CONTENTS. General Remarks...

Transcription

1 INSURANCE AGENTS I

2 CONTENTS General Remarks Functions of the Insurance Agents and Agencies Licensing and Regulation Department (Agents Licensing Department) Insurance Agents Fitness of Insurance Agents Activities of Insurance Agents Examinations Subjects of Examinations Examination Passing Rates Looking Ahead Enforcement Trends in the Market of Insurance Agents Agents Commissions Life Insurance General Insurance Acquisition or Formation of an Corporate Agent by an Insurance Company Training of Agents Licensing Procedures Exemptions Committee Appendices Appendix 9.1 Intern Licensing Procedure Appendix 9.2 Licensing of Licensed Agent Procedure Appendix 9.3 Licensing of Corporate Agent Procedure Appendix 9.4 Replacement or Addition of Business Manager in Corporate Agent Procedure

3 Appendix 9.5 Change of Holdings in Corporate Agent Procedure Appendix 9.6 Revocation of Agents Licenses in 2000 Appendix 9.7 Application for Exemption Procedure Tables Table 9.1 Number of Active Insurance Agents (Interns and Licensed), by Lines of Insurance, Table 9.2 Active Corporate Agents, by Lines of Insurance, Table 9.3 Passing Rates on Intern Examinations, Table 9.4 Passing Rates on Licensing Examinations, Table 9.5 Deletion of Insurance Line from Intern Licenses in Table 9.6 Insurance Commissions and Premiums, Table 9.7 Commissions and Premiums in Life Insurance, Table 9.8 Commission/Premium Ratios in Life Insurance, Table 9.9 Market Shares of Insurance Companies in Commission Payments and Premiums, Life Insurance, Table 9.10 Commissions and Premiums in General Insurance, by Insurance Lines, Table 9.11 Rates of Change in Data in Table Table 9.12 Changes in Companies Commission Rates, Life Insurance, Table 9.13 Share of Insurance Companies in General-Insurance Commissions and Premiums, Table 9.14 Exemption Applications Submitted to Exemptions Committee Figures Figure 9.1 Number of Active Insurance Agents (Trainees and Licensed), by Lines of Insurance, Figure 9.2 Active Corporate Agents, by Lines of Insurance, Figure 9.3 Passing Rates on Intern Examinations,

4 General Remarks In 2000, Israel had 792 active insurance agencies (corporate agents) that were licensed in one or more lines of insurance (life, property, accidents, marine) and 9,276 insurance agents (interns and licensed). The functions and activities of insurance agents are important mainly because agents are usually the most efficient vehicles in closing insurance transactions. This chapter discusses the examinations that insurance agents must pass to be licensed as interns or as licensed agents and discloses the passing rates on these exams. This chapter also shows trends in this part of the insurance industry (agents commissions, mergers among insurance agencies, and agents training), and the activities of the Exemptions Committee. It also describes actions by the Commissioner of Insurance that pertain to agents activities, such as the decision to toughen enforcement in regard to criminal records of insurance agents. In this context, the Commissioner of Insurance, in consultation with the Advisory Committee, revoked the licenses of several insurance agents who had been convicted of criminal offenses and/or had been declared bankrupt. Another important decision by the Commissioner of Insurance during the reporting year had to do with regulation of insurance agents who hold interns licenses for a period exceeding that stipulated in the law. Over the years, a situation developed in which many insurance agents held interns licenses in certain lines of insurance for more than the three years that the law allows. It was difficult to bring this matter under control due to several clashing considerations of principle. On the one hand, the principles of rule of law and sound management require enforcement of the law in this regard; on the other hand, the agents at issue had been active for a long time and most of them had families. Therefore, the Commissioner concluded an arrangement that aimed to reconcile these considerations. The main provisions of the arrangement are presented in Part 4 of this chapter ( Enforcement ). In 2000, the Commissioner of Insurance authorized several acquisitions and formations of corporate agents by insurance companies and approved several mergers of corporate agents. For the most part, insurance companies acquire or form corporate agents when they wish to establish direct relations with their clients, whereas mergers among corporate agents are usually worked out to cut costs. 4

