SOLVENCY OF INSURANCE COMPANIES

Transcription

1 SOLVENCY OF INSURANCE COMPANIES B

2 CONTENTS Main Findings Life Insurance General Insurance Return on Equity Earnings in the Insurance Industry Employment in the Insurance Industry Analysis of Business Results Life Insurance Life-Insurance Reserves Paid and Pending Claims Earnings Supplemental Reserves for Payout of Pensions Management Fees Administrative and General Expenses and Agent s Commissions General Insurance Structure of the Market Earnings Selected Lines in General Insurance Property and Compulsory Motor - Vehicle Insurance Liability Insurance Excluding Compulsory Motor-Vehicle Health Insurance Reinsurance Marketing Expenses Regulatory Policy and Activity Investment Activity

3 Enforcement New Areas of Activity Prohibition of Money Laundering Order Appendices Appendix Licensing Report Appendix 2.2 Licensed Insurers in Israel, End of Appendix 2.3 Financial Statements for Tables Table 2.1 Employment with Insurance Companies, Table 2.2 Gross Life-Insurance Premiums, by Groups, 1990, 1995, Table 2.3 Distribution of Gross Premiums in Life-Insurance Business, by Groups, 1990, 1995, Table 2.4 Main Factors that Affect Life Insurance Reserves, by Groups, Table 2.5 Gross Reserves and Pending Claims in Assured-Yield Life Insurance Policies, by Groups, Table 2.6 Gross Claims and Average Reserves in Life Insurance, Table 2.7 Gross Claims Relative to Average Reserves in Life Insurance, Table 2.8 Contribution to Life-Insurance Earnings, by Groups, Table 2.9 Table 2.10 Allocation of Investment Earnings and Management Fees to Insureds in Life Insurance Participating Portfolio, by Groups, Agents Commissions and Administrative and General Expenses in Life Insurance, by Groups, Table 2.11 Agents Commissions and Administrative and General Expenses Relative to Gross Premiums in Life Insurance, by Groups, Table 2.12 General Insurance Premiums, by Groups Table 2.13 Share of Premiums in General Insurance, by Groups, 1990, 1995,

4 Table 2.14 Earnings in General Insurance, by Groups, Table 2.15 Table 2.16 Premiums, Claims, and Earnings in Compulsory Motor-Vehicle Insurance, Share of Claims and Earnings in Net Premiums, Property Motor-Vehicle, Table 2.17 Premiums and Expenses in Liability Lines, Table 2.18 Health Insurance Premiums, Ilness and Hospitalization Line Table 2.19 Gross Premiums and Reinsurance Premiums, General Insurance, Table 2.20 Reinsurers in General Insurance Ratio of Claims to Premiums Less Commissions, by Groups, Table 2.21 Reinsurance Abroad for General Insurance, by Lines of Insurance, Table 2.22 Table 2.23 Agents Commissions Relative to Gross Premiums in General Insurance, by Groups, Commissions, Administrative and General Expenses Relative to Premiums in General Insurance, by Groups, Figures Figure 2.1 Return on Equity, Banks and Insurance Companies, Figure 2.2 Return on Equity, Insurance Groups, Figure 2.3 Earnings Life Insurance versus General Insurance, Figure 2.4 Figure 2.5 Figure 2.6 Figure 2.7 Share of Earnings in Gross Premiums Life Insurance versus General Insurance, Effect of Implementation of D.A.C. Method on Increase in Earnings from Life Insurance Business, by Groups, Effect of Pension Payout Reserve on Reduction of Earnings from Life-Insurance Business, Marketing Expenses as Share of Gross Premiums, Life Insurance, by Groups, Figure 2.8 Change in Earnings in General Insurance, Figure 2.9 Gross Premiums, General Insurance, by Insurance Lines,

5 Figure 2.10 Earnings in General Insurance, by Insurance Lines, Figure 2.11 Motor-Vehicle Thefts, Figure 2.12 Traffic Accidents and Injuries, Figure 2.13 National Motor-Vehicle Fleet, Figure 2.14 Figure 2.15 Share of Reinsurance Premiums in Compulsory Motor-Vehicle Insurance Premiums,by Groups, General Insurance, Reinsurers Claims Relative to Premiums Less Commissions, by Groups,

