Benchmarking and Why Insurance Backed Investment Projections are Bad for Your Financial Health

jamal-investme2It is standard that all investment managers who either have separate investment mandates or mutual funds will benchmark their performance against an index.

This helps the client and advisors in setting expectations and giving themselves the ability to compare an active investment manager vs a passive investment.

However, Insurance backed savings and investment schemes do not do this.

They take a gross performance of an underlying asset class and then make projections on the return of your savings or investment plan.

These projections have nothing to do with reality and as such set the wrong expectations for the investor.

It is a well-known fact that 50% of investors do half of what the market does. Also, the projected returns by the insurance companies do not include the fee structures which at the time of writing can be as high as 4-5% p.a.

It is not surprising that clients are feeling disappointed. In this instance, the wrong expectations are being set and, it is most unlikely the client will achieve his or her goals.

Why are these projections from insurance companies not based upon the average return of their clients?

Take time to absorb that statement.

The insurance companies have empirical data to be able to benchmark their clients returns against the index’s so it is not a lack of technology.

I will make an intelligent assumption, if they showed the average performance of client’s vs the projection, no one would invest this way.

Protection and Investments do not belong together. They contradict themselves. Investments are a cost conscious structure, insurance is not.

The UAE IA’s Circular No. 12: ‘Advisers, get ready to be registered, tested’

Towards the end of last month, the United Arab Emirates Insurance Authority quietly went public with a 26-page synopsis of its latest thoughts with respect to its already-flagged-up plans to introduce a raft of new regulations governing the way life insurance and insurance-based savings and investment products are to be marketed and sold in the country. 

The IA regulations package, which is currently being referred to simply as “Draft Circular No. 12 of 2017”, updates the IA’s previous missive, Circular No. 33 of 2016, and in so doing, contains a number of new elements – the most surprising of which is a change is in the minimum requirements for insurance intermediaries looking to practice in the UAE, and news of plans for them to be registered, according to Gordon Robertson, founder and director of Investme Financial Services.

Below, Robertson, pictured, takes an in-depth look at Draft Circular No. 12 of 2017 (subtitled “Draft Regulations Regarding Life Insurance and Family Takaful Business in the UAE”), and shares some of his findings and conclusions – a key one of which is that the UAE’s advisory industry is currently “not prepared” for the changes it will soon be expected to take on board. 

Since last November, we have been aware of the coming changes in the way insurance-backed savings and investments are sold and marketed in the UAE. There were hopes that “Circular No. 33”, as we came to know the document outlining the proposed changes, might be watered down.

Now that we have the next instalment of what the Insurance Authority is planning to introduce, it says, as soon as possible, in the form of Draft Circular No. 12, we find that although there have been some minor changes as to the implementation,  the real surprise lay in the way the IA is proposing to regulate the UAE’s army of financial intermediaries.

If the regulations take effect as set out here, it is clear that quite a few intermediaries will be forced either to close, merge, or leave the industry in the UAE.

The timing hasn’t been formally set, but the Insurance Authority has made it clear that it is setting a May 11 deadline for input on its proposals from “life insurance companies and family takaful operators and other interested parties”, after which it is hoping “to issue the final regulations without undo delays”.

Once published in the Official Gazette, much of this will become law immediately; some of it a year later, and the rest in another year’s time.

These proposals will clearly alter the face of insurance-backed lump sum and savings programmes in the UAE. This is possibly not surprising, as they’ve been brought about in response to a huge number of mostly-justified complaints from clients who have been reacting to what they consider to be excessively high fees, the lack of commission disclosure, and up-front commissions, as opposed to commissions being spread out over the life of a policy.

What the Insurance Authority is proposing to change:

Savings products

  1. The maximum fee that advisers, under the new proposals, will be allowed to charge on savings products is 4.5% of the periodic premium (investment portion), to a maximum of 90% of the first-year premium (down from the current 7% to 8% level).
  1. First year commission is capped at 50% of the annualised premium, or 50% of the total commission paid, whichever is less. The rest will be paid over the life of the policy to the adviser.This will be paid by the product provider, and not through the client’s account. There will be a commission claw-back against the agent during the first five years, based upon the first year’s commission.

