Non-life and Health Insurance

Transcription

1 Non-life and Health Insurance

2 The Capital Market, Insurance and Saving Division Contents 1. Introduction General Review of the Industry... 6 A. General 6 B. Market concentration Characteristics and Results of Activities A. Profitability B. Reserves C. Commissions D. General and administrative expenses Business Results in Health Insurance A. General 37 B. The sickness and hospitalization insurance line activities in the health field being reported under non-life insurance C. Distribution by sub-lines activities in the health field being reported under non-life insurance and under life insurance Stability and Assessment of Risks A. Quality of the assets B. Reinsurance C. Loss ratio D. Liquidity risks E. Insurance Risk Text Box A The Reform in the Compulsory Vehicle Insurance Line List of Tables Table D-1 Number of Insurance Companies Operating in Non-Life Insurance Lines... 6 Table D-2 Gross Premiums by Non-Life Insurance Lines, Table D-3 Premiums for Non-Life Insurance by Insurance Groups Table D-4 Market Share of Premiums in the Various Insurance Lines by Insurance Groups Table D-5 Results of the Market Concentration Indices in Non-Life I nsurance Lines, Table D-6 Profit Rates from Gross Premiums in Various Insurance Lines Table D-7 Profits from Non-Life Insurance Business by Insurance Companies Table D-8 Market Share by Profits in Non-Life Insurance Lines by Insurance Groups Table D-9 Use of Parameters in Setting "Compulsory Vehicle Insurance" Rates for Private Vehicles... 28

3 Non-life and Health Insurance Table D-10 Minimum and Maximum Rates in the Privately-Owned Private Vehicle Market Table D-11 Ratio of Income from Investments in Non-Life Insurance Reserves Table D-12 Ratio of Insurance Agents> Commissions to Gross Premiums Table D-13 General and Administrative Expenses in Non-Life Insurance Table D-14 Data on Collective Insurance for Table D-15 Data on Private Insurance for Table D-16 Gross Premiums by Health Insurance Sub-lines, Table D-17 Gross Premiums in Insurance Companies by Private Health Insurance Sub-lines in Table D-18 Gross Premiums in Insurance Companies by Collective Health Insurance Sub-lines in Table D-19 Ratio of Securities (excluding in Held Companies) to Total Assets and Debit Balances Table D-20 Ratio of Fixed Assets, Receivables, Investment in Held Companies to Total Assets and Debit Balances Table D-21 Ratio of Retained Premiums (After Payment to Reinsurers) to Gross Premiums in Table D-22 Gross Loss Ratio by Lines and Companies, List of Charts Chart D-1 Distribution of Gross Premiums by Non-Life Insurance Lines in Chart D-2 Distribution of Gross Premiums by Companies in Chart D-3 Ratio of Income from Investments to Investment Assets in Non-Life Insurance Chart D-4 Ratio of Income from Investments to Net Premiums in Non-Life Insurance Chart D-5 Profitability of Non-Life Insurance Lines, Chart D-6 Gross Premiums in Non-Life Insurance Business versus Profits from Non-Life Insurance Business Chart D-7 Profits by Main Non-Life Insurance Lines, Chart D-8 Market Share Comparison - Premiums versus Profits Chart D-9 Market Share Comparison - Premiums versus Profitsin Non-Life Insurance Business Chart D-10 Cumulative Change in the Average Compulsory Vehicle Insurance Rate for Private Vehicles Chart D-11 Ratio of General and Administrative Expenses to Net Premiums Chart D-12 Business Results in the"sickness and Hospitalization" Line,

4 The Capital Market, Insurance and Saving Division Chart D-13 Distribution of Gross Premiums by Companies in the "Sickness and Hospitalization" Line in Chart D-14 Distribution of Gross Premiums by Companies in the "Sickness and Hospitalization" Line, Chart D-15 Distribution of Gross Premiums by Health Insurance Sub-lines in Chart D-16 Loss Ratio in Collective Insurance by Main Health Insurance Sub-lines in Chart D-17 Loss Ratio in Private Insurance by Main Health Insurance Sub-lines in Chart D-18 Ratio of Direct Commissions to Gross Premiums by Main Health Insurance Sub-Lines in Chart D-19 Total Gross Premiums by Health Insurance Sub-Lines, Chart D-20 Private Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in Chart D-21 Private Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in Chart D-22 Private Insurance - Distribution of Gross Premiums in the "Critical Illnesses" Sub-line by Insurance Companies in Chart D-23 Private Insurance - Distribution of Gross Premiums in the "Critical Illnesses" Sub-line by Insurance Companies in Chart D-24 Private Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in Chart D-25 Private Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in Chart D-26 Collective Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-line by Insurance Companies in Chart D-27 Collective Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in Chart D-28 Collective Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in Chart D-29 Collective Insurance - Distribution of Gross Premiums n the "Long-term Care" Sub-line by Insurance Companies in Chart D-30 Ratio of Negotiable Securities to Total Assets and Debit Balances Chart D-31 Ratio of Retained Premiums to Gross Premiums Chart D-32 Ratio of Cash/Cash Equivalents and Negotiable Assets to Current Liabilities Chart D-33 Ratio of Reserves to Average Claims in Retention

5 Non-life and Health Insurance 1. Introduction The Non-Life Insurance Department in the Capital Market, Insurance and Savings Division is responsible for policy-making, regulation and ongoing supervision of all lines of the insurance industry, with the exception of life insurance. The objective of the Department s activities is to ensure a proper market structure, based on fair competition. The activity in non-life insurance is divided into four main fields: 1. Property insurance vehicle property, property loss, comprehensive residential, comprehensive business premises, engineering insurance, etc.; 2. Liability Insurance vehicle compulsory, third party, professional liability, employers liability, etc.; 3. Health insurance sickness and hospitalization and personal accident; 4. Financial insurance credit insurance, guarantees, etc. An analysis of the financial results in the non-life insurance lines shows a slight increase in the volume of premiums that companies collected in However, after three consecutive years during which a rise in profits was recorded, this year, profits have dropped some 13%. The market concentration indices indicate a decrease in concentration in nearly all lines. Notable is the decrease in the market concentration of the compulsory vehicle insurance line. The reason for this is apparently the reform in the compulsory vehicle insurance line, which has led to more lively competition.