5 1. Functions of the Insurance Agents and Agencies Licensing and Regulation Department (Agents Licensing Department) In the discharge of its duties, the Agents Licensing Department: a) licenses insurance agents and ensures that they meet their legal obligations; 1 b) licenses insurance agencies (corporate agents) and ensures that they meet their legal obligations; c) receives and analyzes regular reports from insurance companies on matters concerning the Department s regulatory purview; d) takes part in phrasing and designing regulatory policy in matters related to regulation of the actions of insurance agents and agencies in Israel. e) conducts licensing examinations for insurance agents manages and revises the pool of test questions, coordinates the tests, determines the times and places they will be held, checks the tests, and sends the scores to the examinees. 1 Main legislation, secondary legislation, case law, and directives of the Commissioner. 5

6 2. Insurance Agents Fitness of Insurance Agents The conditions of fitness to serve as an insurance agent are set forth in the Control Law and the regulations. The purpose of the conditions is to make sure that all persons who practice this occupation have the requisite level of skill. Activities of Insurance Agents Table 9.1 Number of Active Insurance Agents (Interns and Licensed), by Lines of Insurance, Interns Licensed Interns Licensed Interns Licensed Life 3, ,5 285,2 438,5 070,2 223,6 General 409,1 522,4 245,1 647,4 301,1 871,5 Life+general(2) , , ,4 Marine Total 425,8 387,8 672,9 Source: Database of the Commissioner of Insurance (1) The data in this table and in Table 9.2 pertain to each insurance line separately. In 1998, for example, 3,104 insurance agents held intern licenses in life insurance, irrespective of whether or not they hold intern licenses (or agent licenses) in some other line. Note that some insurance agents hold full licenses in one field and intern licenses in others. (2) General = property and accident. 1 The terms of fitness are listed in the 1999 report of the Commissioner of the Capital Market, Insurance, and Savings. The data presented in the 2000 report are significantly different from those in the 1999 report due to technical changes in the database. 6

7 The number of active insurance agents increased by 6 percent between 1999 and 2000, due to factors external to the insurance industry and to changes and developments within the industry. In , the number of interns in all fields of insurance except marine insurance declined perceptibly by 33.3 percent in life insurance and by 42.1 percent in general insurance. One reason for the downtrend is that the matter of interns who held interns licenses for longer than the three years stipulated in the law was placed under regulation in 2000, as described in detail in the section of this chapter on Enforcement. Due to the arrangement that was worked out in this matter, types of insurance were deleted from the licenses of some insurance agents and the licenses of some other agents were revoked altogether because these agents either had no interest in making up the missing vocational training or failed to meet the terms of the training. In the past few years, the Commissioner of Insurance has been adjusting the subjects of the examinations to changes in the industry. The passing rate on the exams seems to be declining, as Tables 9.3 and 9.4 show. Between 1998 and 2000, there was a slight increase in the number of fully licensed agents in all types of insurance. The reason for the increase evidently has to do with the arrangement 3 3 see Part 4 of this chapter. 7

8 For details, that was made in regard to interns who had held their interns licenses for longer than the law allows. By forcing many interns to take licensing examinations, the number of fully licensed agents was increased. Another reason for the increase, of course, is the growth of the country s population. Table 9.2 Active Corporate Agents, by Lines of Insurance, New agents Life General Life+general Marine Total Source: Database of the Commissioner of Insurance (1) This refers to insurance agencies that received their first licenses in a given field that year. Notably, this figure is included in the other data shown in this table. Therefore, the figure of 782 licensed agencies in 1999 includes the forty-two new agencies. (2) See Note 1 to Table

