Contents General Remarks Insurance Agents Examinations Enforcement Trends in the Market of Insurance Agents...

Transcription

1 Contents General Remarks Functions of the Insurance Agents and Agencies Licensing and Regulation Department (Agents Licensing Department) Insurance Agents... 6 What Is an Insurance Agent?... 6 Status of Insurance Agents... 6 Fitness of Insurance Agents... 7 Number of Insurance Agents Examinations Subjects of Examinations Examination Passing Rates Enforcement Trends in the Market of Insurance Agents Agents Commissions General Remarks and Definitions Life Insurance General Insurance Acquisition or Formation of an Agent-Corporation by an Insurance Company Licensing Procedures Procedures for Licensing Individual Agents Procedures for Licensing Agencies Appendices Appendix I-1 Agency Licensing Procedures Appendix I-2 Change or Addition of Business Manager in Agency Procedures Appendix I-3 Change of Agency Holdings Procedures Tables Table I-1 Number of Active Insurance Agents (Interns and Licensed), by Lines of Insurance, Table I-2 Passing Rates on Intern Examinations, Table I-3 Passing Rates on Licensing Examinations, Table I-4 Insurance Commissions and Premiums, Table I-5 Commissions and Premiums in Life Insurance,

2 Table I-6 Commission/Premium Ratios in Life Insurance, Table I-7 Market Shares of Insurance Companies in Commission and Premium Payments, Life Insurance, Table I-8 Changes in Companies Commission Rates, Life Insurance, Table I-9 Commissions and Premiums in General Insurance, by Insurance Lines, Table I-10 Rates of Change in Data in Table I Table I-11 Commissions and Premiums in General Insurance, by Companies, Table I-12 Market Shares of Insurance Companies in Commission and Premium Payments, Life Insurance, Table I-13 Changes in Companies Commission Rates, General Insurance, Figures Figure I-1 Number of Active Insurance Agents (Trainees and Licensed), by Lines of Insurance, Figure I-2 Passing Rates on Intern Examinations, Figure I-3 Passing Rates on Licensing Examinations,

3 GENERAL REMARKS Insurance agents operate under the provisions of two main laws (and the regulations based on them) the Regulation of Insurance Business (Control) Law, (hereinafter, the Control Law), and the Insurance Contract Law, (hereinafter, the Insurance Contract Law). In 1999, 784 insurance agencies (agent-corporations) were licensed for at least one branch of insurance (life, property, accident, marine) and there were 8,783 insurance agents (interns and licensed). Insurance agents derive their main function and importance, generally speaking, from their efficient role in closing insurance transactions. The primary function of the Agents Licensing Department is to supervise the agents implementation of the law. This chapter of the Commissioner s report looks at the functions of the Agents Licensing Department, the status of insurance agents in Israel, the examinations insurance agents must pass to obtain an intern s license or a full license, trends in the insurance agents industry (particularly in regard to agent commissions), and licensing procedures (for individual agents and for agentcorporations). In recent years, structural changes in the insurance market have affected both the insurance agents and their operations. For example, insurance products are becoming more complex, in the sense of their being financial products, and the range of insurance companies products that agents market has expanded in light of the attempt to target more specifically focused groups of insured. Therefore, insurance agents need a higher level of skills and knowledge. The advent of direct-insurance companies in Israel s insurance market is another example of a structural change that has made this market more competitive. The existence of stiffer competition has made those working in the market more efficient and has reduced the costs to the consumer. The arrival of direct-insurance companies affected the insurance agents marketing methods (some agencies have also gone into telemarketing) and emphasized the need to make consumer services more efficient to retain clientele and create a basis for new clients. Another change in market behavior is the increased importance of electronic commerce in world markets, including insurance. E-commerce allows its users to make quick and convenient transactions without having to search physically for the required product. Only in the last year has this option penetrated Israel s insurance market and it is still in its infancy. The advent of e-commerce in insurance may have a widespread effect on insurance agencies. 3

4 It gives insureds the possibility of buying policies with no need for an agent. It is true that one may purchase a policy directly from an insurance company but, as stated, the possibility of doing so over the Internet is more than convenient and quick; it also saves the cost of searching and is sometimes even cheaper. Notably, the Commissioner of Insurance is examining rules for use in regulating the sale of insurance over the Internet and by telemarketing. In view of the direct marketing challenge (telemarketing and Internet), insurance agents will need today and certainly in the future a level of skills and professionalism that will allow them to market the insurance product and to offer their clientele tangible added value. The provisions of the law are meant to protect the rights of the insured during and after the marketing process. The main goal of the Agents Licensing Department is to ascertain the insurance agents are respecting the provisions of the law and to regulate their activity. 4