6 MAIN FINDINGS Industry revenues from premiums in 2000 were NIS 26.2 billion as against NIS 25 billion in 1999, an increase of 4.73 percent. The increase was due mainly to a 9.5 percent upturn in life insurance premiums. Premiums in general insurance climbed by a meager 0.5 percent. It may be seen that the main source of growth in the insurance industry was life insurance. The ratio of insurance premiums to GDP was 5.9 percent in 2000, as against 6 percent in 1999 and Life Insurance Life-insurance activity increased in 2000 to NIS 12.8 billion in total premiums as against NIS 11.7 billion in Similar rates of growth have been occurring for several years, indicative of the rising importance of life insurance in the insurance companies business results. The increase in premiums traces mainly to two factors: 1. Some 60 percent of life-insurance premiums are generated by executive insurance policies that are affected by the trend in wages countrywide. In 2000, the average national wage climbed by about 10 percent. This accounts for two-thirds of the increase in life-insurance premiums. 2. A well-developed marketing system led to an increase in new life-insurance policies in The new policies generated NIS 1.54 billion in premiums. The most important countervailing factor, which has been in evidence for several years, is the surrender of insurance policies. General Insurance General-insurance premiums increased by only 0.5 percent in Most of the growth occurred in compulsory motor-vehicle insurance, which was affected by an increase in the national vehicle fleet, and in health insurance, which still has unmet potential. Return on Equity Net earnings from insurance and other business (excluding Avner and Karnit) were NIS 963 million in 2000 as against NIS 1,260 million in Earnings from insurance business (before taxes) were NIS billion in 2000 as against NIS 2 billion in There were NIS 120 million in capital issues and NIS 612 million was distributed in dividends. 6

7 The average return on equity in the industry was 20.6 percent in 2000 as against 32.8 percent in Average equity in insurance companies was NIS 4.3 billion. Average ROE has been severely volatile over the years, due to the return on investments in the capital market and volatility in general-insurance earnings. Another factor that has had an effect in recent years is the accounting change in calculating Deferred Acquisition Costs (D.A.C.) in life insurance. For comparison purposes, the banking industry had an 11.7 rate of return in Banking ROE has been rising gently each year in recent years. By comparing the business results of the insurance industry with those of the banking industry over time, we find that the average ROE in insurance has been higher but more volatile. This has to do with the different characteristics of the respective industries activity. A breakdown of average ROE by insurance groups shows a decline in a return relative to The main reason was a decrease in rate of return on investments among insurance companies that are oriented toward life insurance and a decline in earnings in general insurance. 7

8 Earnings in the Insurance Industry In 2000, as before, life insurance was the main source of earnings in the insurance industry. Earnings in life insurance were NIS billion, down 9.6 percent from the previous year. The decrease was mainly due to a decline in yields in the capital market. However, the change in the method of measuring D.A.C. also had a substantial effect on profitability. In general insurance, earnings tumbled to NIS 329 million (excluding Avner and Karnit), 30 percent lower than in The erosion was due to increased competition in the industry and an upturn in paid and pending claims that the industry reported in This year, the companies are gearing up for competition by setting differential rates, principally in motor-vehicle insurance a factor that has a significant effect on profitability in general insurance. 8

9 In life and general insurance, the ratio of earnings to premiums declined in 2000 relative to The decreases were from percent to percent in life insurance (a 17.5 percent decline) and from 4.05 percent to 2.74 percent in general insurance. The reason was an upturn in the claims/premiums earned ratio. 9

10 Employment in the Insurance Industry Employment in the insurance industry is an indicator of the companies efficiency. The industry-employment indicator pertains to employees of insurance companies only and does not include employees of the marketing system. As Table 2.1 shows, insurance-industry employment increased in 2000 relative to 1999 and 1998, despite the trend of mergers that has been typical of the insurance market in recent years, the entry of new insurance companies, and the upturn in competition. Table 2-1 Employment with Insurance Companies, Persons employed Thereof: with academic Life General Other Total training ,547 1,432 1,376 3,351 3,260 3,150 2,115 2,080 2,000 7,113 6,772 6,527 1, Source: Data from insurance companies, processed by the Capital Market, Insurance, and Savings Division ANALYSIS OF BUSINESS RESULTS Life Insurance As the data in Table 2.2 show, life-insurance premiums have increased by 150 percent (NIS billion) in the past decade. The Migdal group showed the highest growth rate during that time, at 250 percent, largely due to the inclusion of the portfolio of Hassneh and its insurance agents in The Harel group reported strong growth increase between 1998 and 1999 due to the inclusion of the life-insurance portfolio of Zion, which joined the group in The Phoenix group recorded an increase of 192 percent in the past decade, due to internal growth of its insurance portfolio without the addition of further portfolios. The average increase in lifeinsurance premiums was 9 percent between 1999 and 2000 as against 7 percent between 1998 and Concentration in the life-insurance industry has increased over the past decade. The five largest groups controlled 95.5 percent of the market in 2000 as against 77.1 percent in