Ten percent of the annualised premium (protection portion), times the number of years of the policy, with a cap of 160% of the first years premium (single premium is 10% of the premium).

Example A: regular savings programme

Here’s an example of how it would work. Let’s assume someone has savings of AED100,000 (£21,156, US$27,225) to invest in a regular savings programme each year, for the next 15 years. This would break down as follows:

a. AED90,000 for investments,  and

b. 10,000 for the protection (insurance).

Commission would be: 90,000 x 15 x 4.5% = 60,750

10,000 x 15 x 10%  = 15,000

Total commission would then be AED75,750, of which 50% would be paid to the agent in the first year, and the remaining amount over the life of the policy.

Year One, for the agent, would be  half of  AED75,750 , or in other words, AED37,875, with AED2,525 annually for each of the next 15 years.

However, the first-year commission would be subject to a commission claw-back during the first five years of the policy.

[Important note: The minimum amount insured, under the new regulations, is now 10%, up from the existing 1%.]

Example B: Term products (no maturity benefits)

Under the Insurance Authority’s new regime, the maximum commission that may be deducted is 10% of the whole premium, or 160% of the annual premium, whichever is less.

In other words, a client saving US$1,000 for ten years would pay a maximum commission of US$12,000 (or 1,000 x 12 x 10, for a total commission of US$12,000.

Single premium policies will have a maximum commission is 10%.

 Retrocession/trailing commission

The adviser can still be paid a trailing commission; however, the fees can no longer be recouped from the product.

In other words,  if a client buys a current mutual fund, it traditionally has had a high Total Expense Ratio (TER); this is because part of that TER was being reimbursed to the adviser. This will no longer be permitted.

As such, the funds will have a lower TER, giving a higher return to the client. However, that may be reduced by having to pay a higher commission to the product provider (they are not allowed to breach the previous overall commission limits).

Short term products

Maximum commission for life and takaful products in the UAE is currently capped at 25% indemnity commission (this is where a life company pays commission upfront to an intermediary based on the full value of the policy).

This is being stopped, and replaced with a system whereby the commission will be paid when the client pays the premium.

Products with an insurance portion below 10%

Going forward, these will only be able to be marketed when it is clearly stated in a bold red font that “the product has a limited or no life protection benefit”. The customer’s signature is required immediately below this disclosure.

Takaful products

The rules governing the sale of takaful products are similar to the way general insurance is structured.  However, the wakala and muduraba fee for short-term products is set at a maximum of 35% of gross written contribution.

Multiple channels
Going forward, clients will no longer subsidise other sales channels. This will help reduce costs to most clients, as they will be paying only for the sales channel they are using.

Disclosures

  1. All parties to the transaction must sign off on the product sales document, clearly disclosing each one’s responsibilities. This includes the insurance intermediary, the agency representative, the broker etc. The documents must be in both English and Arabic.
  2. It was the usual practice previously that before an adviser gave an investment product proposal to a prospective client, they would often ask for certain documentation, such as a copy of the individual’s passport, visa, bank account information, etc. Under the new regime, this will not be allowed.
  3. No product will be able to be sold without all the relevant documents, and a copy of these must be supplied to the client.
  4. A declaration that the client signs will say that the client is aware the returns featured in the illustration are not guaranteed.

‘Free look period’ is fixed at 30 days minimum

  1. Under the new rules, if an insurance agreement is cancelled during the ‘free look period’, the adviser must refund to the client all of the commissions that may have been taken; then the pro-rated first year commission must be paid back.
  2. The adviser is not allowed to pressure the client to recoup the cost of the adviser’s time and effort in preparing the structure.
  3. If there is a decision to cancel, then the client will be refunded their full premium. This may include any profit or loss on the fund but will not include the bid and ask pricing of the fund.
    If there has been a cost of a medical exam as part of the sale process, that can also be charged to the client. The client will receive a copy of the receipt for the medical as well a copy of the medical report.
  4. the intermediary is not allowed to ask the client why they want to cancel. However, a third party, such as the company or other representative, may ask, so long as they do not abuse this right by using pressure tactics.