5 1. FUNCTIONS OF THE INSURANCE AGENTS AND AGENCIES LICENSING AND REGULATION DEPARTMENT (AGENTS LICENSING DEPARTMENT) The Agents Licensing Department: a) licenses insurance agents and ensures that they meet their legal obligations; 1 b) licenses insurance agencies (agent-corporations) and ensures that they meet their legal obligations; c) receives and analyzes regular reports from insurance companies on matters concerning the department s regulatory purview; d) prepares position papers as a basis for shaping the Commissioner s policy on regulating the actions of insurance agents and agencies in Israel. e) writes licensing examinations for insurance agents manages and revises the pool of test questions, coordinates the tests, determines the times and places they will be held, checks the tests, and sends the scores to the examinees. 1 Main legislation, secondary legislation, case law, and directives from the Commissioner. 5

6 2. INSURANCE AGENTS WHAT IS AN INSURANCE AGENT? The Insurance Contract Law defines an insurance agent as an intermediator. There is no precise definition of the phrase intermediator, mainly because the operations that fall within this category are not clearly delimited. Therefore, the term intermediator is broadly defined. The general assumption is that it is the insurance agent s job to close insurance transactions efficiently and that this includes the establishment of contractual relations between insurer and insured, the transfer of insurance premiums to the insurer (where this is not done directly), administering routine affairs related to an insurance contract, and helping with and processing the insured s claims when an insurance event occurs. Notably, in recent years several public commissions have examined the legal status of insurance agents in Israel. STATUS OF INSURANCE AGENTS As stated, the status of insurance agents is regulated in two statutes the Regulation of Insurance Business (Control) Law and the Insurance Contract Law. The Insurance Contract Law defines the agent as a intermediator and the Control Law contains provisions for the regulation of insurance brokers. The Insurance Contract Law notes several instances in which insurance agents should be considered emissaries of an insurance company (we discuss these instances below) but when they have the written consent of the insured, they are considered emissaries of the insured. The term emissaries means that the agents represent the principals. They operate in the principals name, act in the principals interests, and have no discretion in performing the actions demanded of them. They have no material interest in protecting the other side s interests, although, if the parties agree, they may operate in a state of conflict of interests. intermediator are the most efficient means of making transactions. They are middlemen who mediate objectively between (at least) two parties who have differing and opposing interests, and attempt to reach a compromise. Intermediators act in the interest of both sides. An agent is considered to be an emissary of the insurance company in the following instances: 1. When a contract with an insured is concluded (including preceding negotiations) during negotiations between the insured and the agent and when the contract itself is 6

7 made, the agent is considered the emissary of the insurance company. The insurance agent works on behalf of the company in the material actions that lead to the finalization of the insurance transaction. Notably, the law allows the agent to be the emissary of the insured if the insured asks the agent to serve this function specifically and in writing. 2. For purposes of compulsory disclosure in concluding a contract the agent must disclose the terms of the contract to the insured before the contract is concluded. If a material fact or a relevant term is not disclosed, the company will be legally liable for not having fulfilled its disclosure requirement. 3. When premiums will be transferred to the insurer via the agent, unless the insurer has informed the insured that the premiums should not be paid to the agent. 4. In regard to notification from the insured to the insurer, unless the insurer has informed the insured, in writing, that notices should be sent elsewhere. Although the law sounds explicit, it is not clear and certain when agents are considered intermediators since the nature of agents work contains intrinsic conflicts of interests. On the one hand, they are paid (wages and commissions on sales of insurance policies) by insurance companies. On the other hand, they are supposed to obtain the best possible policy terms for their customers (by dint of the fiduciary obligation towards them). In many cases, best policy terms means insurance coverage of superior value, i.e., more coverage at lower cost to the insured. Insurance companies then get less recompense (a lower price) for policies sold and the agents receive lower commissions (where the commission is calculated as a percentage of the price of the policy). Therefore, agents cannot be considered to be true intermediator. Furthermore, as stated, the law does not stipulate on whose behalf agents work in any case where they are not true emissaries. Neither does the law stipulate to whom agents have a fiduciary obligation in these instances and to whom they owe the obligation of disclosure. Thus, it is somewhat problematic to define the status of insurance agents in Israel. FITNESS OF INSURANCE AGENTS The Control Law and the regulations authorize the Commissioner to issue intern s licenses to persons who meet the following conditions: a) residents of Israel. b) at least eighteen years old. This is meant to ensure that those employed in the profession are mature and able to assume the responsibility that derives from this occupation. 7