6 The Capital Market, Insurance and Saving Division 2. General Review of the Industry A. General More than twenty insurance companies are engaged in the various non-life insurance lines. A majority of the premiums collected during 2004, as well as a majority of the profits, are concentrated in the vehicle insurance lines (compulsory and property). As Table D-1 shows, most insurance companies show some activity in these lines, while fewer insurance companies operate in lines generating a lower volume of premiums and profits. Table D-1 Number of Insurance Companies Operating in Non-Life Insurance Lines Personal accident 17 Vehicle compulsory 16 Vehicle property 16 Sickness and hospitalization 16 Comprehensive residential 15 Employers liability 15 Engineering insurance 14 Property loss 12 Cargo in transit 11 Comprehensive business premises 10 Aircraft and seacraft 10 Credit insurance 3 The duration of the life of the policy and the duration of the claims clarification process are the main characteristics that differentiate the various insurance lines. Thus, for example, property insurance and financial insurance policies are issued, for the most part, for a relatively short period (up to one year), while the claims in respect thereof are clarified shortly after the policies are issued. The various types of liability insurance policies are usually issued for one year, but the claims clarification process is protracted, since clarifying liability is a relatively complex process and the prescription period for a liability claim is long. Health insurance policies are issued for various periods, ranging from a few months to the entire lifetime of the insured, while claims are clarified, for the most part, within a short

7 Non-life and Health Insurance time. Due to these distinct variables, the financial results in the various insurance lines must be examined individually. Table D-2 presents the gross premiums in the various non-life insurance lines, as well as the rate of change in each of the lines for the period 2000 through An examination of the business results in the non-life insurance lines shows that the total premiums in the non-life insurance lines reached NIS 17,552 million in 2004; i.e., growth of about 0.5% over the previous year. Although there was no significant change in the total premiums collected in 2004 compared to 2003, by examining the particular figures for the various lines, one can see that some lines show substantial change compared to the previous year. The most evident change is the increase in the premiums collected in the various liability insurance lines and in the sickness and hospitalization insurance line: this is the fourth consecutive year that the premium collections have risen in these lines. Also notable is the drop in the gross premiums collected in the property loss and third-party insurance lines. In the compulsory vehicle insurance line, there was nearly a 2% decrease in total premiums collected in 2004 compared to When taking into account the fact that, this year, the number of vehicles has increased by approximately 2.8%, then this 2% decrease in total premiums means that the average premium decreased by approximately 5%. This decrease is explained, inter alia, by the improved availability of information to the public, which was obtained thanks to the implementation of the "compulsory vehicle insurance premiums calculator" by the Commissioner of Insurance. This calculator enables the public to compare the compulsory vehicle insurance rates offered by the different insurance companies. The improved availability of information has also led to more lively competition in the compulsory vehicle insurance line As also described on page 28.

8 The Capital Market, Insurance and Saving Division Table D-2 Gross Premiums by Non-Life Insurance Lines, (NIS millions, percent) Rate of change versus 2003 Distribution by Lines Vehicle Property 4,556 4,953 5,005 4,953 5, % 29.3% Vehicle Compulsory Sickness and Hospitalization Comprehensive Residential 3,928 4,048 4,221 4,222 4, % 23.6% 1,103 1,263 1,460 1,607 1, % 10.3% 1,004 1,091 1,310 1,340 1, % 7.8% Other Liabilities , % 6.5% Property Loss 913 1,183 1,557 1,417 1, % 6.2% Property Other ,132 1, % 5.9% Other % 4.3% Third Party % 3.0% Employers' Liability % 1.8% Personal Accident % 1.3% TOTAL 14,152 15,599 17,221 17,467 17, % 100.0% Division, on the basis of the companies consolidated financial statements. Chart D-1 presents the distribution of gross premiums by the various non-life insurance lines in Approximately 53% of the total insurance premiums originated in the vehicle insurance lines (compulsory and property), in which no significant change was recorded compared to The market shares of most of the other insurance lines also remained without change.

9 Non-life and Health Insurance The insurance lines showing a relatively significant change in total insurance premiums are the minor lines. Thus, for example, the most significant change occurred in property loss insurance. The market share of this line dropped from 8% in to 6% in Chart D-1 Distribution of Gross Premiums by Non-Life Insurance Lines in 2004 Employers Liability 1.8% Third Party 3.0% Other 4.3% Property Other 5.9% Property Loss 6.2% Other Liabilities 6.5% Personal Accident 1.3% Vehicle Property 29.3% Comprehensive Residential 7.8% Sickness and Hospitalization 10.3% Vehicle Compulsory 23.6% Division, on the basis of the companies consolidated financial statements. Table D-3 presents the total gross premiums in non-life insurance by insurance groups and the market shares of those groups. As is also shown in Chart D-2, this year, the five major groups collected about 70% of all premiums in the non-life insurance lines. Menorah, the smallest of them, increased its market share this year to nearly 9%. On the other hand, the four major groups collected about 61% of the total premiums this year in the non-life insurance lines which is about a 2% drop compared to This decline, which is also reflected in the market shares of the major insurance groups (concurrently with the increase in the shares of most of the small companies), attests to the heightened competitiveness in the non-life insurance market. The decrease originates mainly in the Clal and Migdal groups. The volume of premiums that these groups collected in 2004 diminished considerably compared to the 2. The data for 2003 are taken from the Annual Report of the Commissioner of the Capital Market, Insurance and Savings for 2003.