Illustrations to be given to the client

Under the proposed regulations, product illustrations given to clients must show:

  1. The frequency of payment to be used, such as monthly/quarterly/annual/single payments.
  2. The full and proper name of the plan; its sum assured, coverage term, and premium payment term.
  3.  The death/protection benefit, account value and surrender value should be clear and distinctly presented.
  4. 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.
  5. Any illustration should state that it is either “illustrative value” or “guaranteed value”, whichever applies.
  6. The cumulative plan premium should be indicated.
  7. All compulsory charges must be disclosed.
  8. Revised illustrations must be supplied if requested, and would be compulsory if any top-up premiums are more than 20%, or if there is a withdrawal more than 20%; also, if there are changes to benefits, this must also be disclosed separately with a revised illustration.
  9. The life insurance company behind the product being illustrated must quote the gross return, based upon cash flow, and then deduct all other charges so that the client is able to see clearly whether there is any actual benefit in having this type of policy.
  10. Two scenarios at a minimum should be illustrated.
  11. Maximum investment return is based upon the three-month EIBOR (Emirates interbank offer rate) plus 4%, rounded up to the next 0.5%.
    For example, current EIBOR (1 May 2017) is 1.46%; plus 4% is 5.46%, rounded up is 5.5%. The first calculation, therefore, would be based upon 5.5%.
  12. The second scenario must show a clear picture of the effect of charges or a reduction in yield. This will illustrate the effect of all the charges, if the illustration is not clear, then they must show a zero-pct. return.
  13. Under the new regulations, any fees paid by a mutual fund to the IFA, or to the IFA’s company, are considered to belong to the client, and must be reimbursed to the policy holder.
  14. Surrender charges and the surrender value of the policy at the end of each year must be provided as a separate document. The font must be in red, and the client must sign this document separately.
    If there is a discrepancy between the illustration and the valuation, then this must be justified by the actuary.
  15. For “with profit” policies, a qualified and appointed actuary must certify the illustration before it is shown to any prospective clients. The illustration should also be consistent with the valuation reports, and if it isn’t, the actuary may have to explain why it’s not.
  16. The annual valuation report has to be sent as a separate document, and not bunched with other documents. The “font” must be red, and the client must sign receipt of this document.
  17. To ensure that that the profitability of each savings product is achieved throughout the policy period, and that the policyholder is not heavily penalised for the company’s profit in the initial year(s), the actuary must ensure that any surrender charges are equitable between the provider and the client.
    These charges are only to mitigate risk in relation to the actual expenses incurred by the provider.

Declaration by the policy holder

  1. Under the new regulations, the client will be required to sign a declaration stating “I have received a copy of this illustration and understand that non-guaranteed elements illustrated are subject to change and could be either higher or lower. The intermediary (John Jones) has told me that they are not guaranteed. Further I confirm that insurance intermediary (John Jones) has not made any verbal or written communication, electronic file or any other material that is different from this illustration”.
  2. A statement to be signed and dated by the intermediary or fund manager must be included, saying to the effect, “I certify that this illustration has been presented to the applicant and that I have explained that the non-guaranteed elements illustrated are subject to change. Further, I confirm that I have disclosed all charges and fund management fees to the customer, and I have made no statements in any form that are inconsistent with this illustration.”
  3. Historical performance of the top five funds for that product in the client’s risk strategy must be provided to the policy holder.These top five funds are measured by assets under management (size of the fund), and with a minimum of five years’ history (track record) unless the fund has been in existence for less than 5 years.
  4. The client must receive information on all funds available in a period. The client will then select the funds they wish to buy, rather than the company or adviser suggesting a limited choice for the client.This must be disclosed at the point of sale and on an annual basis to the client.These top five funds must be chosen from the range of funds that are available to retail investors within the UAE.

Banc assurance

Banks often buy insurance at a discount from a provider. Under the proposed new regulations, the banks will no longer be allowed to mark up the price, and thus make an extra profit, when selling insurance to their clients.

Under the new rules, the banks will can only be compensated by the insurance provider separately.

Also, banks will no longer be allowed to insist that the client buy the credit insurance from the bank, but going forward, will be obliged to accept a credit life policy from other companies.