8 c) a licensed agent has agreed to train them. They are required to spend a period of internship with a licensed and experienced agent who will guide them in their work (as lawyers and accountants do). d) They have passed examinations in Fundamentals of Insurance and fundamentals of the types of insurance in which they wish to specialize. In other words, they must demonstrate a reasonable level of professional knowledge. e) They have not been convicted of crime or served a prison sentence in the five years before the license is given, and there are no legal proceedings against them for an offense that may, under the circumstances, be considered one of moral turpitude. This is meant to keep the insureds money out of the hands of persons who are unfit for this purpose. Fully licensed agents must meet the following conditions: a) residents of Israel. b) At least twenty years old. Since interns cannot start work before the age of eighteen, and the internship lasts two years, fully licensed agents cannot be younger than twenty. c) They may not be employees of an insurance company in any capacity other than insurance agent. d) They must have undergone a period of internship (or been given an exemption). This is to ensure that the agents have acquired enough experience and knowledge. e) They must have passed final examinations after completing the internship. This is to ensure that the agents have acquired enough experience and knowledge. f) They must have paid the license fee. g) They must not have not been convicted of a crime or served a prison sentence during the five years before the license is given, and there must be no legal proceedings against them for an offense that may be considered, under the circumstances, one of moral turpitude. There must be no other facts that would disqualify them from being insurance agents. The logic behind this requirement in regard to interns also applies here. 8

9 Trends for the future The Spivak Committee s Position on Changes Required in Agents Qualifications In 1997, a committee headed by Prof. Avia Spivak was appointed to prepare a curriculum for the training of insurance agents in Israel. The rationale behind the appointment of the committee, and the committee s main purpose, was to ensure an appropriate professional level of insurance agents in view of the complexity of the insurance product (both now and in the future). The committee presented its findings in January The main stipulations follow: 1. At least one year of compulsory study at an approved scholastic institution (the rules governing approved scholastic institutions appear in the committee s report). 2. Terms of admission to the study program: matriculation certificate (with note made of the scope of subjects that agents must study during their training) or a threshold score on the psychometric test. 3. The committee recommended a curriculum that would give agents the knowledge required for their occupation, including the number of study hours in each subject. The curriculum should include a semester of basic subjects and a semester of insurancerelated subjects. In each semester, the relevant subjects should be defined and added. 4. The fundamentals examination in its present form should be abolished, and all exams up to the intern s license should be taken as internal examinations at the scholastic institutions. 5. Internship to be accepted for studies in a given line of insurance, the candidate must pass examinations in introductory courses on insurance and insurance law. Success in the semester of studies on the specific field of insurance should a precondition for beginning one s internship. 6. The licensing examination should be administered by the Commissioner, as is the practice today. 9

10 NUMBER OF INSURANCE AGENTS Table I 1 Number of Active Insurance Agents (Interns and Licensed), by Lines of Insurance, (1) Interns Licensed Interns Licensed Interns Licensed Life 3,253 4,632 3,014 5,188 2,582 5,834 General (2) 2,122 3,859 1,904 4,225 1,542 4,746 Life+general 991 2, , ,724 Total 8,209 8,524 8,783 (1) Note that some insurance agents hold both full and trainee licenses. (2) General = property and accident. 10

11 3. EXAMINATIONS SUBJECTS OF EXAMINATIONS 2 There are two categories of examinations: for interns (fundamentals and specific type of insurance 3 ) and for fully licensed agents. In the fundamentals exams, examinees have to show that they have the knowledge required to begin their internship. Thus, a fundamentals exam focuses on general subjects relating to the insurance market. It includes questions about insurance law (in particular, the Control Law and the Insurance Contract Law), basic insurance concepts (such as replacement value and underinsurance), the underlying principles of insurance contracts as derived from the law (such as the right to indemnification and the obligation of disclosure), insurance policies, and the legal status of an insurance agent in Israel. In examinations on specific types of insurance, and in final exams, examinees must show familiarity with and knowledge of the type of insurance in which they wish to deal as licensed agents. In the life insurance exams, for example, candidates must be conversant with the mathematical principles of life insurance (rules of probability, interest), group arrangements, etc. In the licensed agent exams, candidates must display a level of knowledge that suffices for work as insurance agents, so that they can accept the responsibilities and liabilities of this occupation. Future trends in regard to examinations are discussed in Chapter B. 2 The lists given in this chapter are not exhaustive. The full list can be found at the Ministry of Finance Web site, 3 The fundamentals test is for everyone applying for an insurance agent s license; the tests for a specific type of insurance depend upon the branch for which the agent wishes to have an intern s/full license. 11

