Despite geo-political risks in the region and the economic pressures of falling oil and gas prices, the Gulf continues to offer significant opportunities on the back of government spending and, in particular, extensive energy and infrastructure developments. At the same time, reports estimate that the insurance industry across the Gulf Cooperation Council (GCC) will reach $37.5 billion by 2017, at an estimated compound annual growth rate of 18%.
Historically, insurance penetration rates in the Gulf have always been low compared to more mature markets. Part of this has been the inherent lack of awareness of risk and insurance in the past, making it a struggle for providers to connect and deliver effectively to the market. Distribution channels, therefore, have tended to be quite limited and traditional.
However, the market is now set to experience significant transformation on the back of greater awareness of the risks associated with projects and also the introduction of compulsory insurances, such as motor and health. With this in mind, it is worth considering how changing regulatory and legal requirements, as well as new technology, will impact on what are currently the most common insurance distribution models in the region.
Bancassurance refers to a partnership arrangement between a bank and an insurer, or where the bank and insurer are part of the same commercial organisation. The insurance products can then be sold to the bank's client base. Although the success of bancassurance in European markets has been mixed, the use of bancassurance distribution in the Gulf continues to be a rapidly expanding channel through which insurers can gain access to a captive pool of customers at relatively low cost. An estimated 40% of insurance premiums sold in the UAE are sold through this channel.
As in the developed markets, tie-ups between insurers and the major banks can give rise to difficulties and tensions. Although there is no universally applicable model, one of the biggest challenges is to ensure an effective community of interest between banking and insurance 'partners' given that traditional banking relationships and products are often very different. Similarly, care should be taken to ensure that banking staff have the right knowledge and understanding of the insurance products and appropriate incentive arrangements in place, particularly for more complex and specialist insurances.
In the Gulf, bancassurance products are typically linked to credit and mortgage bank offerings and also include term insurance, medical, motor and home insurances. There are also investment related products for areas such as education, savings or retirement. There are significant risks of mis-selling, requiring comprehensive compliance processes and effective literature in order to explain the products and the respective roles and responsibilities of the banking and insurance partners. In the absence of robust arrangements, the scope for confusion and brand damage can be quite high.
In some GCC countries, bancassurance law and regulation is relatively limited, meaning that the partners must take particular care when drafting governance mechanisms and legal agreements. However, specific regulation in relation to bancassurance is now emerging in all of the GCC states except Kuwait. For example, in the UAE, bancassurance regulation has been in place since 2011.
Insurers in the UAE are only permitted to deal with intermediaries, including banks, licenced in the UAE. This prohibits them from dealing with foreign banks and intermediaries, including those only established in UAE free zones. Insurers are also prohibited from delegating certain activities to the banks, including issue of policies and claims settlement. Insurance products can only be marketed to existing customers of the bank, and not marketed more generally.
Very recently, the UAE Insurance Authority issued further proposals in the form of a draft 2016 Board Resolution. These require prior Insurance Authority approval of the arrangements, and a new requirement for a qualified and 'specialist' insurance person to be employed by the bank in order to ensure control and training plans for local staff are satisfactory.
In Qatar, a new framework law was introduced in 2012 with regard to financial services as a whole including insurance. The Qatar Central Bank is also introducing new enabling insurance regulations over the next few months covering all insurance distribution models. Saudi Arabia already has specific regulation that includes separation of staffing between insurance and banking staff. In Oman, there must be an independent insurance management function overseeing product development and marketing. In a number of countries, claims can only be managed only through the insurer.
The legal set-ups can include full joint ventures or mutual ownership models in which integration and alignment is often more evident, exclusive or 'multi-channel' distribution agreements and more open arrangements. Legal agreements will need to specifically cover roles and responsibilities for each party, as well as the various regulatory restrictions outlined above. Important areas to clarify include remuneration such as profit share, advance payment arrangements and incentives; claims and complaint management; risk escalation; regulatory reporting; and the duration of the arrangements and exit terms.
There are relatively few truly independent brokers in the Gulf region - that is, those who act for the client and search across the whole market for the best solutions regardless of provider. However, some of the big multinational brokers operate in some of the major commercial insurance lines.
In many GCC jurisdictions there is still limited definition, law and regulation around the different types of intermediary, including introducers, consultants and brokers. This is beginning to change in some countries including the UAE, Saudi and Qatar. There also continue to be many 'unauthorised' brokers that are still not regulated or supervised by the regulators.
Regulation itself remains inconsistent and fragmented. For example, in Qatar, brokers that operate from the Qatar Financial Centre are subject to minimum qualification requirements, detailed training and competency and disclosure requirements. On the other hand, in the wider state of Qatar, this is not the case and brokers are still effectively unregulated. This is set to change this year, with the Qatar Central Bank new broker regulations.