9 3. Examinations Subjects of Examinations There are two categories of examinations: for interns (fundamentals and specific type of insurance ) and for fully licensed agents. In the fundamentals exams, examinees have to show that they have enough knowledge to begin their internship. Thus, a fundamentals exam focuses on general subjects related to the insurance market. It includes questions about insurance law (in particular, the Insurance Control Law and the Insurance Contract Law), basic insurance concepts (such as replacement value and underinsurance), the underlying principles of insurance contracts as derived from the law (such as the right to indemnification and due disclosure), insurance policies, and the legal status of an insurance agent in Israel. In examinations on specific types of insurance and in final exams, examinees must show familiarity with and knowledge of the type of insurance in which they wish to deal as licensed agents. In the life-insurance exams, for example, candidates must be conversant with the mathematical principles of life insurance (rules of probability, interest), group arrangements, etc. In the licensed-agent exams, candidates must display a level of knowledge that suffices for work as insurance agents, so that they can accept the responsibilities and liabilities of this occupation. 4 The lists given in this chapter are not exhaustive.the full list can be found at the Ministry of Finance Web site, 5 The fundamentals test is for everyone applying for an insurance agent s license; the tests for a specific type of insurance depend upon the branch for which the agent wishes to have an intern s/full license. 9

10 Table 9.3 Passing Rates on Intern Examinations, Subject of test Change, 2000 vs. Persons Passing Persons Passing Persons Passing 1998 (pct. tested rate(%) tested rate(%) tested rate(%) points) Fundamentals 1, , , Life , Property Accidents Marine Source: Database of the Commissioner of Insurance (1) The data include persons tested in the same line of insurance more than once. 10

11 Table 9.4 Passing Rates on Licensing Examinations, (1) Subject of test Persons Passing Persons Passing Persons Passing tested rate(%) tested rate(%) tested rate(%) Life , Property , Accidents , Marine Source: Database of the Commissioner of Insurance (1) The persons tested data include persons tested in the same line of insurance more than once. Tables 9.3 and 9.4 show that the passing rates have been declining at both levels of testing, intern and full-license. This is attributable to several factors: 1. The sophistication of the products that insurance agents sell and the level of knowledge required of the examinee. The passing rate has been falling because the requirements are becoming tougher. 2. In the past, the examination questions were not revised and were repeated from year to year. In recent years, both the questionnaires and the pool of questions that are used in composing the tests have been revised. 3. In 2000, there was a significant increase in the number of examinees. The reason has to do with the arrangement made by the Commissioner of Insurance in regard to interns who had held their interns licenses longer than the law allows. 11

12 Looking Ahead At the present time, the Agents Licensing Department, with guidance from the Commissioner of Insurance, is rewording the examination questionnaires and building up a larger pool of questions. The questions are phrased with assistance from a team made up of staff members of the Capital Market, Insurance, and Savings Division and experienced and knowledgeable insurance people. It is crucial to put this matter in order for two main reasons: 1. As stated, the insurance products that agents will sell in the future, as well as some of those sold today, are complex financial products that will entail through knowledge of insurance and finance. To obtain an agent s license, a candidate must prove that he/she has enough knowledge to do the job. Thus, these tests are a unique professional tool that enables a licensed agent to demonstrate his/her skill. Consequently, a special team is writing test questions that will measure an agent s professional ability to market complex insurance policies. 2. The intern exams and the licensing exams have different goals. Intern exams set out to determine whether the candidate has enough basic knowledge to sell insurance policies. The licensing exam determines whether the candidate has extensive insurance knowledge and the ability to prepare an insurance plan for the insured. Thus, licensing exams are more difficult than intern exams. 12

13 4. Enforcement 6 The provisions of the law that deal with enforcement task the Commissioner of Insurance with making sure that insurance agents obey the law and have appropriate professional training to sell insurance policies. Enforcement actions taken in 2000 are described below. a. Compulsory Submission of Agent Commission Records Insurance companies were required to present the Commissioner with data on the commissions they paid to insurance agents. Examination of these data makes it possible to monitor and analyze developments in the various types of insurance and to make sure that commissions are not being paid to persons who are not lawfully licensed, as set forth in Paragraph 41 of the Control Law. b. Revocation or Suspension of Insurance Agent s License According to Paragraph 29 of the Control Law, the Commissioner of Insurance, after consulting with the Advisory Committee, may revoke or suspend the license of an insurance agent for one of the reasons set forth in the aforementioned Paragraph, i.e., if the agent was declared bankrupt (Paragraph 29(a)(2)), breached one of the material terms of the license (Paragraph 29(a)(3)), or committed another infraction listed therein. In 2000, the Commissioner of Insurance revoked several agents licenses; their names are shown in Appendix 9.6 of this report. c. Interns Who Hold Intern Licenses beyond the Term Stipulated in the Regulations According to the law, an intern may hold an intern s license for no longer than three years. In the third year, he or she must pass the licensing exams. Over the years, and in contravention of the provisions of the law, some intern-agents have held interns licenses for longer than three years in some cases, for decades without taking the licensing exams in the types 6 The need for a supervision and enforcement system for insurance agents is explained in the report of the Commissioner of the Capital Market, Insurance, and Savings for A committee established under Paragraph 4 of the Control Law. 13