10 The Capital Market, Insurance and Saving Division previous year (together, the groups collected about NIS 290 million less than in 2003). This downtrend in the major insurance companies market shares is also evident in the results of the market concentration indices, which are given below (Table D-5). Table D-3 Premiums for Non-Life Insurance by Insurance Groups (NIS millions, percent) Company Market Share (by Rate of Change Premiums Premiums) in Premiums Clal Group 3,582 3,605 3, % 20.6% 19.9% -2.8% -2.2% Harel Group 3,200 3,349 3, % 19.1% 19.1% 0.5% 5.2% Phoenix Group 2,420 2,331 2, % 13.3% 12.2% -8.0% -11.3% Migdal Group 1,769 1,748 1, % 10.0% 9.9% -0.4% -1.6% Menorah 1,175 1,360 1, % 7.8% 8.9% 14.8% 32.8% Ayalon 1,048 1,173 1, % 6.7% 6.1% -8.1% 2.9% I.L.D. Group % 4.3% 4.7% 7.7% 36.4% Eliahu % 4.8% 4.6% -3.8% 5.9% IDI Direct % 3.8% 4.0% 5.2% 27.8% AIG % 1.9% 2.2% 15.1% 36.3% Agricultural Insurance % 2.0% 2.1% 4.3% 7.3% Shirbit % 1.7% 2.0% 18.7% 69.0% Shomera % 1.1% 1.4% 33.3% 149.5% Natural Disasters Fund % 0.8% 0.9% 7.6% 11.1% Ezer % 0.4% 0.5% 13.2% 16.7% Foreign Trade % 0.3% 0.3% -11.9% -10.8% Inbal % 0.1% 0.1% 37.0% 126.5% Avner Karnit TOTAL 17,237 17,497 17, % 100.0% 100.0% 0.5% 2.0% Division, on the basis of the companies non-consolidated financial statements. As Chart D-2 shows, the market share of the Clal Group the largest group in the non-life insurance sector reached 19.9% (compared to 20.6% in 2003). Despite the fact that, in general, significant changes in the companies market shares were not recorded this year, Menorah increased its market share by 1.1%, and now accounts for about 9% of the total 10

11 Non-life and Health Insurance premiums in the non-life insurance lines. The Phoenix Group is also notable: its market share decreased by 1.1% and stands at 12.2% this year, compared to 13.3% in Chart D-2 Distribution of Gross Premiums by Companies in Non-Life Insurance Lines in 2004 I.L.D. 4.7% Menorah 8.9% Ayalon 6.1% Eliahu 4.6% Direct Insurance 4.0% Migdal Group 9.9% Other 3.9% AIG 2.2% Phoenix Group 12.2% Agricultural 2.1% Harel Group 19.1% Clal Group 19.9% Government Companies 1.3% Division, on the basis of the companies consolidated financial statements. 1. The Clal Group Clal, Arieh and Clal Credit Insurance; the "Harel Group" Harel and Dikla; the Phoenix Group Phoenix and Hadar; the Migdal Group Migdal and Hamagen. 2. "Others" Shirbit, Shomera and Ezer. Upon examination of the volume of premiums in the non-life insurance lines, it can be seen that vehicle property insurance is the largest line. Approximately 29% of the total premiums in the market are collected in this line. As Table D-4 shows, the Clal, Harel and Phoenix insurance groups each hold approximately 15% of the total premiums in this line. The insurance line with the second highest volume is the compulsory vehicle insurance line. About 24% of all premiums in the market are collected in this line. The Clal Group commands 18% of this market, while the Harel, Phoenix, Migdal and Menorah groups each hold about 10% of the market. The Clal Group commands a market share that exceeds 50% of the residential insurance lines being sold through mortgage banks. The reason for this might be that the company serves as the primary insurer (the leader) at some of the major mortgage banks. Ten percent of the total premiums being collected in non-life insurance are being collected in the sickness and hospitalization insurance line. The Harel Group stands out: it is leading in this insurance line, and collected approximately 50% of the premiums in this line this year. 11

12 The Capital Market, Insurance and Saving Division Table D-4 Market Share of Premiums in the Various Insurance Lines by Insurance Groups (percent) Property Loss Comprehensive Residential Mortgage Banks Comprehensive Business Premises Vehicle Compulsory Vehicle Property Employers> Liability Other Liability Lines Personal Accident Sickness and Hospitalization Aircraft and seacraft Cargo in Transit Engineering Insurance Credit Insurance Other Risks TOTAL Clal Group 41.6% 19.6% 52.3% 4.0% 18.0% 15.3% 26.1% 21.5% 28.6% 15.7% 6.6% 27.6% 33.4% 64.2% 21.7% 20.1% Harel Group 23.6% 16.2% 20.1% 0.0% 10.6% 16.2% 14.6% 31.7% 25.3% 49.5% 7.3% 10.6% 8.1% 0.0% 3.3% 19.3% Phoenix Group 7.4% 16.3% 2.3% 21.4% 10.5% 14.4% 15.9% 10.6% 12.5% 13.1% 18.2% 22.9% 23.6% 0.0% 3.4% 12.3% Migdal Group 0.8% 10.5% 13.2% 54.1% 9.7% 6.6% 18.3% 10.0% 5.0% 10.5% 18.4% 10.9% 5.5% 0.0% 14.8% 10.0% Menorah 4.3% 12.4% 7.8% 12.7% 9.6% 9.4% 8.1% 9.1% 4.0% 9.4% 43.3% 16.5% 11.8% 0.0% 0.8% 9.0% Ayalon 7.6% 6.5% 0.0% 0.0% 8.5% 7.2% 7.0% 7.7% 2.9% 1.5% 0.0% 1.1% 9.3% 0.0% 0.5% 6.2% I.L.D. Group 1.1% 4.2% 0.0% 2.2% 8.4% 6.2% 1.3% 1.0% 0.6% 0.0% 0.0% 6.1% 2.1% 33.5% 6.9% 4.7% Eliahu 3.9% 3.2% 0.1% 0.0% 8.5% 7.2% 2.0% 1.0% 0.7% 0.0% 0.0% 4.2% 0.1% 0.0% 0.1% 4.7% IDI Direct 0.0% 5.3% 4.3% 0.6% 6.4% 7.1% 0.2% 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 4.0% AIG 0.9% 2.9% 0.0% 0.0% 2.6% 2.9% 0.8% 3.5% 16.1% 0.0% 0.0% 0.0% 0.6% 0.0% 0.1% 2.2% Agricultural 8.8% 0.0% 0.0% 0.0% 1.9% 1.9% 5.0% 3.1% 0.5% 0.0% 0.0% 0.0% 4.9% 2.4% 1.1% 2.1% Shirbit 0.0% 1.4% 0.0% 3.3% 2.6% 3.6% 0.0% 0.5% 3.6% 0.1% 6.1% 0.0% 0.6% 0.0% 2.3% 2.1% Shomera 0.0% 1.7% 0.0% 1.8% 2.6% 2.1% 0.7% 0.2% 0.2% 0.1% 0.0% 0.0% 0.0% 0.0% 0.5% 1.4% Natural Disasters Fund 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 21.8% 0.9% Ezer 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.6% 0.5% Foreign Trade Risks 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 7.3% 0.3% Inbal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.7% 0.1% Total for all Companies 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Total, excluding Avner and Karnit 1,150,920 1,005, , ,696 3,948,483 5,139, ,997 1,668, ,880 1,838,591 31, , ,791 52, ,923 17,393,307 Avner + Karnit , ,807 TOTAL INCLUDING AVNER & KARNIT 1,150,920 1,005, , ,696 4,140,290 5,139, ,997 1,668, ,880 1,838,591 31, , ,791 52, ,923 17,585,114 Division, on the basis of the companies nonconsolidated financial statements. 12