Insurance Intermediaries

Any person acting as an insurance intermediary must be:

  1. Employed by a licensed company
  2. Sell only products that are sold by this licensed company
  3. Be licensed by the authorities, and this license must be renewed on an annual basis
  4. Meet minimum educational qualifications for practicing in the insurance intermediary profession, as well as engaging in CPD (continuing professional development) every year
  5. Be at least 21 years old, and have a minimum two years of  experience in the insurance industry
  6. Have no criminal record of a felony or misdemeanour involving moral turpitude, trustworthiness or against public morals, bankruptcy and not having rehabilitated
  7. Never have been suspended or had qualifications cancelled without these having been formally restored while working in the insurance industry
  8. Must have professional liability insurance
  9. Comply with all the laws, regulations, instructions and decisions issued the authority and other relevant legislation

Annual renewal

The intermediary must be able to demonstrate to the IA that they meet the minimum service standards such as:

  1. They hold regular annual review meetings with their policyholders, discussing the progress towards the agreed savings targets;
  2. Their review documentation will include the actual performance of the product to date, and a new projected performance plan, going forward to the intended policy termination date;
  3. An annual gap analysis to enable the client to assess the need for additional contributions, or a change in risk appetite to achieve the planned savings goal

Application for license and registration

The new application form will require applicants to provide:

  1. Their name, nationality, address and place of residence
  2. A copy of their Emirates ID, if a UAE resident; and a current passport, if  non-resident
  3. A certified copy of the minimum qualification and membership from an entity accredited by the Insurance Authority
  4. A declaration that they have never been subject to disciplinary actions by any professional body that they belong to, or by the supervisory authorities in other jurisdictions
  5. A certified copy of their academic and professional qualifications
  6. An official certificate proving that they have never been convicted for an offence involving moral turpitude or trustworthiness along with a declaration that the applicant has never been declared bankrupt or bankrupt and rehabilitated
  7. An undertaking to comply with all regulations and laws issued by the Insurance Authority
  8. Proof of payment of the fees as per the regulations, as well as any other documents requested by the Director General

The IA will notify candidates of their approval or rejection within 20 business days of their having completing their application.

  1. If more information or documents are required, this must be submitted within 60 days of the date of the notification
  2. Failure to supply the information sought will result in the application being cancelled, and a three-month waiting period must pass before the applicant can submit another application
  3. If their application has been approved, and the necessary fees paid, they will then be entered into the official register
  4. If they are rejected, they can appeal the rejection within 30 days. (A Board of Directors decision, however, will be deemed to be final.)
  5. The licence has a maximum validity of one year, and expires on 31 December.
  6. On an annual basis, the insurance intermediary will submit a renewal document with supporting documentation no less than 30 days prior to expiration of their licence.
  7. The intermediary must inform the authorities within 10 days of any change to the intermediaries’ documentation, to ensure continued compliance. 

Commission abuse penalties

Under the new regulations, all forms of commission abuse will be  strictly prohibited. Those who are found to be in violation of this may be subjected to the suspension or non-renewal of their licence.

Enforcement

Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows:

  1. Fees and commission abuse regulations will take effect on publication
  2. Commissions, disclosure and regulations regarding pure protection will take effect one year after their Official Gazette publication
  3. All other elements of the new regime will take effect two years after publication

As indicated earlier, many of the proposed changes will be seen by the UAE advisory industry as Draconian, and will introduce a dramatic change the entire industry – to the benefit, many of us believe, of the industry’s clients.

The biggest adjustment, for many, is likely to be that of having to comform with the new minimum requirements to become an insurance intermediary.

As mentioned above, the consultation period on the latest version of the regulations is set to end on 11 May.

UAE Insurance Intermediaries to be regulated

There has been a lot of articles about the new regulations regarding products, but nothing about the proposed regulation of intermediaries. It has currently only been issued on the Circular 22, however if no objection the consultation period will end May 12. It is expected that this will be quickly be adopted with an implementation period of two years.

I have put together the proposed new regulations.

Application for license and registration.

