Insurance cheques cannot be issued in broker's name

Dubai: Effective from March, cheques will have to be issued directly in favour of insurance companies on policies sold to individuals and businesses. This applies even to those policies sold by brokers directly to clients in their capacity as financial intermediaries.

This is a 180-degree departure from the current practice in which cheques can be made out to brokers. Last year, there was an instance of a brokerage firm utilising funds thus collected for their own personal purposes.

Interestingly, the regulatory authority has adopted a rule which is not a common practice in insurance jurisdictions elsewhere.

More capital

"Insurers are certainly better capitalised and equipped to handle credit risk whenever credit is extended to the insured," said Siddarth Razdan, chief operating officer of Insighters, a brokerage firm.

"It's important that insurers quickly gear up to handle credit requests, as otherwise there could be delays in closing business routed through insurance brokers.

"Insurers may need to inject more capital or secure other means of funding with this new directive, as they have to absorb the credit risks directly onto themselves," Razdan said.

Mustafa Vazayil, managing director of Gargash Insurance, says industry players must be blamed for creating the circumstances that led to the new directive.

Lack of control

"While we appreciate the concern of the authorities to streamline the credit control aspect following the failure of a mid-sized broker last year, it is worth noting that such an instance occurred primarily because of the lack of control on the insurers' part," said Vazayil.

"As part of the broking community, we will study the directive collectively and represent our views to the authorities."

The directive should also be seen as part of a wider move by the regulatory body to update the practices and processes within the local insurance sector.

A new law for brokers is on the way and, according to industry sources, could even include higher capital requirements.

Positive aspect

But right now all eyes are focused on the March 1 deadline. For brokers to go through such a major change in the way they operate will take some doing.

"It is not going to be easy to implement, but at the same time there is a good side whereby some brokers won't be able to change the premium charged to clients," said George Ashkar, managing director of Gateway International Assurance.

"Also, it secures the payments from clients and that itself is a good thing to have."

With the new directive coming into effect, online payments on new policies and renewals cannot be done through payment gateways operated by brokers.