12 EXAMINATION PASSING RATES Table I-2 Passing Rates on Intern Examinations, (1) Subject of test Persons tested Passing rate (%) Persons tested Passing rate (%) Persons tested Passing rate (%) Change, 1999 vs 1997 (pct. points) Fundamentals 1, , , Life Property Accidents Marine (2) (1) The data include persons tested in the same line of insurance more than once. (2) The marine-insurance data are not a representative sample because the number of persons tested does not suffice to meet that definition. Table I-2 shows that, generally speaking (with the exception of marine insurance), the passing rate decreased between 1997 and 1999 by 12 percentage points in the fundamentals exam, by 9 percentage points in life insurance, by 2 percentage points in property insurance, and by 19 percentage points in accident insurance. 12

13 Table I-3 Passing Rates on Licensing Examinations, (1) Subject of test Persons tested Passing rate (%) Persons tested Passing rate (%) Persons tested Passing rate (%) Change, 1999 vs 1997 (pct. points) Life Property Accidents Marine (2) (1) The data include persons tested in the same line of insurance more than once. (2) The marine-insurance data are not a representative sample because the number of persons tested does not suffice to meet that definition. Table I-3 shows that, generally speaking, the passing rate on these examinations also declined. These changes in the examination results (intern and licensing) can be traced to several factors, chiefly the increased complexity of the products marketed by the agent and the amount of knowledge required of the examinee. The increase in required knowledge leads almost inevitably to a lower passing rate. Moreover, in the past the examinations were not revised and the questions recurred; last year, however, the questionnaires were revised and the pool of questions used in the tests was enlarged. 13

14 4. ENFORCEMENT The legal obligation to ensure that agents meet the provisions of the law entails a system to regulate insurance agents, foremost to protect insureds interests. The provisions of the law aim to assure insureds rights. Likewise, since today s insurance product not to mention tomorrow s is a complex financial product that affects insureds wealth and future, there is a need for a regulatory system to control and verify, above all, that the insurance agent has the appropriate professional training and education and to ensure that he/she is fulfilling the provisions of the law, which are designed to protect insureds and the economic interests that they have entrusted to the agents. The law is enforced in several ways: a) Presentation of a valid license all insurance companies must require agents to present a valid license in order to receive their commissions. Thus, only agents with a valid license may charge commissions and anyone who engages in insurance brokerage without a license is, in fact, working without recompense. Such an agent will have practically no motivation to sell insurance policies. In other words, the more strict the regulatory system enforces the law, the fewer unlicensed insurance agents there will be. b) Serving notice concerning structural changes in insurance agencies changes in shareholdings, shareholders, business manager, and the composition of the board. The Commissioner has to approve these structural changes to assure certainty and clarity in regard to the identity of players in the insurance market. c) Insurance agents must present an annual report on commissions paid them by insurance companies. d) Revoking or suspending an agent s license Paragraph 29 of the Regulation of Insurance Business (Control) Law stipulates that the Commissioner of Insurance, after consulting with the advisory committee, 4 may revoke or suspend 5 an agent s license if one of the reasons for said action is present, e.g., if the agent has declared bankruptcy (Paragraph 29(a)(2)) or if the agent has breached a material condition of his/her license (Paragraph 29(a)(3)), etc. 4 A committee established according to Paragraph 4 of the Regulation of Insurance Business (Control) Law. 5 For a period of no more than forty-five days. 14

15 e) An intern exceeds the period of internship stipulated in the regulations over the years, some interns have held their interns licenses for more than three years, for decades in some cases, without taking the final examinations in their chosen fields of insurance. This is a violation of the law. Last year, it was decided to bring this practice to a halt by revoking these agents licenses (in the types of insurance at issue, of course). However, the Commissioner has given these agents an additional grace period to pass final examinations in the types of insurance in which they have been working. Accordingly, their licenses were extended until June 2000, by which time must pass final examinations in fields of insurance for which they hold interns licenses. For this reason, several additional testing dates were offered. f) Paragraphs 18 and 19 of the Control of Insurance Businesses (Insurance Agent s License) Regulations, , entitle the Commissioner s exemption committee to take the following actions, if the Commissioner proposes them: 1. to exempt a license applicant (intern s or full license) from taking the examination (fully or partly) if the applicant is knowledgeable and experienced in insurance matters or has been examined on the relevant subjects at an institution approved by the committee to teach insurance-related subjects; 2. to grant a license to a person who has not completed (or has been exempted from) the internship and to a person who is employed by an insurance company in a capacity other than insurance agent. g) To request information the Commissioner is authorized to request any other information regarding agents activity that may affect insureds interests. 15

