Insurance company or insurance broker – Why choose a broker in the UAE?

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In this article we explore recent developments in both the UK and UAE surrounding remuneration issues and broking practices. On 1 MarchLloyd's Market Bulletin Y in respect of distribution costs, broker remuneration and additional charges came into effect, aimed at Lloyd's Managing Agents and affecting the brokers with whom future insurance brokers dubai deal.

Interestingly, despite Ward's comments on broker remuneration practices, the bulletin stresses that "Lloyd's does not seek to interfere with the agreement of commercial arrangements in the market…", but acknowledges that as remuneration arrangements are constantly evolving, then so too must the methods to reduce the associated legal and regulatory risks. This bulletin is aimed at ensuring that high standards are maintained when it comes to broker remuneration arrangements, particularly in light of the UK Bribery Actwhich came into force on 1 July According to the bulletin, there is a concern that additional payments by insurers for example, contingent commissions might be seen as inducing or influencing the broker to place business with the insurer contrary to the broker's client's best interests, or which might otherwise cause improper performance by the broker of its duties.

Such concerns are elevated where the additional payments are calculated by reference to the amount of business underwritten by the insurer or the profitability of the business. Consequently, Lloyd's now expects Managing Agents to consider a series of questions in order to determine whether an additional payment should be approved, or whether the commercial motivation behind the additional payment is not appropriate in the circumstances.

The bulletin also stresses the need for full records to be kept by Managing Agents, and also outlines the reporting requirements where additional payments are approved. Although Lloyd's-centric, the new guidance will, no doubt, be of interest to brokers operating in the local market, particularly given the UK Bribery Act connotations and the lead taken by Lloyd's in driving international best practice.

In the past 18 months, the UAE insurance market has been the victim of a number of scandals, the most high profile of which concerned a brokerage firm in Dubai being found future insurance brokers dubai have used premiums collected from its clients as working capital of the business and even for investment in property future insurance brokers dubai than keeping it in a segregated client account. This left a number of Insurers without payment and important consequences for the insured customers whose premiums had not been passed on.

The UAE Insurance Authority's initial response was to issue a Circular in Aprilrequiring premiums collected by brokers to be deposited in a separate account to the one used for their day-to-day working capital needs. For many brokers in the UAE, particularly those set up in accordance with international best practice, this requirement was nothing new future insurance brokers dubai was already in place.

However, for some it presented more of a challenge. Historically, premiums collected in the UAE were often used for the brokers' own short-term working capital requirements, with arrangements in place whereby the broker would make payments to Insurers at the end of a specified period. The Insurance Authority continued its reforms with the issuance of Circular No. This Circular requires that, from 1 March onwards, cheques issued by the Insured customer for the payment of insurance premiums future insurance brokers dubai be issued directly in the name of the Insurer.

However, Insurers often do not have the systems in place to process broker commissions in a timely manner upon receiving these payments, resulting in delays in brokers receiving their remuneration. This also causes problems where premiums are paid in instalments rather than one up front lump sum. This sudden change to existing practice caused some consternation within the local market, resulting in the broking community approaching the Insurance Authority to ask them future insurance brokers dubai reconsider their position.

We shall have to wait and see whether the Insurance Authority bows to pressure, or whether it stands firm on this issue. There are a number of areas which will require greater scrutiny by regulators in the UAE in due course, including the practice of "grossing up" of premiums. Grossing up occurs where the Insurer obtains reinsurance terms from Reinsurers, but passes on a significant increase in price even on a proportional placement to the customer.

Such practices are typically not transparent future insurance brokers dubai do not serve the customer's best interests. It is arguable that the controversy surrounding existing broker remuneration practices could largely be avoided by moving to a fee-based structure whereby brokers are paid for services provided to their clients, rather than underwriters accounting for acquisition costs.

This is in line with most other professional services providers who charge their clients for time spent on a particular matter, according to set hourly or fixed rates. The FSA in the UK has signalled its intention to require the financial adviser community to future insurance brokers dubai towards fee-based remuneration and it is seemingly a matter of time before it turns its attention to the broking community to require similar changes.

Moving away from the commission-based approach which lacks transparency and can lead to conflicts of interest to a time-spent basis should ensure that brokers are properly remunerated for the value that they add. At present there is a danger that brokers either charge too little, resulting in a request for extra fees to cover the future insurance brokers dubai e.

Such an approach may give clients a distorted view of the value that brokers provide, since underwriters are left to pick up the tab. Whether there is an appetite for such a shift is another matter, particularly so in the UAE, where the Insurance Authority has to date focussed more on the handling of premiums, rather than tackling underlying issues such as broker remuneration practices and grossing up. We understand that a new law for brokers is in the pipeline and so it remains to be seen what regulatory requirements this will introduce.

Last month we considered issues of UAE law surrounding the incorporation and enforceability of arbitration clauses in contracts of insurance. Insight Recent changes and future considerations…. New Lloyd's bulletin on broker remuneration On 1 MarchLloyd's Market Bulletin Y in respect of distribution costs, broker remuneration and additional charges came into effect, aimed at Lloyd's Managing Agents and affecting the brokers with future insurance brokers dubai they deal.

Changes to premium collection regime in the UAE In the past 18 months, the UAE insurance market has been the victim of a number of scandals, the most high profile of which concerned a brokerage firm in Dubai being found to have used premiums collected from its clients as working capital of the business and even for investment in property future insurance brokers dubai than keeping it in a segregated client account. Other areas for reform There are a number of areas which will require greater scrutiny by regulators in the UAE in due course, including the practice of "grossing up" of future insurance brokers dubai.

The future for broker remuneration It is arguable that the controversy surrounding existing broker remuneration practices could largely be avoided by moving to a fee-based structure whereby brokers are paid for services provided to their clients, rather than underwriters accounting for acquisition costs.

Quantum issues including Future insurance brokers dubai multiple damages. Moving in the right direction Last month we considered issues of UAE law surrounding the incorporation and enforceability of arbitration clauses in contracts of insurance.

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