11 Table 2.2 Gross Life-Insurance Premiums, by Groups, 1990, 1995, (NIS millions, December 31, 2000, prices) Year Migdal Clal Phoenix Harel Menorah Other Total , ,170 5, ,901 2,012 1, , ,677 2,511 1,812 1,103 1, , ,833 2,707 1,969 1,614 1, , ,182 2,967 2,173 1,753 1, ,793 Percent change in premiums 1990/ % 120% 127% 58% 51% -45% 75% 1990/ % 174% 144% 115% 74% -28% 114% 1990/ % 196% 165% 216% 81% -57% 128% 1990/ % 224% 192% 244% 96% -51% 150% 1999/2000 9% 10% 10% 9% 8% 14% 9% Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division Total insurance premiums of the Migdal group increased by 250 percent in the past decade, due to the acquisition of half of the Hassneh portfolio, the acquisition of Hamagen, the acquisition of Shimshon, and an internal increase in performance. Total insurance premiums of the Clal group increased by 225 percent, due to the acquisition of half of the Hassneh portfolio, Tzur Shamir, and internal growth during the period. The Phoenix group improved its performance by 192 percent. This was due to natural development of the group, with no acquisitions of other insurance portfolios or companies. This is noteworthy because it is the highest figure stemming from a company s natural development. Notably, when an insurance portfolio is acquired, so is its marketing resources, i.e., its contracts with insurance agents. This also affects the future growth of the company that makes the acquisition. The Harel group improved its performance by 244 percent. It boosted its portfolio significantly in 1999 with the acquisition of Zion. The Menorah group improved its performance by only 96 percent, all of which due to internal growth. Menorah s share in the industry declined and its growth rate was far below the industry-wide average. 11

12 Table 2.3 Distribution of Gross Premiums in Life-Insurance Business, by Groups, 1990, 1995, (Percent) Year Migdal Clal Phoenix Harel Menorah Other Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division In the past two years, the life-insurance premiums of the insurance groups have been eroding slowly and premiums have been shifting to other companies. This is evidenced by the growth rate of the other companies relative to the development of the life-insurance industry at large. Life-Insurance Reserves Life-insurance reserves change due to four main factors: 1. the savings component in premiums received during the year; 2. maturities and surrender of policies; 3. payout of insurance proceeds; 4. earnings from the investment of insurance reserves. The component of premiums earmarked for savings has a very important effect on insurance reserves. This component increases the size of the reserve. Another factor is the accrued earnings on investments of the existing reserve. A third important factor a countervailing factor that reduces the reserves is the surrender of insurance policies. 12

13 Table 2.4 Main Factors that Affect Life Insurance Reserves, by Groups, 2000 (NIS billions, December 31, 2001, prices) Migdal Clal Phoenix Harel Menorah Other Total Retained premiums Investment earnings Surrenders (1.46) (0.92) (0.6) (0.55) (0.39) (0.14) (4.06) Maturities (0.25) (0.1) (0.61) (0.1) (0.06) (0.02) (0.62) Claims net of reinsurance (0.46) (0.33) (0.21) (0.17) (0.08) (0.08) (1.33) Expenses (0.59) (0.38) (0.4) (0.35) (0.26) (0.12) (2.1) Growth of reserve Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division Table 2.5 Gross Reserves and Pending Claims in Assured-Yield Life Insurance Policies, by Groups, (NIS billions, December 31, 2001, prices) Migdal Clal Phoenix Harel Menorah Other Total Pct. change 1.0% 1.7% 1.3% -0.3% -0.2% 0.2% 0.9% Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division 13

14 Insurance reserves and pending claims in assured-yield life-insurance polices grew by NIS 360 million in Importantly, assured-yield life-insurance policies were issued only until the end of Since policies of this type are no longer issued, the increase in reserve in 2000 was very small, at about 0.9 percent, and the reserves of several groups contracted. In future years, one expects the reserves to decline because more money will be withdrawn from the reserves than the sum deposited to the reserves plus earnings on investment of the reserves. Paid and Pending Claims The insurance industry paid out NIS 6.4 billion in life-insurance claims in The uptrend in early surrender of insurance policies continued. The ratio of gross death and disability claims to average reserve was 2.5 percent and has not changed in the past three years. The ratio of surrenders to average reserve climbed to 6.2 percent in 2000 as against 5.8 percent in 1999 and 5.2 percent in 1998, but the rate of increase is slowing steadily. Table 2.6 Gross Claims and Average Reserves in Life Insurance, NIS millions, Dec. 31, 2000 Percent change Average reserves 54,396 59,661 65, Claims due to insurance events 1,398 1,521 1, Surrenders 2,841 3,436 4, Maturities Pension payments Total claims 4,975 5,653 6, Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division 14