16 5. TRENDS IN THE MARKET OF INSURANCE AGENTS AGENTS COMMISSIONS 6 GENERAL REMARKS AND DEFINITIONS Agents commissions are important in understanding trends in the insurance market, because they point to market developments and rates of growth. Insurance agents are the main channels through which insurance companies market insurance policies; changes in their income may signal economic changes in the insurance market, growth of the industry, and economic changes in the insurance companies themselves. A change in trend may, as stated, also illuminate the agents own economic situation and the way they react to changes in the insurance market. Since commissions are usually calculated as a percentage of the premium, they are an important factor in the price of insurance to the consumer. Commission rates are set in several ways. In life insurance, the rate is fixed according to the Annual Bulletin (standard table of commissions of each insurance company), occasional special promotions, and personal contracts. 7 Occasional special promotions are rarely offered in general insurance and, in addition to standard tables or personal contracts, commissions are usually paid on the basis of insurance companies commission tables for each type of insurance. The system used to pay commissions also varies from one type of insurance to another. In life insurance, commissions are paid for new policies, expansion of policies, collection (which remains constant throughout lifetime of the policy), and for management of the insurance portfolio. In general insurance, commissions are paid for new policies and renewals only. The method of remuneration also varies from one kind of insurance to another. In life insurance, the method is characterized by the way payments are spread, taking into account revocations, the definition of the qualifying premium, the time when the commission is paid, etc. In general insurance, the remuneration method is distinguished by proportions of the premium according to tables based on types of insurance or personal arrangements. 6 In this chapter, the term agent includes an agent-corporation. 7 Notably, in both life insurance and general insurance, personal contracts are usually concluded with reputable agents only. 16

17 Table I-4 Insurance Commissions and Premiums, (NIS millions, adjusted to December 1999) General insurance Life insurance Year Premiums 13, , , , , ,062.5 Commissions 1, , , , , ,015.9 Commissions/premiums (pct.) The data were culled from the insurance companies 1999 financial statements. Table I-4 shows that in general insurance three indicators declined from 1997 to 1999: total insurance premiums collected by insurance companies, total commissions paid to agents in those years, and the rate of commissions. Commissions decreased by NIS 75 million (3.7 percent), insurance premiums decreased by NIS 266 million (1.9 percent), and the rate of commissions on all insurance premiums slipped by 0.3 percent. In life insurance, in the years , there was an uptrend of NIS 156 million (8.4 percent) in commissions and an NIS 1.4 billion increase (13.2 percent) in premiums collected by insurance companies. However, the rate of commissions on premiums dropped by 0.8 percent. 17

18 Below is a brief glossary of insurance terms: Premium (general and life insurance) a payment made to an insurance company as stipulated in the insurance offer attached to the policy, including any other extra payment for supplemental insurance, extensions, and any other added provisions in the policy. Annual premium (new) a premium for a specific year, paid to an insurance company for a new insurance transaction pertaining to that year. Annual premium (not new) a premium for a specific year, paid to an insurance company for insurance transactions made in previous years. Premium (nonrecurrent) a premium paid irregularly, in addition to the regular premium payments listed on the insurance specification attached to the policy. Commissions commissions represent agent s remuneration for transactions that they conclude on the company s behalf. The term refers to the total remuneration, in cash or cashequivalent, that insurers forward to insurance agents, as shown in the insurers financial statements. This remuneration includes, generally speaking, direct commissions, awards, and participation in expenses. Notably, reported commissions include commissions on new transactions (transactions for the sale of insurance in the statement year) and old transactions. Nonrecurrent commissions commissions paid for nonrecurrent premiums collected. Annual commissions (new) commissions paid for annual premiums (new) collected. 18

19 LIFE INSURANCE Table I-5 Commissions and Premiums in Life Insurance, (1) (NIS millions, adjusted to December 1999) Change Change Change (2) 1998 (2) 1999 Sum Pct. Sum Pct. Sum Pct. Premiums Lump-sum Annual (new) , , Annual (other) 9, , , , Total 10, , , , Commissions Lump-sum Annual (new) Annual (other) 1, , , Total 1, , , Commission/premium ratio (pct. points) Lump-sum Annual (new) Annual (other) Grand total (1) The data were culled from companies annual reports to the Commissioner of Insurance. (2) The data for 1997 and 1998 are different from corresponding data in Table I-4 because this table is based on forms received by the Commissioner from insurance companies n the relevant reporting year. The forms were not changed to reflect the reclassification that appears in the financial statements on which Table I-4 is based. Table I-5 shows that the total life insurance premiums rose impressively in the previous two years due to an increase in the population and, consequently, in the number of insureds. Consequently, total commissions paid to agents also rose, although premium rates edged 19