13 Non-life and Health Insurance B. Market concentration The market concentration indices help estimate the level of competition in specific market sectors. The assumption is that, usually the higher the level of concentration, the lower the level of competitiveness: the incentive to improve efficiency diminishes, while the ability of commercial bodies to dictate the price of the product or service increases. Table D-5 presents the results of the market concentration indices in the main non-life insurance lines for The higher the indices, the higher the level of concentration. 1. The Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of all the insurance companies market shares. The market share for each company is calculated as the ratio of gross insurance premiums collected by the company and the total insurance premiums in the line. The HHI ranges between 0 and 1. The closer the number obtained is to 1, the more concentrated the line. 2. The Concentration Ratio 3 Index (CR3) totals the market shares of the three largest insurance companies or groups in the line. The higher the percentage obtained, the more concentrated the line. 3. The Concentration Ratio 5 Index (CR5) totals the market shares of the five largest insurance companies or groups in the line. As can be seen, all these indices show that the most concentrated lines are sickness and hospitalization, employers liability and property loss. The least concentrated lines are the vehicle lines (compulsory and property). Compared to 2003, the market concentration has decreased in all lines, with the exception of sickness and hospitalization. The most evident decrease in concentration is in the compulsory vehicle insurance line this is the fourth year it has shown a decrease (apparently as a result of the reform instituted in this line, which led to heightened competition) and in the comprehensive residential insurance line, for this, the third year. 13

14 The Capital Market, Insurance and Saving Division Table D-5 Results of the Market Concentration Indices in Non-Life Insurance Lines, Herfindahl- Hirschman CR3 CR Vehicle Compulsory % 39.1% 62.8% 58.4% Vehicle Property % 45.9% 64.0% 62.5% Comprehensive Residential Sickness & Hospitalization % 52.0% 79.6% 74.8% % 77.9% 98.3% 98.2% Property Loss % 74.0% 89.5% 89.0% Employers> Liability % 60.3% 82.4% 83.0% Division, on the basis of the companies consolidated financial statements. 14

15 Non-life and Health Insurance 3. Characteristics and Results of Activities A. Profitability The method of recording results in financial statements, as well as the method of calculating reserves, vary from one insurance line to another, and these varying methods of calculating and recording reserves, of course, also affect the profits of the insurance companies. In the various property insurance lines, income from premiums is recorded on the policy issue date: sums received in respect of the period subsequent to the date of the financial statements are allocated to a "reserve for uncancelled risks." The insurance companies invest the monies they receive and reap yields from these investments. The income from investments is credited immediately to the Statement of Income. In the various liability insurance lines, the method of recording premiums is the same as that customary in the property insurance lines, however, here, the company cannot recognize profits immediately (due to the length of time required in order to clarify claims in the liability insurance lines). Most of the profits are allocated to a separate reserve for a period of three to five years until the claims in these lines are clarified fully. The profit retained in this separate reserve is comprised of income recorded from premiums, less expenses, claims paid and pending claims, plus the yield earned on the investment of the funds in the reserve. The profit is released and allocated to the Statement of Income only at the end of the period. It can be deduced from this that the profits (or losses) recorded in the Statement of Income for 2004 were mainly those that accrued in the property insurance lines in respect of 2004, as well as the profits (or losses) in the liability insurance lines in respect of the 2001 underwriting year and the years preceding Chart D-3 and Chart D-4 present various indices for examining the yields of the insurance companies. As expected, the yield varies according to the fluctuations in the capital market. Thus, record yields were recorded in 2003, while in 2004, the yields diminished (but are still quite good. For example, the Tel-Aviv 100 Index rose in 2003 by more than 60%, while in 2004 it rose by about 17%). 15

16 The Capital Market, Insurance and Saving Division Chart D-3 Ratio of Income from Investments to Investment Assets in Non-Life Insurance 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Division, on the basis of the companies consolidated financial statements. Chart D-4 Ratio of Income from Investments to Net Premiums in Non-Life Insurance 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Division, on the basis of the companies consolidated financial statements. 16