15 Table 2.7 Gross Claims Relative to Average Reserves in Life Insurance, (Percent) Claims due to insurance events Surrenders Maturities Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division Earnings Total life-insurance earnings were NIS 1.35 billion in 2000 as against NIS 1.5 billion in 1999, a 9.6 percent decline. Four main factors explain the earnings performance: 1. the effect of changes in the accounting method used to record deferred acquisition costs (D.A.C.); 2. earnings on investments and management fees on assets of policies in the participating portfolio; 3. underwriting earnings derived from the total life-insurance portfolio; 4. the interest spread on assured-yield policies. The change in the D.A.C. accounting method increased earnings by NIS 675 million as against NIS 412 million in 1999, accounting for 50 percent of total earnings this year as against 27.6 percent in the previous year. The reasons for this are the following: 1. strong investment earnings in the previous year that diminished the effect of the accounting change; 2. the effect of the change in method of recording D.A.C. The effect on earnings rises for several years after the change, for two reasons: a) an increase in total D.A.C. from the second year on, because these outlays include earlier years. (Acquisition costs for the second year include acquisition costs for the first and second underwriting years combined.) b) the amortization period for D.A.C. is fifteen years and the total depreciation is smaller than D.A.C. accrual. 15

16 Table 2.8 Contribution to Life-Insurance Earnings, by Groups, 2000 (NIS millions, December 31, 2000, prices) Migdal Clal Phoenix Harel Menorah Other Total Change in D.A.C. computation method Participating management fees Underwriting profits & interest spread in assured yield policies Total ,347 1,490 Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division 16

17 Supplemental Reserves for Payout of Pensions The Economic Arrangements Law for 2000 revoked the extra tax benefit that had been given for life-insurance policies. (The extra benefit was expressed in recognition of lump-sum withdrawals from pension policies as tax-exempt benefits.) The change increased the likelihood that insureds who had contributed to pension-type policies would withdraw their money in pension form. Since the insurance companies had assumed that most insureds would withdraw their funds in a lump-sum and not in pension form, they had not updated the pension coefficients that had been built into the insurance policies. Due to the failure to make this update, the reserves did not reflect the companies true liability to insureds. Thus, a supplemental provision became necessary. In 2000, the insurance companies set aside NIS 91 million as a supplemental reserve for the expected increase in pension payouts. Management Fees The management fees that the insurer charges for managing the investment of money in participating life-policies are set forth in the Control of Insurance Transactions Regulations (Conditions in Insurance Contract), The regulations allow insurance companies to charge management fees in two ways. One is by collecting one-twelfth each month of

18 percent of the balance of assets. The other way, which is more prevalent, is to impose a fixed charge of one-twelfth of 0.6 percent of managed assets and a variable charge of 15 percent of accrued earnings. There is also a mechanism for the reimbursement of variable management fees in years that follow years of negative returns. The rate of management fees in the participating portfolio in 2000, as a share of total investment earnings, was substantially higher in 2000 than in The main reason is that the management fees included a fixed component and a variable component. The larger the investment earnings are, the less the fixed management fee is affected by the balance of assets managed, and vice versa. The insurance companies management fees were NIS 157 million lower in 2000 than in 1999, because returns in the capital market were smaller. Table 2.9 Allocation of Investment Earnings to Insured and Management Fees to Insuredin Life Insurance Participating Portfolio, by Groups, 2000 (NIS millions, December 31, 2000, prices) Migdal Clal Phoenix Harel Menorah Crediting to insured Management fees Total Management fees as share of investment earnings (pct.) 23% 31.5% 30.7% 18.9% 30.8% Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division Administrative and General Expenses and Agents Commissions Administrative and general expenses and agents commissions were NIS 3 billion in 2000 as against NIS 2.7 billion in All insurance groups reported increases in agents commission expenses. Administrative and general expenses were stable overall and those of the Clal insurance group declined. This is the result of mergers that have occurred in recent years, which led to efficiencies. 18

19 Table 2.10 Agents Commissions and Administrative and General Expenses in Life Insurance, by Groups, (NIS millions, December 31, 2000, prices) Migdal Clal Phoenix Harel Menorah Commissions Admin. and gen. expenses Total Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division As the table shows, there has been a salient efficiency trend in recent years. Unlike the share of commissions, the share of administrative and general expenses declined relative to 1999 and Examination of the various groups shows that the Phoenix lowered its ratio of commissions to total premiums and of administrative and general expenses to total premiums. At the other groups, however, the commissions/premiums ratio either increased or was unchanged relative to It is also evident that scale economies were at work: the three largest insurance groups had lower ratios of marketing expenses to premiums than the two other groups. Menorah, the smallest group, had the highest ratio of expenses. 19

20 Table 2.11 Agents Commissions and Administrative and General Expenses Relative to Gross Premiums in Life Insurance, by Groups, (Percent) Migdal Clal Phoenix Harel Menorah Commissions Admin. and gen. expenses Total Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division 20

21 GENERAL INSURANCE Earnings in general insurance, unlike life insurance, are typically volatile. Between 1990 and 2000, the industry oscillated between very low earnings and losses. In 1992, as the graph below shows, the industry sustained very severe losses, but by 1993 the trend reversed direction and positive earnings appeared. Total premiums in general insurance in 2000 were NIS 13.4 billion, or NIS 12 billion excluding Avner and Karnit. Most premiums (60 percent) were derived from motor-vehicle insurance. Premiums on account of health insurance continued to rise and accounted for NIS 1 billion in total general-insurance premiums. 21

