promote and distribute funds (having historically been regulated by the Insurance Authority and exempted from the UAE Central Bank regulations). It remains to be seen whether life insurance products will be exempted from the regulations and/or if amendments will be made to facilitate the use of fund platforms.
Health insurance
The continuing development of the health insurance market looks set to continue in 2012. It Following the developments by the Health Authority Abu Dhabi (HAAD), this year it looks to be the turn of the Dubai Health Authority (DHA) to promulgate its own regulations governing the provision of health insurance, the establishment of provider contracts and the administration of claims.
In addition, the UAE Ministry of Finance has published a draft Federal Health Insurance Law. If implemented in its current form, this would provide for a basic level of health insurance for all UAE nationals and expatriates by their employers or sponsors. This draft law would appear to further muddy the regulatory landscape through the creation of a Federal Health Insurance Authority, which we assume would operate alongside, or in a monitoring role, for the individual Emirates health authorities such as HAAD or the DHA. No details are currently available as to when the draft law will be published or issued, but it is stated to come into effect within 12 months from the date of issuance.
Split of composite insurance companies?
Article 25 of UAE Federal Law No. 6 prohibits composite insurance companies and provides, at sub-section (2) that all companies operating on a composite basis are to segregate their business into separate companies by July 2012. No guidance has been issued by the UAE Insurance Authority as to the manner in which such a split of operations is to be undertaken. We anticipate that the deadline for compliance will be adjusted accordingly and that guidance will be issued in due course. Any such a split may create interesting opportunities for foreign insurers, particularly in the life insurance sector (which will typically represent the smaller part of most composite insurers' activities), to enter the UAE market by way of joint venture and/or acquisition.
A new regulator in the UAE?
Rumours have been circulating during the second half of 2011 that the UAE Insurance Authority will be restructured and its functions transferred to another regulator. These rumours were exacerbated by the reported dissolution of the Board of the Insurance Authority. It remains to be seen whether there are any substance to these rumours. However, shortly before going to print, the Deputy Director General of the Insurance Authority, issued a press statement indicating that the new Board is to be constituted shortly. It is anticipated that such a development will likely be followed by increased supervisory activity in relation to the insurance sector.
The emergence of captives in the region
2011 saw continued development of the region as a hub for captive insurance. Three jurisdictions currently offer captive insurance licenses in the GCC (Bahrain, DIFC and QFC) and, we understand, the Insurance Commission of Jordan has also recently established its own captive insurance regime. The QFCRA updated its Captive Insurance Business Rules (CAPI) in July 2011, reducing the minimum capital requirements for Class 2 captives from US$1m to US$400,000 and the creation of a new flexible "Class 4" captives to allow the development of captives that do not easily fit into the other three categories, but which can otherwise operate effectively.
Following these developments, we anticipate that 2012 will see the continuing emergence of the captive concept in the region. In particular, we await the first captives to be established in the QFC and to see the deployment of cells in Global Star PCC, the first protected cell company in the DIFC offering cells for use by non-group companies.
Whether we will see similar regulations in jurisdictions such as KSA remains to be seen…
What won't 2012 bring?
Finally, let's look at a few developments that we do not think will happen in 2012 (as much as the team here at Clyde & Co LLP might wish otherwise)…
Outsourcing regulations
SAMA has had Outsourcing Regulations for the insurance industry available for public consultation throughout 2011. It is to be hoped that these will be implemented during 2012. The regulations mark a progressive development in the region, recognising that many insurance businesses are regional (if not global) and that, accordingly, many operational functions may well be centralised in group entities elsewhere in the world. The regulations permit, subject, to adequate controls being put in place, outsourcing of both material and non-material functions to entities outside of the Kingdom.
Regrettably, we doubt whether other regulators in the region will follow suit in 2012. In the UAE, for example, the trend of the Insurance Authority appears to be diametrically opposed. The introduction of Board of Directors Resolution No. 9 issuing the Directives of Licensing Third Party Administrators for Health Insurance and Organisation and Supervision of their Operations (the UAE TPA Regulations) is a clear illustration of the point. Notwithstanding that many licensed UAE insurers utilise the services of TPAs established elsewhere in the world, the TPA Regulations appear to provide that health insurance TPAs must be established in the UAE in accordance with the Commercial Companies Law and licensed and registered with the UAE Insurance Authority. This is a development that is particularly unwelcome for the TPAs established in the Free Zones of the UAE specifically to service the health insurance portfolios of UAE insurers.
Recognition of the need for portable life products
The Middle Eastern insurance market has long been recognised has being under-penetrated. This is especially true in relation to the life insurance / family takaful sector. In part, we believe that this is due to the fact that many expatriates purchase life insurance from providers based in the home country. Although such arrangements are technically illegal, it is apparent that expatriates are more comfortable holding such investments, in this manner notwithstanding that they forego the protections afforded by local law. It would surely be better for regional regulators to recognise this desire for portability and, at least for individual life insurance products, which are long-term in nature, create an alternative mechanism for licensing such products (as opposed to requiring such entities to establish operations in each of the jurisdictions in the Middle East in which they have customers).
A single regulator in Qatar
It has long been reported that a single insurance regulator will be established in Qatar, effectively combining the role of the Ministry of Business and Trade and the Qatar Financial Centre Regulatory Authority in this area. Given that insurers in the Qatar Financial Centre are generally permitted to sell insurance in the State, other than to State entities, this would be a most welcome development.
Harmonisation of regulations between the UAE and the DIFC
Although there are signs of greater cooperation between the UAE Insurance Authority and the Dubai Financial Services Authority, entities established in the DIFC remain restricted to 'wholesale insurance activities' (i.e. reinsurance). It would significantly assist the development of the DIFC as a financial hub if companies established in the DIFC could market insurance products onshore (as their QFC counterparts can do in Qatar). In addition, it would allow international insurers, particularly life insurers, a legitimate way of accessing the wider UAE market until such time as the moratorium imposed by the UAE Insurance Authority is lifted.
Regional passporting
At the risk of turning from the disaster movie theme to the action and adventure of an Indiana Jones movie, our finally entry on the list of unlikely events in 2012 is the holy grail of all insurance related wish-lists for the region… At every insurance conference of recent times that the author has attended there have been calls for a harmonization of insurance regulations across the GCC in order to allow "passporting" of products across the region. Such arrangements would create greater consumer choice, encourage competition and lower operational costs for insurers. Needless to say, as has proven the case in relation to the proposed single GCC currency, such harmonization looks difficult to achieve in practice.
1 It would appear that the Mayans were significantly more accurate than your average 21st Century weather forecaster.
2 We have seen no evidence to support these pessimistic views (or indeed, signs that underwriters are developing 2012 exclusions for incorporation into their policies).