14 of insurance in which they specialize. In recent years, measures have been taken to correct this situation, including non-renewal of the licenses of agents who failed to meet the stipulations of the law. Even so, the Commissioner of Insurance allowed these agents to retain their licenses until June By that time, they were to pass final exams in the types of insurance in which they operate. To lighten the burden on these candidates, additional examination dates were provided. Consequently, the relevant provision of the law has been enforced since the middle of 2000, i.e., interns must take licensing exams during their third year of internship and may take them three times. An intern who fails the exams three times may no longer be active in the relevant type of insurance. Notably, within this rather large population of interns there was a subgroup of people aged fifty or more who had been interns in a given type of insurance for more than fifteen years and failed the licensing exam in their field of expertise. In consideration of these agents lengthy professional careers, the Commissioner of Insurance put together an arrangement, approved by the Exemptions Committee that operates by force of Regulation 18 of the Control of Insurance Transactions (Licensing of Insurance Agent) Regulations, , in which such agents may apply to the Commissioner of Insurance for full licensing provided that they: 1. took a course, approved by the Commissioner, in the particular type of insurance; 2. attended in at least 75 percent of the hours of said course; 3. submitted a final project at the end of the course that earned a grade no lower than 60. These agents have until March 31, 2001, to meet the terms of the arrangement. Table 9.5 Deletion of Insurance Line from Intern Licenses in 2000 Insurance line Number of agents from whom lines were deleted Life 601 General 310 Life+general 96 Marine 198 Source: Database of the Commissioner of Insurance 14

15 d. New License Format A new format for licenses was set forth in 2000 and implemented in In the new format, three separate licenses are issued: intern, agent, and corporation. The main change of importance concerns the intern s license. In the past, such a license noted whether the licensee was an intern in a specific field of insurance only. Today, it also shows the date on which the internship begins and the deadline for passing the licensing exams. The latter piece of information pertains to the provision of the law that requires an intern to pass licensing exams within a year of the end of the two-year internship. e. Payment in Cash for License Fee and Challenge-of-Test-Results Fee Two regulatory stipulations were made in 2000, for implementation in 2001: 1. Payment of license fees shall be in cash only. 2. The Control of Insurance Transactions (Fees) Regulations, , were amended to set the fee for challenging the results of an examination (intern or full license) at NIS

16 5. Trends in the Market of Insurance Agents Agents Commissions 8 General Remarks Agents are an important mechanism for insurance companies in marketing policies. Changes in agents income may signal economic changes in the insurance market, growth of the industry, and economic changes in the insurance companies themselves. Since commissions are usually calculated as a percentage of the premium, they are also an important factor in the price of insurance to the consumer. Commission rates are set in several ways. In life insurance, the rate is fixed according to the Annual Bulletin (a standard table of commissions of each insurance company), occasional special promotions, and personal contracts. In general insurance, the occasional-promotion method is seldom used. In addition to standard tables and personal contracts, commissions are paid on the basis of insurance companies commission tables for each type of insurance. The method used to pay commissions also varies from one type of insurance to another. In life insurance, commissions are paid for new policies, increases in the face amount of insurance, collection fee (which remains constant throughout lifetime of the policy), and for management of the insurance portfolio. In general insurance, commissions are paid for new policies and renewals only. The method of remuneration also varies from one kind of insurance to another. In life insurance, the method is characterized by the way payments are spread, taking into account cancellations, the definition of the qualifying premium, the time when the commission is paid, etc. In general insurance, the remuneration method is distinguished by proportions of the premium according to tables based on types of insurance or personal arrangements. 8 In this chapter, the term agent includes an corporate agent. 16