The UAE's Insurance Authority introduced new Insurance Broking Regulations in 2013. These regulations include minimum significant financial thresholds for paid-up capital, bank guarantees and professional indemnity, as well as a set of duties and obligations with regard to dealing with clients. The UAE Securities and Commodities Authority also regulated intermediaries involved in investment business activities and consultancy, including some intermediaries dealing in investment-backed insurance with insurers.
In Saudi Arabia, the Saudi Arabian Monetary Agency (SAMA) is a very active regulation. It issued its own Insurance Intermediaries Regulation in 2011, and all brokers operating in the Kingdom must be licenced by SAMA and comply with its requirements, including a requirement to hold professional indemnity insurance. Since 2010 the marketing, issuing or renewal of any unlicensed foreign insurance products through local brokers has been prohibited.
The extent to which brokers and intermediaries search the market varies, but there is increasingly evidence of more 'panels' which can extend to four or five insurers for each product line. Remuneration is still essentially commission-based, and there is little in terms of regulation of remuneration beyond disclosures. However, this is also changing and some volume override arrangements are now banned.
This is an area in which there is likely to be significant opportunity for change and development as the various regulations change, bed in and become more effective. Regulatory capital and professional indemnity requirements will ensure serious players are attracted to the market, and will provide barriers to entry.
The bigger multinational brokers have strong market shares but there is also an opportunity to further extend this market and it represents an area where innovation and investment could result in increased sales and profitability, as well as professionalism, if well-harnessed. With regulation biting, the increased level and complexity of compliance and requirements for more technology and connectivity in provider, intermediary and client solutions, this may in time create an opportunity for the 'network' and 'support services' intermediary distribution models that were enormously successful in the UK.
Agencies are set up to serve and represent insurers, and they increasingly have capital and professional indemnity obligations similar to other intermediaries, such as brokers and consultancies. As with bancassurance models, there are financial and reputational risks from agency arrangements and minimum legal requirements are typically prescribed by GCC regulators.
In the UAE and Saudi, the requirements for regulation as an agency are particularly prescriptive and there are limitations on the number of agencies for certain lines of business. For example, in the increasingly competitive health insurance market in Saudi Arabia, agents can only represent one medical insurance company but are free to cover other lines with other insurers. These requirements therefore need careful analysis to ensure the preferred models are sustainable and provide the insurer with the necessary flexibility.
Direct business and technology
Direct sales, whether through 'in house' representatives or by way of technology, integrated platforms and online offerings, create a further opportunity to get more control, improved servicing and access to clients. Insurers need to be wary of growing acquisition costs and brand protection, which can be negatively impacted by certain bancassurance or broker strategies. With limited law and regulation around commissions, there are significant risks of inappropriate recommendations. Some regulators are becoming more prescriptive in restricting remuneration models, but regulation is still relatively reactive.
The Gulf is renowned for its take up of smart technologies and, combined with platform and 'white labelling' strategies, there are significant opportunities to innovate and develop much stronger and long lasting relationships as well as improved retention and loyalties. The use of technology – and mobile health offerings in particular - are particularly important in areas such as group health.
Laws and regulations for conducting e-commerce in the Gulf are becoming increasingly evident - for example, enabling laws in relation to digital signatures and electronic transactions in the UAE and Qatar. With increasing interest in collecting and analysing data, insurers need to develop solutions that will anticipate future data privacy laws, although data privacy laws currently still tend to be the exception rather than the rule. In the near term, new dedicated data privacy laws are about to come into law in Qatar; and effective disclosures and client consents to use of data will become the norm, particularly in sensitive areas such as health insurance and e-health.
For online distribution, legal frameworks and regulation are often trying to catch up and the regulatory differences in the different countries are still quite marked. Some rules, such as those of the Qatar Central Bank, still require suitability assessments for insurance; while international centres such as the Dubai International Financial Centre have rules that restrict retail distribution.
Employers and workplace arrangements
Distribution frameworks, innovation and solutions should not forget the employer and workplace arrangements. The 'trusted' employer continues to be in a position to take a more responsible and leading role in distribution and servicing models. While employee benefit consultants are already increasingly active in delivering solutions, there are consequently more opportunities for insurers to assist employers in their health, retirement and savings programmes for employees.
Solutions for these models will require careful implementation in order to avoid the risks of the employer being deemed to be engaged in unregulated investment business. This can be avoided with well-developed processed and client literature.
Roger Phillips is a Doha-based insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.