17 Non-life and Health Insurance Chart D-5 presents the profits (in NIS millions) in the non-life insurance lines for the years 1995 through After three consecutive years ( ) during which a rise in profits was recorded in the non-life insurance lines, this year, a decrease in profits of approximately 13% was recorded. The profits in 2004 totalled approximately NIS 1,902 million, compared to about NIS 2,197 million last year. Much of the profits in 2003 derived from profits from investments. This year, on the other hand, the profits from investments plummeted by tens of percentage points, which of course, was sufficient to cause a drop in the overall profit. The drop in the investment profits derives, inter alia, from the moderate rises in the capital market during 2004 compared to 2003 which had been a year of record yields in the Israeli capital market. Chart D-5 Profitability of Non-Life Insurance Lines, (NIS millions) 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, Division, on the basis of the companies consolidated financial statements. Chart D-6 presents the premiums versus the profits in the non-life insurance business. For most years, there is an evident correlation between the direction of the change in the total premiums and the direction of the change in the total profits in the non-life insurance lines. In 2004, in contrast to the correlation that had existed in previous years, the premiums rose (although slightly 0.5%), while, as stated, the overall profits fell by approximately 13%. The data on the premiums were affected this year mainly by the financial results of the Clal Group, the Phoenix Group and Menorah. The Clal and Phoenix groups recorded a decrease in their total premiums in 2004 of approximately NIS 100 million and NIS 185 million (respectively). Menorah, on the other hand, recorded an increase of NIS 200 million in the premiums it collected this year. 17

18 The Capital Market, Insurance and Saving Division The decrease in the total profits in the non-life insurance lines was affected mainly by the decrease in the profits of the Clal Group and the Phoenix Group. The Phoenix Group s profits plummeted this year by more than NIS 100 million and resulted in a loss. This sharp drop in profits is explained, inter alia, by a decrease in the premiums that the groups collected and by a decrease in the income from investments, which was characteristic of the entire market. As stated above, the main reason for the decrease in the income from investments is that the capital market rose only moderately in 2004 compared to The companies profits from investments decreased by about 35% in 2004 compared to their profits in 2003 (a decrease of more than NIS 1 billion). Chart D-6 Gross Premiums in Non-Life Insurance Business versus Profits from Non-Life Insurance Business (NIS milllions) 2,500 20,000 18,000 2,000 16,000 14,000 Profit 1,500 1,000 12,000 10,000 8,000 Premiums 6, ,000 2, Premiums Profit Division, on the basis of the companies consolidated financial statements. Chart D-7 presents the profits (in NIS millions) in the main non-life insurance lines during the years 2000 through This chart reflects a very high level of variance in the profitability of the non-life insurance lines, and shows that different lines yielded differing rates of profit over the years. The change in the profits among the various lines between 2004 and

19 Non-life and Health Insurance is substantial and reached tens of percentage points. By comparing the change in profits with the change in the premiums in the same line, one can see that there is not always a direct correlation between the two. Although the profits dropped in most lines, still, all lines presented in the chart are profitable. In all years presented in the chart, the compulsory vehicle insurance line is the most profitable, however, in 2004, the profit dropped by 12%, after a steady growth in profits during the preceding few years. This statistic also reflects the reform instituted in the compulsory vehicle insurance line, after it was opened to competition. It is also important to note that much of the profit in this line derives from income from investments of reserve funds. Other notable changes are the transition from loss to profit in the various liability insurance lines, and the growth in profits of about 40% in the vehicle property insurance line. Chart D-7 Profits by Main Non-Life Insurance Lines, (NIS millions) Vehicle Compulsory Sickness and Hospitalization Vehicle Property Property Loss Comprehensive Residential Various Liabilities (excluding Vehicle Compulsory) Division, on the basis of the companies consolidated financial statements. Table D-6 presents the profit rates from gross premiums in the non-life insurance lines from 2000 through This table shows that, except for the personal accident insurance line, all other lines presented were profitable in Table D-8 shows that most of the losses in the personal accident line derive from the losses of AIG and from the losses of the Clal Group, although most of the other insurance companies also recorded losses in this line. 19

20 The Capital Market, Insurance and Saving Division In the various liability insurance lines, a relatively high variance is evident. In the various types of property insurance, the profit rate from premiums has been more or less stable over the years. The comprehensive residential insurance line is the line with the highest profit to premiums ratio, which might be due to the lack of competition in this line. This lack of competitiveness enables the mortgage banks (which centralize most of the activity of this line) to collect high premiums. Table D-6 Profit Rates from Gross Premiums in Various Insurance Lines (percent) Comprehensive Residential 9.8% 8.5% 5.2% 8.6% 7.8% Property Other 5.0% 3.5% 6.2% 4.1% 7.1% Sickness and Hospitalization 6.3% 8.6% 3.9% 7.9% 5.0% Vehicle Property 0.9% 4.2% 5.1% 3.7% 4.9% Third Party 2.2% -1.5% -5.3% 10.2% 3.5% Property Loss 1.0% 2.4% 3.5% 4.8% 3.3% Personal Accident 2.7% -8.3% -4.9% 4.4% -9.6% TOTAL 3.2% 5.3% 6.0% 12.6% 10.8% Division, on the basis of the companies consolidated financial statements. Chart D-8 presents data on the percentage of insurance premiums collected by the various non-life insurance lines out of the total premiums in non-life insurance, as well as data on the profit rate in the various non-life insurance lines out of the total profits in non-life insurance for 2004 (including Avner and Karnit). As is quite evident, the most notable lines are the vehicle insurance lines (compulsory and property). The vehicle insurance lines share of the total premiums in the non-life insurance lines reached about 53%, while their share of the total profits reached about 76%. The compulsory vehicle insurance line achieved the highest profits of all lines and reached approximately 62% of all profits in the non-life insurance lines. The premiums in compulsory vehicle insurance reached approximately 24% of all gross premiums. As Table D-8 shows, the Clal Group achieved the highest profits in the compulsory vehicle insurance line, followed by Eliahu. In 2004, Eliahu earned almost the same as the Clal Group, and more than all other groups and companies. Despite the decrease 20