17 Table 9.6 Insurance Commissions and Premiums, (1) (NIS millions, adjusted to December 2000) General insurance Life insurance Year Premiums 10, , , , , ,392.9 Commissions 1, , , , , ,922.7 Commissions/ premiums (pct.) Source: consolidated financial statements of insurance companies. (1) The 1998 data are different from the corresponding data in Table 9.4 because this table is not based on consolidated statements. Table 9.6 shows that the downtrend in agents commissions in general insurance stopped in 2000, after a decrease of NIS 75 million (3.7 percent) in , and that the rate of commissions in premiums collected also leveled off. In life insurance, in contrast, the increase observed in continued, especially in the rate of commissions, which rose by about 1 percentage point, in contrast to the commission rate in general insurance, which was flat at 14.5 percent on average. 17

18 Life Insurance Table 9.7 Commissions and Premiums in Life Insurance, (1) (NIS millions, adjusted to December 2000) Change Change Change Sum Pct. Sum Pct. Sum Pct. Premiums Lump-sum % % % Annual (new) 1, , , % % % Annual (other) 9, , , % % 1, % Total 11, , , % % 1, % Commissions Lump-sum % % % Annual (new) , % % % Annual (other) 1, , , % % % Total 1, , , % % % Commission/ premium ratio (pct.) Lump-sum Annual (new) Annual (other) Total Source: regular annual reports from insurance companies.source: regular annual reports from insurance companies. (1) The data were culled from annual financial reports presented by insurance companies to the Commissioner of Insurance. 18

19 Table 9.7 shows that the increase in premiums and commissions in life insurance, including the share of commissions in premiums, continued in Agents commissions rose by 9.7 percent in and by 15 percent in , for a real increase of 5.3 percent. During these years, the nonrecurrent premium paid for new transactions increased by 23.4 percent while commissions paid on account of them declined by 26.4 percent. In premiums, in contrast, no significant volatility was observed. Explanations for the increases in premiums and in commissions paid on account of them may be rooted in the real 27 percent increase in the market share of preferred -type executiveinsurance plans. Such policies accounted for 61 percent of the total increase in life insurance during these years. The increase in the market share of preferred policies stems from provisions in the Economic Arrangements Bill for 2000 that allowed insurance companies to begin selling lump-sum preferred policies, since preferred policies given insureds a broader range of options and greater flexibility than endowment-type executive plans. Additional explanations may have to do with changes in life-insurance plans during 2000 and an increase in redemptions. This points to the possibility of an artificial business cycle in this type of insurance, which affected the level of agents commissions. 9 The terms preferred and lump-sum are explained in Chapter 3 of this report Life Insurance. 19

20 Table 9.8 Commission/Premium Ratios in Life Insurance, (NIS millions, adjusted to December 2000) Premiums Com- Commis Premiums Com- Commis Premiums Com- Commis missions sions/ missions sions/ missions sions/ premiums premiums premiums (pct.) (pct.) (pct.) Clal group 2, , , Migdal group 3, , , Phoenix group 1, , , Harel group 1, , , Menorah group 1, , , Zion * * * * Ayalon Eliahu ILDC Direct insurers Total 10, , , , , , Source: consolidated financial statements of insurance companies. 20

21 Table 9.9 Market Shares of Insurance Companies in Commission Payments and Premiums, Life Insurance, (Percent) Proportion of total Premiums Com- Premiums Com- Premiums Commissions missions missions missions Clal group Migdal group Phoenix group Harel group (1) Menorah group Zion Ayalon Eliahu(4) ILDC Direct insurers (2) Total Sources: for groups consolidated financial statements of insurance companies; for other companies regular annual reportsnotes to Tables 9.8 and 9.9: (1) The Harel group acquired Zion, Ltd., in Therefore, the 1999 output is recorded under that of the Harel group. (2) The term direct insurers refers to two companies: IDI Direct Insurance and A.I.G. (3) The groups data were culled from the consolidated financial statements of the insurance companies. Thus, the figures in this report are different from those cited in the Insurance Agents chapter of the 1999 repot of the Commissioner of the Capital Market, Insurance, and Savings. (4) In these tables only, the record of premiums and commissions for Eliahu, Ltd., is in net terms. Therefore, the commission/premium ratio is much smaller for Eliahu than for the other companies in 1998 and