22 Structure of the Market Since general-insurance policies are short in term (usually one year), the companies market shares tend to change appreciably from year to year. This is one reason for the possibility of market penetration by new insurance companies, such as Direct Insurance, Ltd., which, as the data show, have managed to command rising market shares. These results are downwardskewed because the direct-insurance companies deal mainly in individual insurance, in which their share is even greater. The five large insurance groups held a 76.3 percent share of the total general-insurance market in 2000, down by 3.4 percentage points from The Phoenix group lost 3 percentage points in premiums, due to a stringent underwriting policy and a change in the way the group recorded insurance premiums in its books. One may also note a slight increase in the market shares of the Harel Group and the direct insurers; the latter companies have been growing steadily. The Clal Group maintained its position at 25 percent of the Israeli general-insurance market. The general-insurance market share of Migdal has been declining for several years. Table 2.12 General Insurance Premiums, by Groups, (NIS millions, December 31, 2000, prices, Excl. Avner and Karnit) Migdal Clal Phoenix Harel Menorah Direct Other Total insurers ,448 1, ,860 7, ,817 2,859 1,904 1, ,180 11, ,540 2,581 2,107 1, ,753 11, ,296 2,912 2,206 2, ,953 11, ,322 2,989 1,858 2, ,283 11,998 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. 22

23 Table 2.13 Share of Premiums in General Insurance, by Groups, 1990, 1995, (NIS millions, December 31, 2000, prices) Migdal Clal Phoenix Harel Menorah Direct Other insurers Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. The growth of the direct-insurance companies slowed in 2000 relative to previous years. Although these companies continued to gain market share, in contrast to past years the other insurance companies internalized the market change that the direct insurers entry had created and deployed accordingly. Furthermore, the market was typified by an erosion of rates in 23

24 motor-vehicle property insurance, which also slowed the growth rate of the direct insurers. Apart from the lines of insurance noted above, the direct-insurance companies are hardly active in general insurance. The data show that within five years, the direct insurers managed to obtain a market share exceeding 7.5 percent in motor-vehicle policies. Their share in property insurance is smaller because a large percentage of this activity is insured by means of mortgage banks, among which these insurers have made no inroads. Earnings General-insurance earnings (excluding Avner) were NIS 329 million in 2000 as against NIS 475 million in 1999, a decline of 30 percent or NIS 146 million. Analysis of the business results shows that the main reason for the decline was an NIS 360 million increase in claims, net of reinsurance. The difference in gross premiums was only NIS 70 million. Among the various lines of liability insurance, the downtrend in losses continued in 2000 and earnings were NIS 36 million after a loss of NIS 32 million in Total earnings in compulsory motor-vehicle insurance were NIS 59 million, 45 percent lower than in Earnings in property motor-vehicle insurance declined by 78 percent, from NIS 178 million to only NIS 40 million. Property insurance earnings decreased by 26 percent, from NIS 124 million to NIS 92 million. 24

25 General-insurance earnings continued to improve, pursuant to a trend that has lasted several years. Some of the trend traces to the improvement in liability lines. In 2000, the direct insurers sustained losses due to the activity of Personal Direct, Ltd. Were it not for Personal Direct, the direct insurers general-insurance activities would have moved into the black in Table 2.14 Earnings in General Insurance, by Groups, (NIS millions, December 31, 2000, prices) Clal Menorah Harel Migdal Phoenix Direct Other insurers ,629 3,146 53,712 16,389-6,531-16,814 43, ,969 30,825 78, ,067 9,311-7, , ,494 14,675 74,047 98,009 24,398-29,378 93,316 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. 25

26 SELECTED LINES IN GENERAL INSURANCE Property and Compulsory Motor-Vehicle Motor-vehicle lines are affected by two factors: vehicle thefts and traffic accidents. Vehicle thefts affect property motor-vehicle insurance only. Traffic accidents affect both property motorvehicle insurance and, insofar as bodily injury occurs, compulsory motor-vehicle insurance as well. In compulsory motor-vehicle insurance, the correspondence of accidents and earnings occurs at a lag of at least three years, due to the method of determining reserves in compulsory motorvehicle activity. In other words, three years must pass from the time the premium is received to the time the earnings for the same underwriting year are recognized as such. The graph below shows that the number of bodily-injury casualties has been declining since 1998, in a trend that has not yet been reflected in earnings. Examination of the rates of loss in compulsory motor-vehicle activity between 1998 and 2000 shows that profitability has been declining over the past three years, due to an increase in bodily injury in years preceding Data for the corresponding underwriting years substantiate this finding, showing that the decline in earnings occurred because 1997 was worse than The lowering of compulsory motor-vehicle premiums took place over three years a significant 16 percent reduction in 1998 and a 5 percent cut in 1999 and The results of the premium reductions in the past few years will be reflected in 2001 and subsequent years. Furthermore, the share of reinsurers in compulsory motor-vehicle activity increased. 26

