We have read articles about the coming changes proposed by the Insurance Authorities on insurance backed savings and investment products. Most of the articles I have read have only covered a few points and as such have been incomplete. I have put together a very informative article which covers the most important points relating to the new proposals: These proposals if enacted in law will alter the face of insurance backed lump sums and savings programs in the UAE.
This has come as a result of the huge number of mostly justified complaints coming in from clients because of high fees and lack of disclosure
Commissions – The total commission charged should be spread over the life of the policy and no longer upfront.
- Regular premiums will be charged monthly over a period of not less than 5 years instead of the Traditional 18 months in so called “initial units”.
- Single premiums will be charged monthly over a 12-month period.
1. maximum fee is now 4.5% and charged over the first five years. The overall cap is 90% of the first year’s payment. (based upon a monthly saving of aed 6,000 the initial units would eat up 108,000 in the first 18 months. This will be reduced to 64,800 spread over 5 years)
2. Single premium will now be a maximum of 4.5% and charged over 12 months
- Maximum commission deducted is 10% of the whole premium or 160% of the annual premium whichever is less, paid over the first 5 years.
- Maximum commission is 10% of the premium deducted over 12 months.
Short Term Products
- Maximum for Life and Takaful is capped at 25%
Indemnity Commission (commission paid to the advisor)
This is being stopped. Commission will be paid when the client pays the premium.
No longer will clients subsidise other sales channels. This will help reduce costs to the client. They will pay just for the sales channel they are using.
- The advisor will no longer ask for full documentation such as passport copy etc, before they receive a proposal/illustration.
- The declaration will say that the client knows the returns in the illustration are not guaranteed.
Free Look Period
- The client has 20 days from the start of the investment to decide if they want to stay or cancel. The advisor is not allowed to pressure the client to recoup the cost of the advisor time and effort in preparing the structure.
- The client will be refunded their entire money plus any profit or minus any loss on the investment.
There will be no bid offer spread in the calculation.
Illustrations for the client
- Mode of payment such as monthly/quarterly/annual/single
- Name of Plan, Sum assured, coverage term, and premium payment term.
- Death benefit, account value and surrender value should be clear and distinct.
- The premium shown should always be gross of all fees but the death benefit, account value and surrender value should always be net of all fees.
- Any illustration should state that it is either “Illustrative Value” or “Guaranteed Value”
- Cumulative Plan Premium should be indicated.
- All compulsory charges have to be disclosed.
- Details regarding top up premiums have to be disclosed separately.
- The Life insurance company has to quote the gross return based upon cash flow and then deduct all other charges so the client can see if there is a benefit in having this type of policy. All charges have to be deducted before they can show the cash surrender/redemption value.
- Two scenarios at a minimum should be illustrated. Maximum investment return is based upon EIBOR (emirates interbank offer rate) plus 3% rounded up to the next 0.5%. example current EIBOR (Dec 22) 0.55714 plus 3% is 3.55714, rounded up 4%. The first calculation is based upon 4%. The second calculation is based upon a lower number.
- There has to be an illustration based upon 0% rate of return but reflecting all charges.
- Any fees paid by the fund to the IFA or to the company belongs to the client and should be reimbursed to the client. It is normal in the UAE that funds pay a so-called retrocession/trailer of up to 1%. This ultimately comes from paying a higher expense ratio in the fund. Once this is removed the returns to the clients should rise.
- With profit policies, any illustration must be certified by a qualified and appointed Actuary. This should now be consistent with the valuation reports, if not the actuary may have to justify why it is not consistent.
- The annual valuation report has to be sent as a separate document and not bunched with other documents. The “font” has to be red and the client has to sign receipt.
Declaration by the policy holder.
- The client has to sign a declaration stating that they have received a copy of the illustration, and that non-guaranteed elements are subject to change. They are aware it is not guaranteed and that the advisor has never promised them anything else either verbally or electronically.
- A similar statement has to be proved by the advisor.
They have to quote the last 5 years performance of the top 5 funds in the policy.
- Policies which were previously sold with 1% or 101% of the cash value are no longer deemed to be an insurance policy due to the minimum amount insured.
- In future the minimum insurance will be 110% of single insurance if over the age of 45 OR 125% of the premium if under the age of 45.
- Regular premium/savings will be 7 x annual premiums or 0.25 x term x annual premium whichever is higher if over the age of 45. OR 10 x annual premium or 0.5 x term x annualised premium whichever is higher.
Protecting the policy holder
- Surrender values in the future will be equitable to both the client and the provider. Ie the provider should not benefit to the detriment of the client.
- The calculation to determine the redemption value has to be disclosed, ie if the charges are deducted linearly it is easier to reflect the true charges on the redemption value.
- Banks often buy insurance at a discount from a provider. The banks are no longer allowed to mark up the price when selling to the client. The bank has to be compensated from the provider and not the client.
- Banks are no longer allowed to just represent one provider but to offer choices to the client or allow the client to obtain their own life insurance.
Once the new laws are published in the Gazette the providers have up to 6 months to implement the new laws.
As can be seen, these new changes are draconian and will change the entire industry here in the UAE to the benefit of clients.
I have been harping on about this for several years. I think the fees are still too high, but the full disclosure will help clients achieve better returns, better flexibility and understand the cost of the products being recommended.