20 downward gradually by 0.7 percentage points. The policy mix (the way the policy is divided between savings and risk) has much to do with this: the larger the savings component in the policy, the less commission the agent receives. Since the policies had a larger savings component during these years, and since the commission is a percentage of the risk component, the commission rate dropped commensurably. The steep decline in the commission rate for (new) annual premiums traces to the significant increase in Adif ( preferred )-type executive insurance plans. By 1998, this increase accounted for more than 80 percent of growth in this type of insurance.8 For example, the share of Me orav (traditional)-type policies, which are more profitable for insurance companies than the Adif type, has been declining steadily in recent years. This is explained by the decline in the commission rate, which, in turn, reflects increasing competition among insurance companies. Generally speaking, there are various explanations for the changes shown in the tables above, but they derive chiefly from demographic growth (more people are taking out insurance) and structural changes in the market during those years, e.g., the changeover to differential underwriting and the use of more up-to-date mortality charts. These changes have lowered life-insurance premiums and, consequently, agents commissions. 8 Report of the Commissioner of the Capital Market, chapter on life insurance. 20

21 Table I-6 Commission/Premium Ratios in Life Insurance, (1) Premium s (NIS millions, adjusted to December 1999) Commis sions/ premium Premium s (pct.) s Commis sions/ premium s (pct.) Premium s Commissions Commissions Commissions Commis sions/ premium s (pct.) Clal group 2, , , Migdal group 3, , , Phoenix group 1, , , Harel group (2) 1, , , Menorah group 1, , , Zion (2) Ayalon Eliahu (3) ILDC Direct insurers (4) Total 10, , , , , , (1) The groups data were culled from the financial statements of the group constituents and not from consolidated statements. (2) The Harel group acquired Zion in 1999; therefore, the data for Zion in 1999 were recorded as belonging to the Harel group. (3) In these tables only, the premium and commission data for Eliahu is expressed in net terms. Therefore, Eliahu had a much lower commission/premium ratio than the other companies in 1998 and (4) Direct insurers IDI and AIG. 21

22 Table I-7 Market Shares of Insurance Companies in Commission and Premium Payments, Life Insurance, (1) Proportion of total Premium s (Percent) Premium s Premium s Commissions Commissions Commissions Clal group Migdal group Phoenix group Harel group (2) Menorah group Zion (2) Ayalon Eliahu (3) ILDC Total (1) The groups data were culled from the financial statements of the group constituents and not from consolidated statements. (2) The Harel group acquired Zion in 1999; therefore, the data for Zion in 1999 were recorded as belonging to the Harel group. (3) In this table only, the premium and commission data for Eliahu is expressed in net terms. Therefore, Eliahu had a much lower commission/premium ratio than the other companies in 1998 and

23 Table I-8 Changes in Companies Commission Rates, Life Insurance, (1) (Percentage points) 1998 vs vs vs Clal group Migdal group Phoenix group Harel group (2) Menorah group Zion (2) 1.4 Ayalon Eliahu (3) ILDC (1) The groups data were culled from the financial statements of the group constituents and not from consolidated statements. (2) The Harel group acquired Zion in 1999; therefore, the data for Zion in 1999 were recorded as belonging to the Harel group. (3) In this table only, the premium and commission data for Eliahu is expressed in net terms. Therefore, Eliahu had a much lower commission/premium ratio than the other companies in 1998 and The foregoing data show that the smaller the insurance company is, 9 the higher the commissions it pays for life insurance. In 1999 for example, the average commission rate for the three largest groups (Clal, Migdal, and Phoenix) was 15.6 percent, 1.2 percentage points lower than in 1997, while the average rate of commissions for the three smallest groups (Ayalon, Eliahu, and ILDC) was 22.5 percent, 10 up 2.2 percentage points. There are several explanations for this: 1. Expansion of the basket of products available to the agent large insurance companies are able to offer a broader range of products than smaller companies can offer, allowing agents to earn more for the entire basket than for the sale of each product separately. 2. Large insurance companies conclude executive life-insurance transactions with large firms. Increased competition in this area has lowered agents commissions and, therefore, has also lowered the commission rate. 9 In terms of the proportion of total premiums that it collects. 10 This figure is derived from the last note to Tables I-6, I-7, and I-8. 23

24 3. Large insurance companies pay lower commission rates than other companies do, because they hold old insurance portfolios on which commissions are very low In executive life insurance, the commission payment is spread over many years and, therefore, decreases with each passing year. In regard to the companies market shares in agents commissions, Table I-7 shows that according to the 1999 figures, the Migdal group had largest share (31.4 percent, NIS million), down 3.6 percentage points from The Clal group had the second largest market share at 19.0 percent (NIS 383 million) in 1999, up 1.7 percentage points from1997. The Phoenix group had a 17.2 percent market share (the third largest) in 1999 (NIS million), a decline of 0.4 percentage points against The Harel group had a market share of 13.7 percent of commission payments (NIS million) in 1999, up 5.0 percentage points. Notably, most of this increase derived from the purchase of the Zion group in The Menorah group had a market share of 13.0 percent (NIS million) in 1999, virtually unchanged from 1997 (up by 0.1 percentage point). These changes are attributable to strong competition among insurance companies in recent years. 11 Most commission for the sale of a life-insurance policy is paid in the first year of the policy; the commission sum decreases during the lifetime of the policy. 24