27 Table 2.15 Premiums, Claims, and Earnings in Compulsory Motor-Vehicle Insurance (General Insurance), (NIS thousands, December 31, 2000, prices) Gross premiums 3,678,346 3,598,214 3,707,492 Less reinsurance 512, , ,590 Retained premiums 3,165,536 3,012,423 2,970,902 Change in retained UPR -216,336-22,324-54,114 Claims paid and change in pending claims 3,079,694 3,241,914 3,785,551 Less reinsurance 329, , ,547 Retained claims paid and change in pending claims 2,750,246 2,685,138 3,096,005 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. Comparison of the earnings data with the distribution of motor-vehicle thefts and accidents shows that in compulsory motor-vehicle insurance the number of thefts and accidents has been declining gradually in recent years. Total claims decreased in 1999 relative to 1998 but increased between 1999 and (The sums do not include the share of reinsurers.) This incongruence between claims, on the one hand, and accidents and thefts, on the other hand, may be due to increases in the average size of claim and in the number of non-injury accidents. It should be borne in mind that the national vehicle fleet has expanded, the average value of vehicles has increased, and the overall level of vehicle safety has improved. 27

28 Table 2.16 Share of Claims and Retained Earnings in Retained Premiums, Property Motor-Vehicle (General Insurance), (Percent) Claims Earnings from insurance underwriting* Rate of profit/loss in property motor-vehicle activity Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. * Earnings from insurance underwriting earnings after claims expenditure, before agents commissions and administrative and general expenses. The data show that the ratio of claims to insurance premiums has been declining since 1998, from 77.3 percent to the vicinity of 70 percent in 1999 and 2000 a finding that is consistent with the decrease in the number of accidents and vehicle thefts. Total insurance premiums in property motor-vehicle activity declined by 3 percent between 1998 and 1999 and by 2.3 percent between 1999 and Between 1998 and 2000, the total decline came to more than 5 percent. The decreases in accidents and vehicle thefts affected total collection of premiums in this industry, notwithstanding the increase in the number of motor vehicles, and reduced the ratio of claims to premiums. The effects of the decline in accidents and thefts were distributed between the insured, in the form of lower rates, and the insurance companies, in a smaller share of claims. Notably, property motor-vehicle activity sustained losses in 1998 and were profitable in 1999 and 2000, providing evidence of the competition that takes place in this part of the market. 28

29 29

30 Liability Insurance Excluding Compulsory Motor-Vehicle Liability lines are typified by the long tail effect, i.e., payment of claims over many years. The pace of claim payouts depends on the type of insurance and the insurance companies claim-payment policy. The data show that business results in liability lines have been improving and were profitable in 2000 for the first time in several years. Importantly, due to the method used to compute reserves under the Control of Insurance Transactions Regulations, earnings are not recognized for the first three years after the transaction is made. Accordingly, the earnings shown are those deriving from 1997 and prior years. 30

31 Table 2.17 Premiums and Expenses in Liability Lines, (NIS thousands, December 31, 2000, prices) Years Pct. change / /2000 Gross premiums 1,031,719 1,081,567 1,132, % 4.73% Less reinsurance 427, , , % 0.32% Retained premiums 603, , , % 8.36% Change in retained UPR -19,903-8,977-15, % 70.08% Claims paid and change in pending claims 920, , , % -0.46% Less reinsurance 337, , , % -3.70% Retained claims paid and change in pending claims 583, , , % 1.69% Earnings in liability lines -71,967-15,405 41, % % Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. Health Insurance Examination of the various types of health insurance line spoints to a decrease in total premiums in personal-accident activity and a steady increase in illness and hospitalization. The personal-accidents line is noted for short-term policies up to one year whereas illness and hospitalization the policies are typically long-term. Illness and hospitalization insurance is typified by many group policies that account for a substantial share of activity in this line of business. The growth rates in illness and hospitalization insurance in the years 2000, 1999, and 1998, relative to 1997, were 43.7 percent, 33.7 percent, and 13.1 percent, respectively. What is more, this industry has not yet fulfilled its growth potential. 31

