The Central Bank of the UAE (CBUAE) issued the new Insurance Brokerage Regulations on 25 July 2024 (“Regulation”), which supersedes previous regulations and guidance for insurance brokers.
The Regulation will become effective six months after its publication in the Gazette, likely by February 2025, depending on the publication date. The CBUAE has directed all insurance brokers and insurers to align their operations with the Regulation within this six-month period.
The Regulation introduces substantial changes to the setup and operation of insurance brokerage. “Insurance Brokerage” is now defined as an activity involving the solicitation, negotiation, or sale of insurance or reinsurance contracts, clarifying the previously ambiguous area in which some non-regulated entities operated as referral agents or introducers. Key changes include:
Brokerage License Categorization: The Regulation classifies insurance broking licenses into three categories: primary insurance, reinsurance, and composite insurance. This categorization allows those interested in reinsurance activities to operate with potentially lower regulatory requirements compared to those involved in primary insurance.
Prohibition on Premium Collection: The Regulation specifies that premium collection is the responsibility of the insurance company, not the broker. Insurance brokers are now prohibited from collecting premiums for any line of business. This prohibition raises questions about the continued applicability of the escrow requirements for insurance brokers issued by the CBUAE in 2022.
Commission Payment: Insurers must pay commissions to insurance brokers within 10 business days of receiving the premium. For premiums paid in instalments, brokers must receive their share of the commissions in a corresponding manner.
Minimum Capital and Bank Guarantee: These requirements have been separated under the new Regulation. While the minimum capital and bank guarantee requirements for insurance brokers and foreign branches remain unchanged, the Regulation clarifies that the bank guarantee is in addition to the minimum capital requirements. This raises questions about whether brokers will now need to maintain these two separately and how this will affect their balance sheets, which remains to be clarified.
Appointment of External Auditors: All insurance brokers must appoint external auditors who are listed and approved by the CBUAE.
Policy Issuance Restrictions: Insurance brokers are no longer permitted to issue insurance policies, amendments, or endorsements. All such documents must be issued by insurance companies, affecting the way pre-underwritten products are currently issued by some market participants. The only exception is motor insurance certificates, if mutually agreed upon.
Corporate Governance Policy: Insurance brokers are now required to implement a comprehensive corporate governance policy detailing internal structure, management practices, and procedures to ensure transparency, accountability, and ethical behaviour. This requirement expands upon the previous obligations to maintain risk management and internal control policies and mandates the establishment of a Corporate Governance Policy covering all aspects of management, control, and operations.
Financial Soundness: If an insurance broker’s net equity falls below 100%, it must notify the CBUAE immediately and submit a plan to restore it within 15 days. The broker is not permitted to engage in new business until the required net equity is restored but must continue servicing existing clients during this period.
Outsourcing Requirements: The Regulation requires insurance brokers to obtain the CBUAE’s no-objection for outsourcing material business activities. While “material business activities” are not explicitly defined, it likely includes any activity that, if disrupted, would negatively impact the broker. Additionally, brokers are prohibited from outsourcing any activities outside the UAE, raising concerns for overseas brokers that rely on shared services from their head office.
Discounting Restrictions: Insurance brokers are prohibited from offering any discounts to customers from their commission or remuneration received from the insurance company. Any discounts must come directly from the insurer, and brokers must adhere to the insurer’s underwriting guidelines.
Cybersecurity and Data Retention: Under the Regulation, insurance brokers must maintain adequate policies and procedures to prevent and resolve data security breaches and protect customer personal data. All personal data must be stored within the UAE, securely backed up, and retained for a minimum of 10 years.
These changes highlight the CBUAE’s commitment to enhancing the stability, transparency, and fairness of the insurance brokerage sector. Notably, the Regulation allows the CBUAE to apply a prudential approach, meaning the principle of proportionality will guide the extent to which an insurance broker must meet specific requirements. Lesser requirements may apply if brokers can demonstrate that, given the nature, scale, and complexity of their business, the overall objectives of the Regulation are met without addressing every detail specified.