25 GENERAL INSURANCE Table I-9 Commissions and Premiums in General Insurance, by Insurance Lines, Commis Insurance line Premiums sions (NIS millions, adjusted to December 1999) Premiu m/comm ission ratio (pct.) Premiums Commissions Premium /commission ratio (pct.) Premiums Commis sions Premium /commission ratio (pct.) Property loss 1, Homeowner s comprehensive Business comprehensive Compulsory auto 3, , , Property auto 4, , , Employer s liability Other liability Personal accidents Illness and hospitalization Aircraft and marine vessels Cargo in transit Engineering insurance Credit insurance Other risks Business originating abroad Total, business 13, , , , , , Data excl. direct insurers Compulsory auto 3, , , Property auto 4, , , Homeowner s comprehensive (1) The data for 1997 and 1998 are different from the corresponding figures in Table I-4 because they were reclassified during those years. (2) The data were culled from the insurance companies annual reports to the Commissioner of Insurance. 25

26 Commis Insurance line Premiums sions Table I-10 Rates of Change in Data in Table I Premiu m/comm ission ratio (pct.) Premiums Commissions Premium /commission ratio (pct.) Premiums Commis sions Premium /commission ratio (pct.) Property loss Homeowner s comprehensive Business comprehensive Compulsory auto Property auto Employer s liability Other liability Personal accidents Illness and hospitalization Aircraft and marine vessels Cargo in transit Engineering insurance Credit insurance Other risks Business originating abroad Total, business Data excl. direct insurers Compulsory auto Property auto Homeowner s comprehensive (1) The data for 1997 and 1998 are different from the corresponding figures in Table I-4 because they were reclassified during those years. (2) The data were culled from the insurance companies annual reports to the Commissioner of Insurance. 26

27 Since general insurance is composed of many different insurance lines, this section examines the main lines homeowners comprehensive, auto property, health (personal accident, and illness and hospitalization), and compulsory auto which account for 75 percent of total commissions paid in Note: To analyze the change in commission rates for compulsory auto, auto property, and homeowners comprehensive insurance, we use the Excluding direct insurance companies data from the table to neutralize the effect of the figures pertaining to these companies on the market data. Commissions for homeowners comprehensive insurance declined by NIS 19.1 million (6 percent) due to fierce competition with direct-insurance companies. Insurance premiums declined by NIS 12.4 million (1.3 percent) an NIS 5.4 million increase in 1998 (0.5 percent) followed by an NIS 17.8 million decrease (1.8 percent) in The decrease was caused by a reduction in insurance tariffs due to the following: (1) competition with direct insurance companies; (2) a decline in reinsurance premiums, which led to a decrease in the premium for insureds; (3) greater competition among traditional insurance companies. Notably, although the insurance rate has been falling, more consumers join this market each year because they purchase new dwellings with mortgages that require insurance. The factors that have led to a decrease in premiums evidently have a stronger effect than the demographic growth in these types of insurance. The rate of commissions slipped by 0.9 percent, but it is important to note that in this type of insurance commissions were highest in the elementary line, at 31.5 percent in 1999, as against percent in other lines. The decrease in the rate of commissions derives mainly from competition with directinsurance companies. Notably, too, a large proportion of transactions are concluded through mortgage banks, which charge commission rates that verge on 50 percent. In these cases, the banks insure themselves for the building only and not for household contents. The mortgage banks activity in this insurance line, in its present form, is impeding the development of fair competition in the industry. In property auto insurance, agents commissions declined by NIS 83.5 million (9.7 percent) between 1997 and 1999, premiums collected decreased by NIS million (6 percent), and the commission rate slipped by 0.2 percent. There are several explanations for these decreases: (1) In 1999, car thefts decreased by 20 percent; some of this was translated into lower premiums. 27