22 Table 9.8 allows us to adduce the following: 1. In 2000, Migdal Insurance Co. raised its commission rate by 1.5 percentage points relative to 1999, in contrast to the steady downtrend in The commission rate of the Clal group rose steeply (by 1.7 percentage points) relative to This is consistent with upturns in commissions and premiums. 3. The data in Paragraphs 1 and 2 shed light on the opposite trend in , in which the commission rate may have risen, by and large, at the small companies only. 4. ILDC Insurance s commission rate increased steeply (by 42.9 percent in 2000 vs and by 91.5 percent between 1998 and 2000), after a gentler increase (35.7 percent) in This also explains the increase in ILDC s share in total industry commissions to 5.2 percent (see Table 9.9), evidently due to growth of the ILDC insurance portfolio for reasons including the acquisition and formation of several insurance agencies (corporate agents) during the year. 5. Like the data on commission rates in general insurance, Menorah had one of the highest commission rates in the market and was joined in this respect by Ayalon and ILDC. 6. The large companies (the Clal, Migdal, Phoenix, and Harel groups) paid out 16.7 percent in commissions on average in 2000, as against 16.4 percent in The average for the three smallest companies in the market (Ayalon, Eliahu, and ILDC) was 26.9 percent (7.9 percentage points higher than in 1998, due to the upturn in the commission rate of ILDC). 10 As Table 9.9 shows, Migdal maintained its leadership in share of industry-wide commission payments in 2000 (with an increase of 1.2 percentage points relative to 1999). The share of the Phoenix group in total industry commissions paid to agents declined by 2.2 percentage points in and this group s share in industry premiums rose by 1.5 percentage point. Concurrently, the share in commissions of the Clal group and, more emphatically, of ILDC increased while neither company s absolute level of premiums changed substantially. The other companies showed no significant change. 10 The relevant data for appear in the Insurance Agents chapter of the 1999 Report of the Commissioner of the Capital Market, Insurance, and Savings. 22

23 General Insurance Table 9.10 Commissions and Premiums in General Insurance, by Insurance Lines, (NIS millions, adjusted to December 2000) Premiums Commissions Premium/ Premiums Commissions Premium/ Premiums Commissions Premium/ commission commission commission ratio ratio ratio Insurance line (pct.) (pct.) (pct.) Property loss Homeowner s comprehensive Business comprehensive Compulsory auto 3, , , Property auto 4, , , Employer s liability Other liability Personal accidents Illness and hospitalization , Aircraft and marine vessels Cargo in transit Engineering insurance Credit insurance Other risks Business originating abroad Total business 13, , , , , , Data excl. direct insurers Compulsory auto 3, , , Property auto 4, , , Homeowner s comprehensive Source: regular annual reports of insurance companies. 23

24 Table 9.11 Rates of Change in Data in Table 9.10 (NIS millions, adjusted to December 2000) Premiums Commissions Premium/ Premiums Commissions Premium/ Premiums Commissions Premium/ commission commission commission ratio ratio ratio Insurance line (pct.) (pct.) (pct.) Property loss Homeowner s comprehensive Business comprehensive Compulsory auto Property auto Employer s liability Other liability Personal accidents Illness and hospitalization Aircraft and marine vessels Cargo in transit Engineering insurance Credit insurance Other risks Business originating abroad Total business Data excl. direct insurers Compulsory auto Property auto Homeowner s comprehensive Source: regular annual reports of insurance companies.notes to Tables 9.10 and 9.11: (1) The 1998 data are different from the corresponding data in Table 9.4 because the figures were reclassified for those years. (2) The data were culled from the insurance companies annual reports to the Commissioner of Insurance. Since general insurance is divided into many insurance lines, this chapter discusses the main 24

