Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, Dubai, said: “Along with the consolidation, the market is seeing a different dynamics. The regulations will bring in consolidation in the market, as only those who are committed to the UAE market for longer term would remain.

“We are seeing new players entering the market, some of them being insurtech companies, who are well aware of the commission restrictions, and have customised their business model to suit the revised regulatory framework,” said Singh.

He also said a number of small players have stopped offering life insurance solutions since they no longer see the same profits.

Considerable change

Krishnan Ramachandran, chief executive of Barjeel Geojit Financial Services, Dubai, said: “Post implementation of the BOD49 regulations, the life insurance sector in the UAE has been going through a phase of restructuring and adaptation of the new rules and requirements.

“The major impact of course has been the steep reduction / cap in commissions and the payment of the commissions over the term of the policy.”

He said that this has resulted in a considerable change to the working models of many insurance brokerage firms. However, the timing of the implementation during the covid-19 situation has thrown up many challenges for the life insurance industry especially in the insurance premium front which has witnessed an exponential increase compared to the premiums to the pre-covid period.

This, along with the sharp fall in bond yields during this period, has also impacted the returns to the investors.

“The cost-income ratio for insurance brokers have increased substantially and due to this there are consolidations within the market place,” he added.

On the flip side, there are new players entering the insurance market with a long-term view with business models that are compatible with a BOD49 world.

A number of insurance online entities have also commenced operations. These are evolving in the market place and it will only be a matter of time before they are able to scale up their volumes and create a profitable online transactional platform, Ramachandran said.

Consolidation on course

The economic slowdown triggered by the pandemic and a set of regulatory measures have made it challenging for smaller advisory firms in the UAE to survive, making many of them either buyout targets or exit candidates, said DJ Sengupta, managing partner, Capstone Insurance, Dubai, who had earlier said the advice market in the UAE is ripe for consolidation.

Murali Krishnan, business development manager, Berns Brett Masaood Insurance, Dubai, says: “The market started seeing many mergers and acquisitions. The BOD49 regulations speeded up the consolidation process. Already lots of takeovers are happening.”

Sengupta said there will be more small players wanting to merge with bigger players who are future ready, which means the consolidation process will gain momentum.

The UAE’s rules on upfront commission, fees and mis-selling (BOD49)  have long been expected to be a big catalyst for industry consolidation and elimination of smaller players. Now, it’s happening as a number of small brokers have stopped writing life business altogether, said Anand Singh of BSA.

Krishnan says the current situation is ‘survival of the fittest’ and many small players will be forced out of the market. “Much before the pandemic struck the SME sector was severely impacted by the economic slowdown, but banks were not supportive.

“To a great extent insurance business is driven by the SME sector and most brokers have been driving their business through SMEs. For the small brokerages, the pandemic and the BOD regulations proved to be a big blow,” he said.

Sophisticated market

Apart from the BOD49 regulations by the Insurance Authority, the Central Bank has also issued guidance around consumer protection and the Securities & Commodities Authority has issued a rulebook on code of conduct for the sector, indicating that the markets are becoming more sophisticated and the regulatory framework is also evolving for better.

Advisers are starting to feel the pressure, but they understand that if they want to survive they have to play by the rules, said Singh.

It was expected that the revolutionary regulations would address issues related to mis-selling, upfront payments and overall unspecified commission payouts.

Singh said: “BOD49 has been a step in the right direction and players have found ways around the commission structures by way of overheads commissions etc. While the regulations are a step in the right direction, it will take some time before the complete impact is felt.”

Murali Krishnan said: “For frontline MNCs, this is an opportunity, as they can beat the competition by buying out the smaller firms. The positive is that the market will shrink and to that extent there will be healthy business.”

The Insurance Authority (IA) implemented BOD49 on 15 October 2020 and the rules state that no indemnity commission — a sum paid upfront to advisers on the full value of an insurance policy — is allowed for regular premium policies and the commissions paid should be based on the annualised premium collected.

Jopp told International Adviser: “The impact of BOD49 can’t be underestimated. It’s a huge piece of legislation for the life insurance business, and I think the main intention of the Insurance Authority was to create transparency, and to be sure that customers really knew what they were getting and what they were paying for.

