Brokers appeal against new insurance premium rules in UAE

The brokerage community has approached the Emirates Insurance Authority (EIA) for a reappraisal of its recent decision on how premium payments are collected.
Last month the insurance regulator mandated that all premium payments on policies sold or renewed by brokers should be issued directly in favour of the insurers.
The directive came into effect from March 1. For the 70-odd active insurance brokers this represents a sharp U-turn from the way they have conducted their business for decades.
Sensitive
"It can be confirmed that representatives of the broker community have approached the EIA for a re-look at the directive," said an industry representative. "We are hopeful that the practical aspects of what we have proposed will be taken on board.
"This is an issue of extreme sensitivity for the wider insurance industry and not confined to the brokerage firms."
Industry sources, however, declined to comment on what these proposals were. They also did not say whether any alternate arrangements had been proposed.
In the past, the premium collected was used by brokers for their own short-term working capital needs as per arrangements with the insurers.
They would make the payments to the insurers at the end of a specified period, usually averaging 60 days.
Regulatory regime
The Emirates Insurance Authority brought in the new requirements after a brokerage firm in Dubai was found to have mishandled premium payments collected from its clients. This happened last year, and since then the regulator brought in changes that ensured such repeats would not occur.
It was also part of a broader move by the EIA to bring in an updated regulatory regime for the insurance industry as a whole to function.
Earlier, the EIA issued a circular requiring brokers to maintain separate bank accounts for premium collected from customers.
"While brokers have welcomed all the recent initiatives from the EIA, we feel there is a need for an extended discussion on the premium payment issue," the industry source said.
Supportive
According to Siddarth Razdan, chief operating officer at the brokerage firm Insighters, "The new regulation will lead to changes in operational procedures, both at the insurance companies and the insurance brokers' end.
"Personally speaking, I do not see a reason why the new regulation should lead to a shake-up in the insurance broker community."
Insurers, with few exceptions if any, are fully supportive of the change in status quo from March 1. Obviously, the fact that payments will be made directly to them from the day a policy is sold or renewed and premiums collected represents a big plus for them.
No longer will they have to wait the 60 days or so that was the norm earlier. Based on market feedback, local insurers are implementing the March 1 directive without any leeway given to their broker partners on staggering the payments.
Now that the brokers have made an approach to the EIA, the ball is now in the latter's court.
Helpful for clients
That all clients pay up the full premiums at the time of buying a policy or renewing it is a fallacy, according to broker sources.
"This is certainly not the case, especially where the premium amounts are large," said Siddarth Razdan at Insighters. "In fact, under the old system, there could be cases where the client did not pay the insurance broker in full within the credit period enjoyed by the broker from the insurance company. But the broker, in turn, paid the insurance company the full premium on the due dates." These are the grey areas that will need to be cleared with the March 1 deadline coming into effect.
gulfnews.com
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Takaful growth attracts domestic and multinational providers

Takaful insurance across the Middle East and South East Asia has seen rapid growth over the past five years. Francesca Nyman reports on what the future looks like for this sector.
The takaful insurance industry has seen remarkable growth over the past five years. Global takaful contributions grew by 31% in 2009 to reach $7bn, and by the end of 2011 the market was thought to have a value of $12bn, according to Ernst & Young.
Approximately 70% of all global contributions come from the GCC, the Cooperation Council for the Arab States of the Gulf, where low insurance penetration, demographic factors and the rise in Islamic consciousness have made the region a prime target for domestic providers and large multinationals alike. The second largest contribution comes from South East Asia, which accounts for 21% of the market.
In context
Analysts are keen to put this growth in context; after all, this is still a niche market. Swiss Re's Malaysia-based head of retakaful, Marcel Papp, points out "growth is always easier when the base is low and for takaful the base is very low". But, caution accepted, the numbers are impressive and, while the global economic turmoil took its toll on the conventional market, takaful has continued to see growth.
"Every year we have been anticipating a slowdown but, with conventional insurance seeing negative or single-digit growth, takaful insurers have maintained almost 20% growth," comments Ayman Alajmi, regional head of takaful and managing director Bahrain for Chartis Takaful Enya.