21 Non-life and Health Insurance in profits this year in the compulsory vehicle insurance line, its relative share of all profits in the various non-life insurance lines increased, due to the sharper drop in the profits of the other lines. In terms of volume of premiums, the largest line was the vehicle property insurance line, and this was the case for the vast majority of companies. The Harel Group collected approximately 15% of the premiums in this line (approximately NIS 830 million), followed by the Clal and Phoenix insurance groups. Chart D-8 Market Share Comparison - Premiums versus Profits 70% 60% 50% 40% 30% 20% 10% 0% -10% Vehicle Compulsory Vehicle Property Comprehensive Residential Sickness & Hospitalization Property Other Other Liabilities Employers' Liability Property Loss Third Party Personal Accident Market Share - Premiums Market Share - Profits Division, on the basis of the companies consolidated financial statements. Chart D-9 compares the companies, both on the basis of the premiums collected and on the basis the profits from the non-life insurance business. As a rule, to the extent that the company s share in the line s total profits is higher than its share in the total premiums, this indicates that the company is more efficient than the other companies. As the chart shows, the profits of the Harel Group, Eliahu, the Migdal Group, Ayalon and IDI Direct exceeded their shares in the premiums. Eliahu is the most notable: its market share of the profitability is nearly three times higher than its market share of the premiums that it collected in non-life insurance. A majority of Eliahu s profits originated in the compulsory 21

22 The Capital Market, Insurance and Saving Division vehicle insurance line: the company recorded profits in this line of more than NIS 130 million (the second most profitable line was vehicle property in which profits of about NIS 30 million were recorded). In 2004, Eliahu also showed high profits from investments (approximately NIS 110 million), which also contributed to the overall profits. On the other end of this spectrum, among the companies whose market shares of the profits were lower than their market shares of the premiums were Clal, Menorah, I.L.D. Insurance Company, AIG and Shirbit. The Phoenix Group should be noted in particular: despite its being one of the major players in the line, in 2004, the company recorded a loss of 1.4%, notwithstanding its investment profits of some NIS 160 million. Most of the Phoenix Group s losses were recorded in the sickness and hospitalization insurance line more than NIS 80 million and in the vehicle property insurance line about NIS 25 million. 30.0% Chart D-9 Market Share Comparison - Premiums versus Profits in Non-Life Insurance Business 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Harel Group Clal Group Eliahu Migdal Group Ayalon IDI Direct Menorah I.L.D. Group AIG Shirbit Agricultural Insurance Shomera Foreign Trade Inbal Natural Disasters Fund Ezer Phoenix Group Market Share by Profits Market Share by Premiums Division, on the basis of the companies non-consolidated financial statements. 22

23 Non-life and Health Insurance Table D-7 presents details about the profits of the insurance companies and about the companies market shares in the non-life insurance lines, by profits. In 2004, the companies profits totalled about NIS 1,355 million excluding Avner, and about NIS 1,900 million including Avner. After a rise in profitability in 2003, this year, the profitability of the non-life insurance lines decreased by about 8%. Unlike in 2003, when nearly all companies showed a relatively high level of profits 2004 was characterized by a mixed trend in the level of profitability of all non-life insurance companies, both large and small. The Harel Group s profits rose by 7.5% compared to Today, this is the insurance group generating the highest profits of all insurance companies. Last year, the Clal Group was in first place in terms of volume of profits. This year, it lost about 25% of its profits compared to last year, and in 2004, its profits reached approximately NIS 263 million, i.e., about 13.8% of the total profits in the market. The Migdal Group and other companies, including Shirbit, Agricultural Insurance and IDI Direct also showed growth in profits this year. 23

24 The Capital Market, Insurance and Saving Division Table D-7 Profits from Non-Life Insurance Business by Insurance Companies (Non-consolidated Balance Sheet Data) (NIS thousands, percent) Profits from Non-Life Insurance Business (NIS thousands) Market Share (by Profit) Rate of Change in Profits Company Harel 39, , , % 15.3% 17.4% 4.3% 503.7% Dikla 53,871 75,145 88, % 5.1% 6.5% 17.3% 63.6% Sahar - Zion 112, % 0.0% 0.0% 0.0% % Harel Group 206, , , % 20.4% 23.9% 7.5% 57.5% Clal 125, , , % 19.1% 15.4% -25.9% 66.9% Arieh -7,017 59,833 42, % 4.0% 3.1% -29.0% See note 2 Clal Credit Insurance 2,519 6,099 10, % 0.4% 0.8% 76.3% 326.8% Clal Group 120, , , % 23.5% 19.4% -24.7% 117.2% Eliahu -105, , , % 14.3% 13.4% -14.8% See note 2 Migdal 8,432 70, , % 4.8% 8.4% 60.5% % Hamagen 19,696 56,378 51, % 3.8% 3.8% -9.4% 159.3% Migdal Group 28, , , % 8.6% 12.1% 29.5% 485.0% Ayalon 54,498 92, , % 6.2% 8.1% 18.5% 100.3% IDI Direct 58,450 81, , % 5.5% 8.0% 31.4% 84.3% Menorah 88, , , % 7.9% 7.6% -11.8% 16.4% I.L.D. 9,301 36,654 36, % 2.5% 2.7% 0.7% 296.7% BSSCH 15,516 7,780 16, % 0.5% 1.2% 108.8% 4.7% I.L.D. Group 24,817 44,434 53, % 3.0% 3.9% 19.6% 114.1% AIG 17,920 26,354 26, % 1.8% 2.0% 1.0% 48.5% Shirbit 4,862 14,712 22, % 1.0% 1.7% 55.9% 371.9% Agricultural 20 9,651 15, % 0.7% 1.1% 58.8% Insurance Shomera 1,093 4,268 2, % 0.3% 0.2% -51.9% 87.8% Foreign Trade 2,073 1, % 0.1% 0.1% -28.5% -54.8% Inbal % 0.0% 0.0% 4.8% 9.2% Ezer -11,481 1, % 0.1% 0.0% % Phoenix 52,265 60,533-53, % 4.1% -4.0% % % Hadar 14,329 37,653 35, % 2.5% 2.6% -6.1% 146.7% Phoenix Group 66,594 98,186-18, % 6.6% -1.4% % % TOTAL 557,659 1,482,067 1,354, % 100.0% 100.0% -8.6% 143.0% Division, on the basis of the companies non-consolidated financial statements. 1. The Clal Group Clal, Arieh and Clal Credit Insurance; the Harel Group Harel and Dikla; the Phoenix Group Phoenix and Hadar; the Migdal Group Migdal and Hamagen. Other Shirbit, Shomera and Ezer. 2. This value is meaningless since the company disclosed a loss in 2002 that was followed by a profit in

