After a stint as an insurance broker, returning to an insurance company position in January of this year was a momentous home coming for me.
Some remember me in 2012 as an active and vociferous member of the broker lobby discussing United Arab Emirate Directive 2 (client payments) and the draft broker legislation. In a recent conference I was pulled to one side by a veteran managing director who was rather emphatic that now that I was wearing a different hat I should not be “batting for the brokers”.
My response was a football analogy: “When a player switches clubs (or sides on the field) surely the rules of the game do not change!” While there are the good, the bad and the ugly among the broking fraternity, one has to acknowledge that brokers have a very important role to play and they are the trusted partner of many of the clients. Their service as a professional broker is invaluable even to the insurance company.
That is why the UAE market needs broker regulation. But this should not be in the form of the draft issued in 2012 by the Insurance Authority. Nor should the legislation only apply to brokers; it should be tailored to address all intermediaries in insurance.
International Best Practice
Drafting a legislative framework for intermediaries – and not only for brokers – would reflect international best practice. Therefore, article 1 and 2 of the draft insurance brokers’ legislation should be amended to encompass all intermediaries similar to, for example, the EU framework. The law should also contain directives relating to the registers of approved persons and minimum license driven qualifications.
This would mean that, for example, Tom, Dick and Harry and their dog selling insurance from say car showrooms or even banks would be appropriately qualified and licensed to do so. Currently, the law regulates brokers and agents but not sub-agents or sales persons. There are many in the market posing as independent salespersons or consultants when they are not legally authorised to do so.
One of the bones of contention among brokers is the relatively excessive capitalization requirements contemplated in the draft broker legislation. This is ‘flat’ without regard to the company’s size; differentiating only by whether the broking company is local or international. Probably a more reasonable approach to capitalization – given that brokers are not the ultimate carriers of risk – is that this is based on the volume and classes of business that they write.
For example, a broker positioned to service the personal lines, SME and private motor market with a premium income of less than, say AED25m should not be expected to hold as much capital as the regional subsidiaries of the large international brokers writing in excess of AED100m locally in premium.
A ‘one size’ fits all approach to capitalisation would be inequitable to the smaller among the broker fraternity and tiered capitalisation based on revenue should be mandated instead. Tied to capitalisation should be the right to open branches within the UAE. Currently, the only requirement contemplated under the new draft legislation is the fee that is levied by the Insurance Authority for a broker to open additional branches. The premium requirement mentioned in the law is too low. This should be higher and tied to the capitalization tier.
Prior to the publishing of the draft broker legislation in mid-2012 the Insurance Authority sparked controversy by the notorious Directive 2 instructing brokers to collect client money not in their name but in the name of insurance carriers. This rendered obsolete the practice of fiduciary accounts. It was repeated verbatim in the draft legislation while conversely advocating higher financial guarantees from brokers.
Some in the market contend that the draft legislation was nothing more than the product of a strong local company lobby aimed at bridling broker activity. In a market where conspiracy theory abounds no one quite knows whether this is true although many suspect that there is some veracity in it.
Brokers are not unlike the opposite sex: we love them, we hate them and we also complain about them but we all know that we cannot live without them.