“As an addendum to that, commissions were capped and the way that the commission was actually paid was changed. That will have an effect on distribution partners, particularly in the IFA sector. There will be consolidation.

“For the really large financial advisory firms, I think they are well capitalised, they have the right people, and they’re able to adapt, but some of the smaller ones that have gotten used to working on an indemnity commission…

“I think that model is broken, and it needs to be changed. Therefore, some of those firms will not survive. I think we will definitely see consolidation in that space.”

Bancassurance taking over?

Another knock-on from BOD49 is the way life insurers look to distribute. Financial advisers in the market believe the regulation will make insurers turn to more bancassurance agreements as a way of increasing their product distribution.

Most recently, Emirates NBD entered into a strategic partnership with MetLife to provide insurance products and solutions to its wealth, retail and SME customer base across the UAE.

But Jopp believes in a multi-channel distribution strategy which features advisers and banks.

“Insurance is hugely under-penetrated in the UAE,” says Jopp. “Our mission is to get those insurance needs fulfilled. We need to get customers to be aware that they have a need. We are adopting a multi-channel distribution strategy.

“We are fully committed to our IFA partners, we’re fully committed to our bank partners and we will look at other ways. We’ve got a D2C offering if a customer wants to deal directly. We’re looking at a variety of affinities and maybe partnerships with other entities, we continuously looking at that because the ultimate goal really is to try and fulfil the needs of the customer.

“From our perspective, we’ve been in the bancassurance space for many years, we understand it well. We have some great partnerships with some of the world’s biggest banks, and we’re very proud of those.

“I think that’s not changing. But that doesn’t mean to say that we are de-scoping or not focusing on the IFAs. Far from it, as that’s why we’ve got our commitments and working together with our largest distribution partners to ensure that we have products, services, and solutions that really are fit for purpose.

“Customers will demand other ways of purchasing policies from providers like us, and we are able to fulfil the whichever way the customer wants to interact with us.”

Further regulation?

BOD49 will undoubtedly leave its mark on the sector for many years to come.

But with the IA, Securities and Commodities Authority (SCA) and Central Bank of the UAE merger, there could be more regulation on the horizon.

“I think what we’re seeing is the regulatory environment changing in so far as the central bank now essentially becoming the head of the IA and SCA,” Jopp said. “I think that is a very positive move. If you’re going to be a world class regulator, I think having alignment of regulation and eliminating regulatory arbitrage is a very good thing.

“It’s a good thing for financial services. I would expect, as the market evolves and the UAE matures, regulation to keep evolving.

“It has to keep evolving, we need regulation to do with digital purchasing, with online capabilities, with adviser training and standards.”

Pandemic

BOD49 is not the only issue for the UAE advice space, it is also going to have to adapt to the problems caused by the coronavirus pandemic.

Jopp said: “I think covid has been a monumental change to the global economy, how the world works, and how countries adapt to it.

“In terms of advisers, and if I look at IFAs in particular, the way that they traditionally sold was very much about meeting face-to-face. With the lockdown that became very difficult, so using Microsoft Teams and Zoom, and all those things became the norm.

“From a provider perspective, we had to look at ways of how we can support our distribution partners, so that they were able to adapt themselves and work in this new environment.

“The other thing it did is it accelerated the digital evolution of what we were offering. We’ve made five commitments to our distribution partners.”

The commitments are:

• ‘We will provide you with the best possible technology’;
• Working with advisers to ‘develop market leading propositions, bond offerings, and products’;
• A dedicated support team for advisers;
• Commitment to pay all covid claims; and
• To be a ‘trusted and global brand’.

Jopp added: “We are here in the market, and we’re here to stay.”

Demand for protection

One of the most significant developments of covid was the increased awareness about the need for protection.

Jopp said: “The actual penetration rate of insurance in the UAE, which is the highest in the Middle East, it’s still incredibly low when you compare it to Europe and North America and parts of Asia.

“There is huge scope for people to get protected. The other thing is, obviously, most of the people in this country are expatriates. They know that if something goes wrong, their family needs to be fully protected and that message is getting out there.

“We see that in the in terms of the number of applications we’re getting, the number of quotes that have been done.