25 Non-life and Health Insurance In 2004, the Harel Group s profits totalled about NIS 325 million i.e., 17.1% of the total profits in the market. Most of the group s profits were generated in sickness and hospitalization insurance (about NIS 145 million) and in compulsory vehicle insurance (about NIS 105 million). Most of the profits in compulsory vehicle insurance originated in investment profits. The Phoenix Group recorded a sharp drop of 119% in its profits, and closed the year with a loss of about NIS 18.5 million. As stated above, most of the company s losses originated in sickness and hospitalization insurance and in vehicle property insurance. Table D-8 shows that about 63% of all profits in the market were generated in the compulsory vehicle insurance line, which is the largest of the non-life insurance lines in terms of profits. The Clal Group earned 21.5% of this profit, while 20.4% were earned by Eliahu and 16.5% by the Harel Group. Profits in the vehicle property insurance line constitute 13.3% of the total profits in the nonlife insurance market. 19.6% of the profits belong to IDI Direct, while about 16% of the profits belong to the Clal Group. The Phoenix Group is the only group that showed a loss in this line, despite the relatively high investment profits that it reaped. Ten percent of the total profits in non-life insurance are in the sickness and hospitalization insurance line. The business results of this line were affected almost entirely by the results of the Harel and Phoenix groups. Almost all the profits in this line (about NIS 140 million) were generated by the Harel Group. The Phoenix Group recorded the highest losses of all companies in this line (a loss exceeding NIS 80 million). Of all the insurance lines in which the Phoenix Group engaged, the highest loss it suffered was in the sickness and hospitalization insurance line. 25

26 The Capital Market, Insurance and Saving Division Table D-8 Market Share by Profits in Non-Life Insurance Lines by Insurance Groups Final Table Property Loss Comprehensive Residential Mortgage Banks Comprehensive Business Premises Vehicle Compulsory Vehicle Property Employers' Liability Other Liability Lines Clal Group 72.1% 15.6% 56.5% 11.8% 21.5% 15.8% 15.7% -0.2% Personal Accident Sickness and Hospitalization -11.7% Aircraft and Seacraft Cargo in Transit Engineering Insurance Credit Insurance Other Risks 42.4% 30.2% 78.4% 33.7% Harel Group 29.1% 7.3% 7.3% 0.0% 16.5% 5.5% 8.7% 20.3% 159.0% 6.7% 6.9% 0.0% 1.9% Phoenix Group 20.4% 2.1% 1.4% -23.4% 5.5% -9.6% 52.7% 26.9% -92.6% 34.1% 23.8% 0.0% 4.6% Migdal Group -1.4% 8.7% 12.7% 67.9% 11.1% 9.9% 9.7% 11.7% 31.8% 4.3% -3.2% 0.0% 16.0% Menorah -0.2% 18.7% 13.6% 10.1% 3.8% 10.6% 12.0% 14.7% 8.6% 0.1% 27.2% 0.0% 0.8% Ayalon 19.5% 3.8% 0.0% 0.0% 7.9% 11.7% 0.7% 8.6% 4.5% 2.0% 12.1% 0.0% -0.7% I.L.D. Group Eliahu IDI Direct AIG 1.8% 1.3% 0.0% 1.0% 0.1% 9.2% 17.6% 10.7% 0.0% 0.1% 8.3% 0.0% 2.4% 0.0% -4.8% 0.0% 3.9% 20.4% 6.5% 1.1% 4.9% 13.0% 19.6% 12.6% -2.7% -2.7% 0.3% -0.4% -1.0% 12.4% 1.2% -2.4% Since a loss was recorded in this line, -0.2% 0.0% 0.0% -0.1% Since a loss was recorded in this line, -3.8% 14.1% 0.0% 0.0% 2.8% 0.2% 0.0% -0.1% 22.3% 0.0% 0.0% 0.0% 28.1% 0.1% 0.0% 0.0% Agricultural -43.6% 0.0% 0.0% 0.0% 1.8% 4.1% 6.8% 10.4% the figure 0.2% the figure 0.0% -0.8% -0.6% 4.9% Insurance has no has no Shirbit 0.0% 4.6% 0.0% 32.9% 0.0% 1.7% 0.0% -2.0% significance 0.0% significance 0.0% 1.0% 0.0% 8.4% Shomera 0.0% 1.6% 0.0% 3.1% 0.0% 0.2% -0.8% -0.6% 0.3% 0.0% 0.0% 0.0% -0.1% Natural Disasters 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ezer 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.7% Foreign Trade Risks 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.9% Inbal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.2% Total excl. Avner 43,075 81,036 25,829 20, , ,116 43,297 70,378-22,152 90, ,625 35,104 10,663 50,683 Avner , TOTAL INCLUDING AVNER Market Share by Lines 43,075 81,036 25,829 20,371 1,188, ,116 43,297 70,378-22,152 90, ,625 35,104 10,663 50, % 4.3% 1.4% 1.1% 62.6% 13.3% 2.3% 3.7% -1.2% 4.7% 0.0% 0.6% 1.8% 0.6% 2.7% Division, on the basis of the companies nonconsolidated financial statements. 26