32 Table 2.18 Health Insurance Premiums, Illness and Hospitalization Line (NIS thousands, December 31, 2000, prices) Premiums 672, , , ,354 Fees 26,874 27,113 32,502 22,760 Premiums + fees 699, , ,450 1,005,114 Less reinsurance 96, , , ,392 Total retained premiums 602, , , ,722 Earnings 41,932 91,630 42,048 50,837 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. Reinsurance Reinsurance arrangements are contracts concluded between insurers and reinsurers. These contracts do not modify the original insurance contract between the insurer and the insured and usually are based on the coverage given by the original contract. Reinsurance contracts rely on good will, honesty, and the follow the fortune effect. Contracting with reinsurers is advantageous for Israeli insurers in several ways: 1. It gives them greater capacity than they could achieve on the basis of their own resources. 2. It protects them against especially large positions that might affect their business results. 3. It improves their financial capability by shifting part of the risk to the reinsurer. There are two types of reinsurance: proportional and non-proportional. The insurer-reinsurer relationship may be based on a contract or on a facultative framework (a contract for specific coverage). In 2000, Israeli insurers transferred NIS 3.5 billion to reinsurers, 26 percent of premiums for general insurance (the same proportion as in 1999). In compulsory motor-vehicle activity, the share of reinsurers in total premiums rose because the reform in this industry led to an increase in the insurance companies share in the industry, at the expense of Avner. 32

33 In property and liability insurance, in which most activity takes place by means of acquisition of layers of reinsurance, there was no change between 1999 and In the other lines, there were slight changes in the direction of greater risk retained by insurers, i.e., an increase in the retained portion. Table 2.19 Gross Premiums and Reinsurance Premiums, General Insurance, (NIS billions, December 31, 2000, prices) Compulsory Property Property Liability Other motor-vehicle motor-vehicle Pre- Rein- Pre- Rein- Pre- Rein- Pre- Rein- Pre- Reinmiums sur- miums sur- miums sur- miums sur- miums surance ance ance ance ance Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. Note: In this calculation, commissions received from reinsurers were not subtracted from the premiums forwarded to them. 33

34 Average results for reinsurers were poor in 2000, the rate of loss coming to 104 percent of premiums transferred less commissions. Additionally, reinsurers incurred administrative and general expenses in conducting this business expenses that are not reflected in the Israeli insurers financial statements. Furthermore, accrued earnings on investments of sums forwarded to reinsurers against future liabilities should be subtracted from this rate. The figures show that the reinsurers have incurred losses in their business dealings with the Harel group for the past three years. In contrast, the reinsurers have had earnings in their business with the Clal group, but less in 2000 than in These results do not necessarily reflect the economic loss or profit sustained by the reinsurers, because differences between the types of insurance are expressed differently in the financial statements. Table 2.20 Reinsurers in General Insurance Ratio of Claims to Premiums Less Commissions, by Groups (Percent) Migdal Clal Phoenix Harel Menorah Direct Other Total insurers Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. 34

35 Examination of the results of reinsurers underwriting by lines of insurance shows that the reinsurers suffered losses in almost all types of general insurance. Most of the damage to reinsurers in 2000 originated in property lines (with the exception of those in classified as other ). The rate of loss was 21 percent of premiums forwarded to reinsurers for property lines of business. The liability lines show a minor loss of 2 percent. Since these results do not include reinsurers revenues on the investments of the sums forwarded to them by the insurers, the reinsurers may well have made a profit on these types of business, especially in long-tail lines in which the money is invested for relatively long terms. The balance of funds that the reinsurers owe to Israeli insurers is NIS 7.5 billion: NIS 6.9 billion in general insurance and the rest in life insurance. The balance of funds owed by reinsurers to the domestic system is equal to 170 percent of total capital of the insurance industry. Thus, reinsurers activity is immensely important for the Israeli system and their financial solvency is crucial to the financial strength of Israel s insurers. Since several foreign reinsurers have recently encountered economic difficulties, there is some concern about damage that may be inflicted on the domestic system. As of July 2001, the exposure to such damage was estimated at NIS 60 million, or 0.86 percent of the total position vis-a-vis reinsurers. 35

36 Table 2.21 Reinsurance Abroad for General Insurance, by Lines of Insurance, 2000 (NIS millions, December 31, 2000, prices) Property 1 Liability 2 Health 3 Other 4 Total Premiums 1,545 1, ,464 Claims 1,503 1, ,059 Commissions Underwriting earnings Claims/net premiums (pct.) 97% 85% 70% 77% 88% Underwriting earnings/net premiums (pct.) -12% -2% -10% 6% -10% Commissions/ premiums (pct.) 18% 14% 27% 19% 17% Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, 3and Savings Division. 1. Property loss, comprehensive homeowners, business, and property motor-vehicle. 2. Compulsory motor-vehicle, employers liability, and other. 3. Personal accidents and illness-and-hospitalization. 4. Engineering, marine, and other. Marketing Expenses Agents commissions in general insurance in 2000 were unchanged from 1999 in proportional terms. Migdal group Efficiencies were evident, the rate of commission declining by 0.8 percent. Phoenix group Commissions increased by a steep 1 percent, to compensate agents for the decline in general performance in the industry. Harel group This group has the lowest commission rate among the groups, due to large transactions performed at low commissions. 36