“When we talk to our distribution partners, there used to be a lot of business that was done as lump sum business, single premium investment business and all that sort of stuff.

“We’ve seen a change, we have seen the demand for protection.”

UAE changes

During the pandemic, the UAE sought to increase its appeal as the place to be for expats by bringing in legislation to change how the country deals with inheritance.

So, could this spark a demand for products around inheritance in the UAE?

“The changes are that people will no longer be subject to Shariah law if they’re a non-Muslim,” Jopp said. “That is a positive. There is no tax on inheritance. So, whereas in countries like the UK and other European countries, we see a lot of insurance products being developed because of the tax angle and what it can do to actually mitigate your tax liability.

“I think we are yet to see exactly how that will pan out. But the essence of having a policy that it pays out right away when something going wrong, that’s what we want to do.

“For us, nothing changes on that. I think the fundamentals don’t change. I think whether the specific products that cater for that, we’re always looking to tailor our products for our different customer segments and different demographics.

“We will carry on doing that and they face a specific need that arises as this piece of legislation gets tested over the course, then then we will adopt accordingly.

“I’m not sure that at this stage, that I see necessarily a huge bubble because that taxation element, which is a main driver in the UK and elsewhere, isn’t here.”

It has changed the way advisers earn revenue and it may affect more in the region as the IA and the Securities and Commodities Authority (SCA) join forces with the Central Bank of the UAE.

The mass regulatory changes sparked widespread speculation that the UAE advice sector would follow the UK with a consolidation spree.

But several months after BOD49 was implemented, there are few signs of a flurry of M&A deals in the space.

International Adviser spoke to several firms in the region to discuss why the rumoured fire sale has not taken place in the UAE.

Activity

There are not as many firms in the UAE as there are in the UK, so activity in the region will be less.

But there are also few rumours of deals close to happening at all in the market.

Sean Kelleher, chief executive of Mondial Dubai, said that “deals are a current hot topic although the rumour mill has a tendency to warp reality”, while Nigel Green, chief executive of DeVere Group, added that “there are always talks happening regarding consolidation”.

Mark Sanderson, managing director of UK and international at Praemium, said: “Adviser M&A deals are often talked about in the UAE and have been for many years, but few ever actually come to fruition.

“Advisers are self-employed for the most part and will move around for better terms around commission splits so the ‘transfer market’ in the UAE tends to be for advisers switching from firm-to-firm and moving their clients with them.”

DJ Sengupta, co-founder of Capstone Insurance and Bankonus, said: “At present there seems to be minimal activity.

“In fact, there are hardly any discussions around M&A. The current situation with lower revenues, higher costs and debt on the books is not conducive for M&A activity.”

Why are firms not buying or selling?

If deals are not happening in the UAE, despite the majority of people in the sector saying they will, then there must be a reason.

So, why is this the case?

Tim Searle, chairman of Globaleye, said: “You’ve not seen the amalgamation of IFAs since many realised that the writing was on the wall with the regulator years ago were unwilling to listen to constructive guidance on how to create a registry framework in the interests of all parties.

“Their only solution seems to be cutting revenue of the IFA by over 50% thinking this will improve the outcomes for clients.

“The need for advisory coupled to suitability reporting, risk rating, cash flow forecasting, minimum education standards, minimum industry recognised qualifications, commission disclosure and total cost of advice all seems to have passed the regulator by.”

Green said: “It could be that there’s a sense that the industry, and indeed the world, still needs to be more post-pandemic focused before an accurate analysis can be made and, therefore, better deals struck.”

Sanderson added: “The typical advisory business model in the UAE doesn’t lend itself to being an acquisition target due to a lack of predictable recurring income. The majority of firms still make the bulk of their revenue through up-front commissions and a substantial proportion of any recurring income is often paid out to self-employed advisers leaving very little basis to value a business on.”

Price

One of the key sticking points in any negotiation is price. A seller could demand too much or a buyer may make a derisory offer.

The UAE advice market is fairly wealthy and therefore businesses may cost more to buy.

Mondial’s Kelleher said: “Financial advisory firms are a business like any other. There are a few standard pricing formulas and buyers or sellers will engage, as in other business, on the treadmill of premium and discount factors.