Application form to include:

a.   Name of applicant, nationality, address and place of residence.

b.   A copy of the Emirates ID for a resident and passport for the non-resident

c.   A certified copy of the minimum qualification and membership from the entity accredited by the Authority.

d.   A declaration that they have never been subject to disciplinary actions by any professional body that they belong to, or by the supervisory authorities in other jurisdictions.

e.   A certified copy of the academic and professional qualifications.

f.     An official certificate proving that the applicant has never been convicted for an offence involving moral turpitude or trustworthiness along with a declaration that the applicant has never been declared bankrupt or bankrupt and rehabilitated.

g.   An undertaking to comply with all regulations and laws issued by the Authorities.

h.   Proof of payment of the fees as per the regulations as well as any other documents requested by the Director General.

Approval/Rejection will be issued by the authorities within 20 business days from the date of completed application.

a.   If any request for more information or documents, this must be submitted within 60 days of the date of the notification.

b.   Failure to supply the information will result in the application being cancelled and a wait of 3 months before the applicant can submit another application

c.   If approved and after payment of fees they will then be entered into the official register.

d.   If rejected, they can appeal within 30 days of the rejection. (The Board of Directors decision shall be final)

e.   The licence has a validity of maximum one year and expires on December 31.

f.    On an annual basis, the insurance intermediary will submit a renewal with supporting documentation no less than 30 days prior to expiration of the license.

g.   The intermediary must inform the authorities within 10 days of any change to the intermediaries’ documentation to ensure continued compliance

Penalties:

a.   All forms of commission abuse are strictly prohibited.

b.   All complaints if in violation may subject the offender to suspension, non-renewal of withdrawal of their licence.

Enforcement

Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows:

a.   Fees and commission abuse effect on announcement in the Official Gazette.

b.   Commissions, disclosure and regulations regarding pure protection is one year after the announcement in the Official Gazette.

c.   All others have a two-year implementation period.

As can be seen, many of the proposed changes will be seen by the UAE advisory industry as Draconian, and will change the entire industry – to the benefit, many of us believe, of the industry’s clients.

The biggest news is that of the minimum requirements to become an insurance intermediary.

Consultation period will end May 11. If no change they will implement the new rules in a short space of time.

New Will for Expats and Non-Muslim: Total Protection from Sharia Law

Anyone that has a property in the UAE should have a court attested “Will” to protect their property in case something happens to them in the near future. Wills are typically prepared by a professional who would then have it notarized in the Dubai courts.

Not having a court attested Will in Dubai, would result in the estate being subject to Sharia law.

Continue reading New Will for Expats and Non-Muslim: Total Protection from Sharia Law

Who needs a Will?

For expatriates living in the UAE, there is a very simple reason to make a Will. The Government of Dubai’s official website states that ‘the UAE Courts will adhere to Sharia law in any situation where there is no will in place’.

In 2009, according to the Dubai Health Authority, 1,572 expatriates died in Dubai. For those who died without a will, their property in the UAE was distributed according to a formula fixed by UAE law (Sharia) (source: The National, February 2011)

If you die without a will, the local courts will examine your estate and distribute it according to Sharia law. While this may sound fine, its implications may not be so. All personal assets of the deceased, including bank accounts, will be seized until liabilities have been discharged. A wife who has children will qualify for only 1/8th of the estate, and without a legal will, this distribution will be applied automatically. Even shared assets will be frozen until the issue of inheritance is determined by the local courts, and surviving family members are often left without access to money during this period.

Continue reading Who needs a Will?

What You Need To Do First Before You Move To Dubai

Living In DubaiDubai is considered as one of the most popular destinations in the world, and the number of expatriates or would-be investors is mounting very fast.  In fact, people who dream of moving or working in the UAE were inspired by stories of a tax-free lifestyle. It looks like everyone wants to experience something new and Dubai for them has everything they ever wanted. However, Dubai is not as easy as it once was and securing a residence permit can be quite daunting these days.

However Dubai can still offer some decent tax benefits for those who want to move in. You can still enjoy a high standard of living in the emirate, as long as you can find decent employment or a lucrative venture that can provide for all your needs. So, if you’re dreaming about Dubai, then you should consider these things first.