37 Menorah group There has been a perceptible uptrend in commissions, with an increase of 0.4 percent in 2000 relative to 1999 and 1.2 percent relative to Other This group has lower commissions rates than the other groups because it includes the direct insurers. Table 2.22 Agents Commissions Relative to Gross Premiums in General Insurance, by Groups, (Percent, excl. Avner and Karnit) Migdal Clal Phoenix Harel Menorah Other Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. The data show that operating efficiency in 2000 resembled that in The share of expenses in insurance premiums was 26 percent, as before. Operating efficiency varied among the insurance companies. The share of expenses in total commissions increased at the Phoenix group and declined at the other companies and groups. The Harel group consistently maintained a lower expenditure ratio than the other insurance groups. Menorah, in contrast, had has the highest average share of expenses in total premiums for the past three years. 37

38 Table 2.23 Commissions, Administrative, and General Expenses Relative to Premiums in General Insurance, by Groups, (NIS millions, December, 31, 2000, prices and percent) Agents commissions Admin. and Total expenses Pct. of general premiums (NIS Millions) (Percent) Migdal Clal Phoenix Harel Menorah Direct Other Avner and Karnit Total 1,960 1,923 1,920 1,461 1,558 1,565 3,421 3,481 3,

39 REGULATORY POLICY AND ACTIVITY Introduction In 2000, regulation of insurance companies focused on two main fields supervising insurance companies investments and allowing insurance companies to enter fields of activity that had been barred to them thus far. The Minister of Finance signed the Control of Insurance bussiness regulations (Methods of Insurer s Investment of Capital and Funds and Management of Insurer s Liabilities), These regulations are more liberal in regard to regulatory involvement in the management of business and the rules of insurers investments. The regulations were approved by the Knesset Finance Committee and went into effect on April 19, Interim measures that eased some investment restrictions in the existing regulations were adopted during the year, and the Division s policy concerning early redemption of earmarked bonds by insurance companies remained in effect. In the course of 2000, the Division acted to allow insurance companies to embark on new avenues of activity. In the main, the Division focused on letting companies become active in offering guarantees of various kinds, pursuant to its licensing of insurers to issue guarantees in 1999 under the Sales Law. Furthermore, the Division, in conjunction with the Accountant General of the Ministry of Finance, circulated a position paper that discussed the possibility of allowing insurance companies to give loans to eligibles of the Ministry of Construction and Housing. Another area of regulatory activity was prompted by the Prohibition of Money Laundering Law a combined effort by several authorities to regulate various financial players, including insurance companies and insurance agents, with administrative orders. 1 See report of the Commissioner of the Capital Market, Insurance, and Savings Division for 1998 (Hebrew), p

40 Investment Activity Allowing Insurers to Invest a Larger Proportion of Assets in Shares As an interim phase in the liberalization of investment rules, the regulatory investment restrictions concerning participating life-insurance policies were eased. The maximum allowable proportion of investments in shares, convertible capital notes, and certificates of participation in mutual funds was raised from 15 percent of the investment reserve to 25 percent. Additionally, the minimum investment requirement in government securities was reduced from 50 percent of the investment reserve to 40 percent. Redemption of Earmarked Government Bonds ( Indexed-Life ) The agreements between the Government of Israel and the insurance companies require the latter to invest up to 86 percent of assets of assured-yield life-insurance policies in earmarked Indexed-Life bonds. The Capital Market Division responded to a request from the insurance companies by allowing them to redeem some of their holdings in earmarked bonds, so that they may invest the proceeds in alternative vehicles. The redemption of earmarked bonds is advantageous to the economy in considerable ways. The government replaces nontradable debt with tradable debt, thus helping to enhance tradability in the market, and the redemption speeds up the insurance companies professionalization and acquisition of risk-management skills. Notably, while early redemption is an irrevocable step for the insurance companies every redemption of earmarked bonds rules out the possibility of future acquisition of earmarked bonds against the sums redeemed. From the standpoint of the insured, the change is meaningless since the insurance companies assure the rate of return on their investments as part of their contractual undertaking to the insured. Until 2000, the bonds were redeemed in discriminatory auctions, in which a minimum rate was set in accordance with the auction results and every company that offered interest higher than the minimum rate redeemed bonds at the interest rate that it had bid. In 2000, this method was replaced with a standard auction method, in which a standard redemption interest rate was established the closing interest rate of the auction and the allocations to the winning bidders were made at this interest rate in accordance with the sums. In the course of 2000, twelve auctions for redemption of indexed-life bonds took place and NIS 2.18 billion was redeemed, bringing the total sum redeemed since this arrangement began to NIS 3.5 billion. 40