Understanding Economic Substance Regulations for Insurance Businesses in the UAE

In accordance with Article 3 of the Cabinet Resolution No. 57 of 2020, the insurance business is one of the relevant activities as described by the Economic Substance Regulations in the United Arab Emirates. The term “insurance business” refers to the activity of taking risks by carrying out insurance contracts, reinsurance contracts and captive insurance contracts, covering the life as well as non-life sectors. 

Core Income Generating Activities of Insurance Business

The Economic Substance Regulations have clearly outlined the Core Income Generating Activities that apply to insurance businesses under Article 3 of Cabinet Resolution No. 57 of 2020. The Core Income Generating Activities of an insurance business include the activities that are essential for a Licensee or Exempted Licensee to generate income from the insurance business.

The following activities are the Core Income Generating Activities of the Insurance Business:

• Predicting and Calculating Risk

Companies that carry out Core Income Generating Activities of the insurance business are required to efficiently calculate the costs and risks of the contracts carried out by the insurance company.

• Insuring or Reinsuring against Risk and Providing Insurance Business Services to Clients

Companies that carry out Core Income Generating Activities of the insurance business involve insuring or reinsuring against various risks. The Insurance Business is required to craft such policies that keep in view specific risks while formulating insurance contracts, reinsurance contracts and captive insurance contracts.

• Underwriting Insurance and Reinsurance

Insurance businesses are required to evaluate and analyse risks that could lead to potential losses in insuring or re-insuring activity. Therefore, the Insurance Business underwrite the costs associated with these risks.

Regulatory Authority

In accordance with Article 4 of the Cabinet Resolution No. 57 of 2020, each of the following authorities is hereby appointed as the Regulatory Authority to regulate the Insurance Business:

• Insurance Authority

In the United Arab Emirates under Federal Decretal Law No. 25 of 2020, the Central Bank of the UAE (CBUAE) is responsible for licensing and regulating insurance businesses. Under the provisions of Federal Law No. 6 of 2007, the Insurance Authority will continue to apply to all licensed Insurance Companies until they are replaced by CBUAE, ensuring that they meet the requirements of the Economic Substance Regulations.

• Free Zone Authority

If an insurance business operates within a free zone, the Free Zone Authority regulates the insurance business according to its own employment law and employees are subject to the rules and regulations of their respective free zone authority.

• Financial Free Zone Authority

In accordance with Federal Law No. (8) of 2004 concerning Financial Free Zones, if an insurance business operates within a free zone, the respective Financial Free Zone Authority oversees compliance with the Economic Substance Regulations in that specific zone.

Requirements of the Economic Substance Regulations for Insurance Business

The Economic Substance Regulations in the UAE have requirements that are required to be fulfilled by the companies that are engaged in the Core Income Generating Activities generated from relevant activities, including insurance businesses. The Regulatory Authorities that regulate the Insurance Business assess and ensure compliance with the Economic Substance Regulations the following requirements:

1. Active Operations: The Regulatory Authorities will carefully examine whether the insurance business is actively conducting its Core Income Generating Activities within the UAE.
2. Economic Contribution: The Economic Substance Regulations require insurance businesses to contribute to the local economy of the UAE by carrying out their relevant activities within the UAE and preventing tax evasion. The Regulatory Authorities appointed to regulate the Insurance Business evaluate the business’s Core Income Generating Activities within the UAE, which can encompass factors like hiring employees as per UAE’s Labor Law and the capital investment in the Insurance Business.
3. Income Generation: Regulatory authorities ensure compliance with the Economic Substance Regulations by determining whether the insurance business has earned a relevant income from the Insurance Business in each reporting financial period.
4. Legal Compliance: In accordance with Article 9 of Cabinet Resolution no. 57 of 2020, the Regulatory Authorities are assigned to send information provided by the Licensee and Exempted Licensee to the National Assessing Authority and to ensure compliance with the Economic Substance Regulations such as paying taxes, avoiding penalties, and meeting the Economic Substance Test is necessary to ensure legal compliance with the Economic Substance Regulations.

Inactive Businesses and Exempted Licensees

If an insurance business remains inactive during a financial year or fails to generate the relevant income from the Core Income Generating Activities. In such cases, the business can qualify for exempted licensee status as specified in the Cabinet Resolution No. 57 of 2020. However, as per Article 8 of Cabinet Resolution No. 57 of 2020, an Exempted Licensee shall submit to the Regulatory Authority a notification with supporting evidence to justify its exempted status and failure to comply with ESR requirements can lead to penalties.