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Understanding Sharia Law When Investing In Dubai

Sharia Law in InheritanceThe real estate opportunities in the UAE are mounting very fast and a lot of foreign investors are interested in buying properties in the country. There are several reasons why UAE has become a dream destination for foreign investors. One in particular is Dubai and its booming economy through tourism and trade. It also boasts some man made marvels like Burj Khalifa which hold the record as one of the tallest buildings in the world. Dubai is also known for its luxurious hotels and breathtaking nightspots. Not to mention, the economic and architectural progress of other emirates within the country. These factors have catapulted UAE as one of the most privileged real estate hubs in the world.

However, before you decide to invest in the UAE, it’s essential for you to know and understand Islamic Law or better known as “Sharia Law.”

So What Exactly Is Sharia?

Sharia is the religious law or moral code of Islam and it deals with many topics including politics, crime, personal matters and economics. For this particular purpose, we are going to tackle on the most pressing issue that most foreign investors are concerned about – inheritance under Sharia Law. Investing in the UAE can be a lucrative venture, but most investors should be thinking on how they can protect their assets, especially if the owner/s of a particular property dies.

In Islamic Law, there are four important duties that need to be performed when the owner/s of a property dies and these are the following:

  1. Pay the debts of the deceased.
  2. Funeral and burial expenses must also be paid in full.
  3. Execute the will of the deceased, which usually gives the testator (owner/s of the will) the right to dispose one third of the estate they own according to their wishes.
  4. Distribute the remaining estate to immediate family and relatives as per rules of priority (Quota).

Therefore, Muslim property owners in the UAE who follows the Sharia Law can only dispose 1/3 of their overall estate under their testamentary will. That’s the maximum share that they can delegate to their chosen heir/s, because the remaining portion of their estate will be lawfully given to other family members and relatives.

Actually, there are different types of heirs and these are the following:

  • Primary Heirs – this group will consist of the spouse, son or daughter, and both parents of the deceased.
  • Quota-Heirs – this can be grandparents, wife/wives and husband, daughters, brothers, sisters and others. Usually, this group has a designated share or quota on the estate or property.
  • Residuaries or Members of the Asaba – this can be a combination of both male and female relatives who will inherit a share after the Quota-heirs inheritance have been distributed.

So, if an owner of an estate leaves no direct relative, then his/her property will directly go the state treasury. But Sharia Law only applies to Muslims in the UAE, however for non-Muslim expats and foreign investors living in the country are allowed under “Personal Affairs Law” to use the laws of their own countries in settling and distributing their properties that are situated in the UAE.

How Can You Protect Your Real Property or Estate In The UAE?

In order for you to protect your property in the UAE, you need to have a legal and valid will and it should be notarized by a UAE court. Expatriates and foreign investors who have several properties throughout the UAE must create their own will as soon as possible. This will exempt them from Sharia Law. Also, it would be wise to appoint a specialist or a credible lawyer who is qualified to draft your will in accordance to the laws of your home country. This will give you and your family the peace of mind that Sharia Law does not come into effect, in case something happens to you in the UAE.

It’s also important for you to distinguish between federal (UAE law) and local law. So, if you’re residing in Dubai and something happens to you, then the law in Dubai will take effect. However, if someone contests you will, then federal law takes over. You need to understand that federal law trumps local law in Dubai. So, you might be asking – how can I truly protect my property and the welfare of my family? Well, the only remedy available to you is to setup trusts or you can also engage in various off-shore solutions. However, this is a complex area and it’s essential for you to hire professional lawyers who are capable of advising you expertly.

The Benefits of eMart and Its Significance to the Real Estate Market in Dubai

emart portalSmart Property Marketplace or better known as eMart is now an active portal launched by the Dubai Land Department. This new online portal will provide a platform for auctions, sales and property rentals in the UAE. It will also serve as an exchange center to facilitate real estate information. An initiative like this will guarantee credibility and transparency in all transactions carried out by the Land Department.

As of 2013, the “World Bank’s Doing Business Index” has ranked the Land Department of Dubai as the fourth best in the world when it comes to property registration and real estate. The LD is also ranked by the index as the best in the Arab world for its outstanding services. With the new eMart initiative, brokers and investors in the real estate industry will truly benefit from fast and accurate online services offered by the portal. This will also facilitate and streamline search operations, thus providing a credible resource for investors in Dubai.

Continue reading The Benefits of eMart and Its Significance to the Real Estate Market in Dubai