27 Non-life and Health Insurance Text Box A The Reform in the Compulsory Vehicle Insurance Line The average insurance rates in the compulsory vehicle insurance line continued to drop this year as well, and the use of differential rates became more prevalent. These changes are the outcome of the reform instituted in this insurance line in recent years. During this reform, the market was opened to competition. Today, the insurance companies set the insurance rates, based on the recommendations of the database operator 3, and subject to the authorization of the Commissioner of Insurance. In February 2004, the supplementary fee for financing the activities geared to prevent traffic accidents was cancelled. Cancellation of the supplementary fee led to a further 3% reduction in the rate, in the wake of other price reductions of more than 35% since 1998, as shown in Chart D-10. Chart D-10 Cumulative Change in the Average Compulsory Vehicle Insurance Rate for Private Vehicles 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Dec 97 Jan 98 Sep 98 Jul 99 Sep 00 Apr 01 Jul 03 Nov 03 Feb The database operator is an independent body that collects and analyzes statistical data from the insurance companies and, according to its analysis, recommends a compulsory vehicle insurance rate to them. 27

28 The Capital Market, Insurance and Saving Division In addition to the basic rate, the database operator also recommends coefficients for the parameters being used in pricing each insured s risk. When determining rates, the insurance companies also take into account the characteristics of the vehicle and its drivers. Thus, a differential rate is set, whereby "careful insureds" pay less than "careless insureds." Table D-9 shows the parameters used by each company when they determined the compulsory vehicle insurance rates in December As of November 2004, all insurance companies, without exception, have been using at least one parameter when setting their rates. Table D-9 Use of Parameters in Setting "Compulsory Vehicle Insurance" Rates for Private Vehicles (Correct to ) Engine Capacity Gender of Driver Age of Driver Years Holding Driver's License Prior Claims Driver's License Revocations Air Bags in Vehicle AIG Ayalon Eliahu Arieh Agricultural Insurance Direct Insurance I.L.D. Migdal/ Hamagen Phoenix / Hadar Harel Clal Menorah Shomera Shirbit 28

29 Non-life and Health Insurance Publication of the "Compulsory Vehicle Insurance Calculator 4 "and the improved availability of information to the public have also contributed to promoting competition, reducing rates and expanding the use of differential rates, which take into account a variety of characteristics of both the vehicle and the driver. Table D-10 presents the rates that the insurance companies charged according to various categories of insureds, correct to December 31, Table D-10 Minimum and Maximum Rates in the Privately-Owned Private Vehicle Market (correct to ) Parameters Example Example Example Example Example Example Engine capacity Gender of driver Male Male Female Male Female Female Age of driver Years driving History of accidents History of offenses Air bags Yes Yes No Yes Yes No Minimum rate on market (NIS) Maximum rate on market (NIS) 1,843 1,760 1,706 1,438 1,367 1,367 2,177 2,177 2,177 2,038 1,731 1,763 Difference (in NIS) The calculator may be accessed at 29

30 The Capital Market, Insurance and Saving Division B. Reserves The reserve funds that insurance companies allocate (according to the assessments of the companies actuarial departments) are invested in the capital market, subject to restrictions that the Commissioner of Insurance has prescribed in the investment regulations. Insurance companies profits in the capital market constitute a part of their revenues, and they derive both from the size of the reserves that they allocate and invest in the capital market and from the outcome of their investments. The ratio between the income from investments and the insurance reserves in non-life insurance expresses the yield on the funds retained in reserves in the non-life insurance sector. Due to the size of the reserves, fluctuations in the yields in the capital market have a significant impact on the insurance companies total profits. Table D-11 shows that, in nearly all insurance companies, the total reserves rose from 2003 to On the other hand, the total profits from investments fell by 3% on average in every line, and totalled approximately NIS 1,388 million (excluding Avner and Karnit). The yield on reserves in 2004 was 4.9%, compared to a yield of 8.2% in This drop derives, inter alia, from the moderate rises in the capital market in 2004 compared to 2003, which had been a lucrative year in the Israeli capital market. 30

31 Non-life and Health Insurance Table D-11 Ratio of Income from Investments in Non-Life Insurance Reserves (NIS thousands, percent) Company Income from Investments Insurance Reserves in Non-Life Insurance,Gross Market Share Reserves Ratio of Income from Investments in an Average Reserve AIG 30,639 27, , , % 7.4% 4.9% Ayalon 104,456 90,814 1,775,303 1,975, % 6.6% 4.8% Eliahu 284, ,087 1,663,429 1,741, % 18.9% 6.5% Arieh 115,350 83,350 1,657,231 1,741, % 7.4% 4.9% New BSSCH 2,031 1, ,882 70, % 2.0% 1.7% Agricultural Insurance 40,981 25, , , % 8.2% 4.5% Direct Insurance 61,428 42, ,727 1,060, % 7.5% 4.2% Dikla 76,286 49, , , % 12.0% 6.5% BSSCH 3,481 2,711 21,930 24, % 17.1% 11.7% Hadar 105,676 86,419 1,681,337 1,770, % 6.6% 5.0% I.L.D. 62,430 50,924 1,031,156 1,190, % 6.8% 4.6% Hamagen 60,797 40, , , % 7.4% 4.9% Phoenix 95,470 75,719 2,312,585 2,408, % 4.3% 3.2% Harel 326, ,219 5,089,702 5,602, % 9.9% 3.8% Clal 310, ,414 4,712,982 5,158, % 7.1% 4.5% Clal Credit 2,265 1,440 41,637 44, % 5.4% 3.3% Migdal 141, ,424 2,227,086 2,632, % 6.8% 4.2% Menorah 130, ,697 1,886,264 2,201, % 7.5% 5.5% Ezer 14,557 13, , , % 9.8% 5.9% Inbal 1,279 1,336 52,796 51, % 3.0% 2.6% Natural Disasters Fund 40,594 21, , , % 10.8% 5.6% Shomera 3,286 6, , , % 2.9% 3.3% Shirbit 16,862 17, , , % 6.8% 4.9% Total excluding 2,031,531 1,387,988 28,767,282 31,920, % 7.6% 4.6% Avner & Karnit Avner 564, ,813 5,207,974 4,008, % 6.2% Karnit 272, ,239 2,721,040 2,979, % 6.2% TOTAL INCLUDING AVNER & KARNIT 2,868,675 1,848,040 36,696,296 38,908, % 4.9% Division, on the basis of the companies non-consolidated financial statements. 31