“Nothing exceptionally different from any other business.”

Devere’s Green added: “Price will always be an important factor in negotiations, but growth and potential are arguably more critical considerations.”

Legacy

If price isn’t a huge problem, then it could be legacy issues.

Firms could be worried what they are buying, which is especially the case in the UK with the defined benefit (DB) transfer scandals.

Praemium’s Sanderson said: “All financial services firms have legacy of some kind or another and with regulatory standards improving in the UAE all the time, firms have made huge steps forward in that regard, so I don’t think legacy challenges are the issue.

“The question is what would a firm actually be buying? With no CIP and the firms having little or no ownership of the assets through a single custodian, there is always a risk that self-employed advisers simply walk out the door post acquisition and take the assets with them. That’s the real risk, not legacy.”

Capstone’s Sengupta added: “There are many legacy factors. Indemnified commission kept the advisory industry alive for very long and the entire industry never thought of developing alternate models.

“With indemnified commission getting reduced by 70%, firms will have to generate three times more revenues to keep up with debt arising from legacy indemnified commission of previous years. Indemnified commission in the past has also resulted in a situation where no advisory firm has much annuity income from existing portfolio.

“At the same time the industry is going through massive changes. Unfortunately for the advisory industry these changes are powerful headwinds – massive drop in indemnified commission, alternate product availability at lower cost, new firms with digital advice are a few of these.

“These factors are not attractive for investors and will drive acquisition price to very low levels.”

Future

Despite the lack of business currently, advisers expect there to be more deals in the UAE, especially with the pandemic taking effect.

Kelleher said: “As regulators increase the cost of compliance and as client knowledge drives their costs down, the need for volume and scale increases steadily.”

Green said: “I think consolidation is inevitable as the world moves into a post-pandemic era.”

Sanderson added: “As regulator standards and downwards pressure on revenues increase, I think it is logical that firms in the UAE will have to find scale, so some strategic mergers would make a lot of sense.

“That being said while some UK and overseas advice firms are showing an interest in the UAE, I think it is unlikely that we would see a typical consolidator look to make many strategic acquisitions there.”

The Insurance Authority (IA)’s newly introduced rule came into effect on 15 October and plans to be a game changer for the industry.

The rules say that no indemnity commission — a sum paid upfront to advisers on the full value of an insurance policy — is allowed for regular premium policies and the commissions paid should be based on the annualised premium collected.

First year commissions must be capped at 50% of the annualised premium or 50% of the total commissions payable under the product, whichever is lower. The remaining commissions must be paid out linearly over the remaining premium payment term of the policy.

Mind the gap

But Richard Burden, head of international sales at Canaccord Genuity Wealth Management, told International Adviser: “The wider impact of regulation, particularly in what we call the older emerging markets, is an interesting one.

“We know that financial services are rarely bought. They’re always sold through very good wealth managers and IFAs. I think what we’re going to see in some of these markets are pension gaps – and then there is the question of whether the state will take up the slack. In most cases, probably not.

“I think when you see the impact of regulation coming in, the traditional life companies start to withdraw product. Over the years, those have been vehicles that have helped clients save for the future and now that you have less products and less providers in those markets, as well as less incentive to sell those products, what are clients going to do?

“Are clients going to jump on their own fund platform and invest $2,000 (£1,495, €1,683) a month? Potentially not. I think there’s a longer-term impact of pensions gap appearing among high net worth expats, who aren’t going to save for the future. They might have the attitude of spending that spare cash, rather than thinking about retirement.

“That’s something of a medium-to-long term impact. If we lose the ability to incentivise people to sell life wrappers and investments – and if regulation starts to disincentivise them from selling – it could ultimately affect clients in the long term, who won’t be saving for their future. We need to find the right balance.

“It’s whether or not under the commission caps are deemed an appropriate level of commission to actually go out and seek clients. We won’t know that impact until the first sales figures starts to come through.”

Technology’s chance to shine

The UK and other western countries have started to push the message that technology will solve an advice and product gap.

But Burden doesn’t think this will be the key to close the gap in the Middle East.