"Growth is always easier when the base is low and for takaful the base is very low." Papp

Low penetration
The low insurance penetration in this region is certainly a contributing factor as insurers do not have to canablise the conventional market. In addition, many have entered the market in joint ventures with the region's Islamic banks.
As E&Y's Islamic Financial Services leader Ashar Nazim explains, this is a significant advantage. "For takaful operators, distribution through Islamic banks allows easy access to a captive market who will only deal in Sharia-compliant insurance solutions. As the size and value of Islamic banking assets has grown in number and value, so has the attractiveness of this channel," he said.
Still challenging
But, despite the positive signs, the takaful market is still challenging. One concern for the multinational carriers that operate in the region is the dim view regulators are beginning to take of companies that peddle a little Sharia-compliant insurance on the side, from the same outfit that dispenses conventional insurance products.
"Previously ‘takaful windows' were permitted allowing a single entity to offer both conventional and Islamic insurance products. However, increasingly such arrangements are prohibited, as is the case in the United Arab Emirates where it is necessary to establish and capitalise a separate entity in order to offer takaful products," explains Peter Hodgins, partner at Clyde and Co.
"All eyes are now on Qatar, which last year banned similar windows in the banking sector."
However, some regions are introducing regulatory changes that actually permit companies to open windows. The Securities and Exchange Commission of Pakistan has recently issued draft takaful rules that allow conventional insurers to open takaful window operations, prompted by a desire to improve insurance penetration in the predominately Islamic region.

"For takaful operators, distribution through Islamic banks allows easy access to a captive market." Nazim

Takaful windows
If Qatar did ban takaful windows and other countries in the region followed suit this would create a compliance issue for multinationals in the region. Mohammad Khan, UK Islamic financial leader at PwC, believes firms entering the market should seriously consider capitalising a separate company to mitigate the risks, but not all companies can, or want to, raise the capital for a separate entity.
Although Chartis' is one company considering taking a change of direction to concentrate on commercial lines reinsurance and become a fully-fledged retakaful company. "There is considerable opportunity for Retakaful insurers to support the growth of Takaful business. This is an area that we at Chartis Enya will look to address, particularly in respect of supporting commercial lines takaful business," comments Alajmi.
The sheer number of players operating, particularly in the UAE, is also a challenge. Competition ranked as the highest risk for most industry readers surveyed by E&Y for its World Takaful Report 2011. As Nazim explains: "The number of operators coming online in the last five years has led to significant downward pressure on pricing."
Overcrowding issue
While most agree the Middle East's direct takaful market is "overcrowded" not everyone believes this is a cause for concern.
"In personal lines there are a lot of players," says Khan. "We will see consolidation within Kuwait, Qatar and some UAE territories such as Dubai and Abu Dhabi, but I expect the players that emerge from this to be stronger."
When it comes to specialised risks, there are far fewer players and much less capacity. Chartis offers takaful directors and officers and takaful professional indemnity, but it is believed to be one of only three companies that offer such products.

"We will see consolidation within Kuwait, Qatar and some UAE territories such as Dubai and Abu Dabi." Khan

Public awareness
A third, and somewhat surprising problem given the sector's rapid growth, is that of public awareness. In a risk survey last year Swiss Re asked muslims whether they felt they had good knowledge of or bought takaful. Only 30% of muslim respondents in Malaysia said they had bought takaful, or had good knowledge of it. Only 5% of respondents in Indonesia said they did.
Papp believes educating the distribution channel is a key part of overcoming this gap, but accepts that it will take some time. There has been a traditional ambivalence to insurance in these countries and, although this is changing with the help of government initiatives, it will not happen overnight.
Growth challenge
If the takaful market continues to grow, some have suggested that it could target territories beyond the Islam-dominated Middle East and South East Asia.
However, if takaful operators were to expand into geographical regions with higher penetration rates some of their current advantages would dissipate. They would be attempting to cannibalise the traditional market and would have to battle for business. But some believe this is a battle they could win.
"Takaful has an added appeal for non-Muslims with its positioning as being more ethical and a fairer means of insuring against risk," Nazim says.
It would be naïve to suppose that for most consumers ethical sensibilities are a stronger driver than their purse, but where price differences are negligible those desires may be given consideration.

"Takaful has an added appeal for non-muslims with its positioning as being more ethical." Nazim

Important ethics
"If I'm looking at an ethical motor product versus a non-ethical product they will be about the same price. On those grounds the ethical product seems the obvious choice," comments Khan.
If takaful vendors can convince the public of this, demand is likely to grow. But whether the financial results will be enough to maintain the interest of global carriers that have entered the market seeking "a slice of the pie" remains to be seen.
There is a ban on excessive profits in takaful, according to Khan, but there is nothing in inherent in the takaful structure that means it would generate less profit.
"What would make a takaful company unprofitable is the same thing that would make a conventional insurer unprofitable: not charging an adequate premium for the risk."
insuranceinsight.eu
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