28 (2) The advent of direct-insurance companies lowered premiums by stimulating competition. In response to the competition, insureds pressured agents to get them a better deal. In response, agents waived some of the premium (including part of their commission) to retain customers for the companies for which they work. Additionally, the mechanisms used to set insurance rates have improved greatly in recent years. They include more indicators in determining premium levels (such as driver s age, whether the driver was involved in an accident in the five years before taking out the policy, number of traffic violations in those years, etc.). Greater accuracy in underwriting, reflecting variable conditions in the marketplace, has stimulated competition in the industry and therefore encouraged insurers to lower their premiums to a larger average extent. In health insurance (illness and hospitalization and personal accident), the major changes occurred in the illness and hospitalization line. Between 1997 and 1999, illness and hospitalization commissions climbed NIS 72.1 million in (58 percent), premiums rose by NIS 236 million (34 percent), and the commission rate went up by 3.2 percent. In personal accident insurance, commissions declined by NIS 4.3 million (8.8 percent) and premiums decreased by NIS 26.5 million in (11 percent). However, the rate of commissions rose by 0.6 percent. Several factors explain this volatility and these changes: (1) The public has become more aware of supplemental illness and hospitalization insurance offered by insurance companies along with the alternative forms of coverage sold by health funds. (2) The commission rate in these lines of insurance rose during the years in question. (3) The introduction of national health insurance made supplemental insurance more necessary. In compulsory auto insurance, agents commissions decreased by NIS 2.3 million (2 percent) between 1997 and 1999, due to the growing market share of direct-insurance companies and a decrease in the general premium. Concurrently, premiums climbed by NIS million (3.4 percent) an increase of NIS million in 1998 (5.5 percent) and a decrease of NIS 73 million (2 percent) in This volatility is not significant even though compulsory insurance rates declined by 22 percent in (8.5 percent in January 1998, 8.5 percent in September 1998, and 5 percent in July 1999), because steady demographic growth in this line of insurance leads to an increase in the number of policies sold. The commission rate declined by 0.2 percent. 28

29 Table I-11 Commissions and Premiums in General Insurance, by Companies, (1) Company or group (NIS millions, adjusted to December 1999) Gross premiums Commision/premium Commissions ratio (%) Gross premiums Commision/premium Commissions ratio (%) Gross premiums Commision/premium Commissions ratio (%) Clal group (2) 2, , , Migdal group 1, , , Phoenix group 1, , , Harel group (3) 1, , , Menorah group Ayalon Eliahu Agricultural Insurance ILDC Direct insurers (4) Zion (3) Elite (2) Avner (5) 2, , , Karnit Other Total 13,846 1, ,684 1, ,580 1, Total excl. direct insurers 13, , , , , , (1) The groups data were culled from the financial statements of the group constituents and not from consolidated statements. (2) The Clal group acquired Elite in 1999; therefore, the data for this company that year appear as part of the Clal group data. (3) The Harel group acquired Zion in 1999; therefore, the data for Zion in 1999 were recorded as belonging to the Harel group. (4) In regard to the data for direct insurance companies, the commission was negative in 1999 due to coinsurance commission rates in the compulsory auto field. The positive commission figure for was due to the coinsurance commission rates that mortgage banks charged for comprehensive homeowners insurance. (5) The commission data for Avner in 1998 and 1999, in Table I-11, are negative due to regulatory changes in which agents commissions were transferred directly to the insurance companies. 29

30 Table I-12 Market Shares of Insurance Companies in Commission and Premium Payments, Life Insurance, (1) Company or group Premium s (Percent) Premium s Premium s Commissions Commissions Commissions Clal group (2) Migdal group Phoenix group Harel group (3) Menorah group Ayalon Eliahu Agricultural Insurance ILDC Direct insurers (4) Zion (3) Elite (2) Avner Karnit Other Total (1) The groups data were culled from the financial statements of the group constituents and not from consolidated statements. (2) The Clal group acquired Elite in 1999; therefore, the data for this company that year appear as part of the Clal group data. (3) The Harel group acquired Zion in 1999; therefore, the data for Zion in 1999 were recorded as belonging to the Harel group. 30

31 Table I-13 Changes in Companies Commission Rates, General Insurance, (1) (Percentage points) Company or group 1998 vs vs vs Clal group (2) Migdal group Phoenix group Harel group (3) Menorah group Ayalon Eliahu Agricultural Insurance ILDC Direct insurers (4) Zion (3) Elite (2) Avner Karnit Other (1) The groups data were culled from the financial statements of the group constituents and not from consolidated statements. (2) The Clal group acquired Elite in 1999; therefore, the data for this company that year appear as part of the Clal group data. (3) The Harel group acquired Zion in 1999; therefore, the data for Zion in 1999 were recorded as belonging to the Harel group. Tables I show that the Menorah group pays the highest commission rates of all companies (21.5 percent), since its main product, individual insurance, carries a higher sales commission rate than group insurance. On the whole, the average commission rate dropped by 0.18 percent during the relevant years. In regard to the companies market share in commission payments, only the Clal, Phoenix, and Harel groups showed steep increases; the other companies had either insignificant increases or decreases. Among the large companies, only the Migdal group experienced a decrease in this market share (2 percentage points). The 31