The Islamic insurance, or takaful, law was issued on Sunday, placing companies under the jurisdiction of the Insurance Authority of the United Arab Emirates and giving them a year to reorganise their processes.
The boards will be responsible for issuing an annual report and will fall under the oversight of a supreme committee within the authority charged with all Islamic legal opinions.
The law also sets standards for financial and accounting issues as well as rules for paying out surpluses resulting from premiums and investments.
'Up until now, companies were just trying to put insurance law in an Islamic context without any specificity,' said Peter Hodgins, partner at Clyde & Co.
'The new law aims to standardise the operating structure of all takaful firms which will strengthen the industry.'
But any standardisation process will likely result in an increase in costs that could hit an industry already struggling to make a profit. That could help spur some long-awaited consolidation, said Justin Balcombe, director of Middle East advisory at Ernst & Young.
Takaful premiums are expected to grow to around $8.8 billion globally by the end of 2010, compared with $3.4 billion in 2007, according to data from Ernsy & Young.
But the industry is made up of a few large players dominating the market, while smaller and mid-size firms struggle to make a profit because of the costs of sharia boards and limits on the types of investments they can make.
'Some smaller players might just be unable to afford the cost of compliance to the changes under the law,' Balcombe said, prompting some to consider merging with a larger competitor.
Hodgins added that the UAE insurance market is extremely competitive, with only nine takaful companies competing with over 50 conventional firms, making consolidation a likely scenario.
Hodgins said one of the major developments of the regulation is the creation of the supreme committee, which will bring consistency by providing detailed rules for the industry.
'It's a relatively radical departure from Middle Eastern standards,' Hodgins said. 'It will provide two layers of sharia oversight, which will get rid of the criticism that there isn't any transparency or consistency in the industry.'
While the law is the first of its kind in the region, Malaysia has had similar rules in place to cover both takaful and Islamic banking. Market watchers hope that the implementation of the UAE law may spread to other markets in the six-state Gulf Cooperation Council.
Sheikh Muddassir Siddiqui, an Islamic scholar and partner at Denton Wilde Sapte, said if the UAE's new law is properly implemented, it will provide more consumer protection and better auditing, ultimately reducing costs of business in the long run.
'I hope similar steps are taken to regulate the rest of the Islamic finance industry,' he said.
source : Reuters