“I think there’s a small element that people will use the tech gap to actually identify their needs and requirements,” Burden said. “But I think fundamentally, at the end of the day, we are a relationship business and people like talking to people, they relate to them and that’s why they buy from them.

“I think tech can enhance, in terms of point of sale and ways that you communicate with clients, but I think fundamentally, as with many other industries, we are a relationship-led business.

“Clients need to explain what their circumstances are because there are often times that it’s only under an analysis or some questioning that people remember things that they never ever thought as part of the advice journey.”

M&A frenzy

The BOD49 regulation was something that dragged on for years until it was finally implemented into the Gazette a year ago.

Unfortunately, not everyone thought it would actually become a thing in the UAE, and Burden thinks M&A deals could be on the horizon because of this.

Burden added: “There were always going to be a small sector of the market that we’re going to wait till 11:59 on the evening before the regulations change, and that was never going to change.

“M&A activity will increase. There were a number of people who buried their head in the sand.

“But you had a lot of them who really thought about what the future is going to look like with lower initial commission and partnered with IFAs and professional connections.

“Rather than the regulation changing habits, it’s almost like the impact of the announcement of the regulation changes the habits. Many of them are up to speed.”

The UAE Insurance Authority implemented the BOD49 regulations on  life insurance with effect from 16 October 2020 after a particularly long gestation period.

The regulations cover insurance companies incorporated in the UAE and foreign branches of insurance companies licensed to carry out insurance operations either through a branch or an insurance agent.

The new rules address the most important issues relating to mis-selling, overall commission payouts, upfront payments to agents/brokers by insurers, fees and charges associated with investment products, the free-look period and mandatory benefit illustrations.

It was anticipated that the game-changing regulations will greatly affect businesses, triggering an exodus of smaller players from the market as revenues take a big hit.

Purpose not served

Many brokers feel that the purpose of the regulations has not been served as they are not benefiting the advisers or customers.

It was feared that  life products were going to get costlier for policyholders, thereby raising a concern whether the regulation can achieve what it intended.

“There is no actual benefit to advisers or clients,” they said.

International Adviser previously reported that paths were being beaten towards the industry exit door, while others seem to have switched to selling products like credit cards.

“Customers are not happy as life insurance premium has shot up by as much as 60%. All regulated products such as life insurance, retirement planning, education planning have taken a big hit in revenues,” said Navin Nihalani, founder and chief executive, Compass Insurance Brokers.

“The big impact is on life advisers, as customers are buying lesser insurance than they need.”

In one example, a customer looking to buy $1m (£755,430, €842,820) worth of life cover now has to pay a premium of $22,500 – up from $14,000 in the past, a rise of nearly 60%.

Another example given showed a 33% increase in premiums to $20,000 from $15,000.

No details were provided about which products or companies were involved in the above examples.

No indemnity commission

The regulations disallowed indemnity commission for regular premium policies and stipulated that the commissions paid should be based on the annualised premium collected.

First year commissions must be capped at 50% of the annualised premium or 50% of the total commissions payable under the product, whichever is lower.

The remainder must be paid out linearly over the remaining premium payment term of the policy.

The first year commission is subject to claw-back during the first five years of the policy, at a minimum.

“Brokers find it a big deterrent. If he has to make the 50% on the first year of commission, he knows that it’s 10% every year for five years. Logically, he is getting the 50%, but if the customer stops paying, he has to return 40% back to the insurance company. Therefore, nobody wants to sell any product with the five-year claw-back condition. Further, brokers are finding it an accounting nightmare,” Nihalani said.

It was feared that the broker role would become redundant if insurance companies start selling directly, bypassing brokers.

None has started it yet, but it is rumoured that Zurich is contemplating setting up a direct sales force.

Insurance companies will naturally look to strengthen their direct sales channels if there is resistance from the broker distribution network.

“Advisers are forced to change track as they have to do something to survive. Already some are planning to turn into DSA (direct selling agencies) models.  It is understood that a few will be surrendering their broking licence to take up DSA licence,” Nihalani said.

Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, previously stated: “Most insurance brokers are unhappy with the regulatory development.

“The new regulations are not sustainable and that if the distribution channel is not sufficiently incentivised, brokers will lose the motivation to sell these products and therefore have an adverse impact on the life insurance market.”