25 lines comprehensive homeowners insurance, property motor-vehicle insurance, health insurance (personal accidents, illness, and hospitalization), and compulsory motor-vehicle insurance which accounted for 75 percent of total commissions paid out in Note: to analyze changes in the rates of commissions in compulsory motor-vehicle, property motor-vehicle, and comprehensive homeowners insurance, we use data from the data excl. direct insurers lines of the table in order to eliminate these companies data from those of the market at large. Agents commissions in comprehensive homeowners insurance increased by NIS 47.9 million in 2000 versus 1999 after having declined by NIS 19.1 million in The share of commissions in total premiums collected rose by 3.6 percentage points relative to Premiums collected increased in 2000 after having declined in The increases may have occurred because quite a few transactions were concluded by means of mortgage banks, which receive commissions that verge on 50 percent and insure buildings only and not building contents. Recently, heightened public awareness of this type of insurance has lured new players into this field. The nature of the sale requires investments and the use of new intermediaries, and this was reflected in an increase in the commission rate in addition to the effect of lower premiums on the aforementioned ratio. The slender margins on which the banks operate abetted the entry of these new intermediaries. In property motor-vehicle insurance, the downtrend observed in continued and the commission rate did not change significantly. This volatility is attributable to several factors that affect the data in different ways: 1. Growth of the motor-vehicle fleet when there are more cars, obviously more insurance of this type is written, resulting in more premiums collected and more commissions paid on account of them. 2. Rate of thefts an increase in car thefts causes insurance premiums to rise. In 1999, motor vehicle thefts countrywide declined by 20 percent, and the downturn was translated partly into a decrease in premiums. 3. Competition the more competition there is, the lower the premiums are. The upturn in competition that occurred when direct-insurance companies joined the industry resulted in a lower level of prices. This is because competition in the industry prompts insureds to press their agents for better prices; the agents, in turn, waive part of the sum that the insured owes so that the insured remains with the company with which the agent works. The sum waived is made up of part of the agent s commission. 4. The mechanisms used in setting insurance rates have become much more efficient in 25

26 recent years and include more indicators for determining the level of premiums (e.g., age of the driver who drives the insured vehicle, extent of driver s involvement in accidents in the five years before the insurance policy is written, and number of traffic offenses that the driver committed during those years). More precise underwriting under changing market conditions abets a larger average decrease in premiums due to competition in the industry. These indicators, as stated, make the data on premiums and commissions volatile in different ways, and their effect on this volatility determines the extent of the volatility. In compulsory motor-vehicle insurance, commissions paid to agents remained stable and the commission rates did not change significantly. Notably, the reform in compulsory motor-vehicle insurance, which the Commission of Insurance decided to implement in 2000, will not be applied until in April 2001; therefore, its effects are not yet evident. In health insurance (personal accidents, illness, and hospitalization), the increase in commissions paid out in continued in 2000 in respect to illness and hospitalization, but the rates of commissions did not change significantly. Several factors explain these fluctuations and changes: 1. The public is increasingly aware of the supplemental illness and hospitalization insurance plans that insurance companies offer and of alternative types of insurance that are sold by public health-care providers. 2. The introduction of national health insurance made supplemental insurance more necessary. 26

27 Table 9.12 Changes in Companies Commission Rates, Life Insurance, (NIS millions, adjusted to December 2000) Gross Com- Commi- Gross Com- Commi- Gross Com- Commi- premiums missions sion/pre- premiums missions sion/pre- premiums missions sion/pre- mium mium mium Company or group ratio (%) ratio (%) ratio (%) Clal group 2, , , Migdal group 1, , , Phoenix group 2, , , Harel group) 1, , , Menorah group Ayalon Eliahu Agricultural Insurance ILDC Direct insurers Zion (1) * * * * Ilit (2) ** ** ** ** Avner 1, , ,221.0 Karnit Other Total 13,423 1, ,321 1, ,393 1, Total excl. direct insurers 13,009 1, ,820 1, ,836 1, Source: consolidated financial statements of insurance companies. 27

28 Table 9.13 Share of Insurance Companies in General-Insurance Commissions and Premiums, (Percent) Proportion of total Premiums Com- Premiums Com- Premiums Commissions missions missions missions Clal group Migdal group Phoenix group Harel group Menorah group Ayalon Eliahu Agricultural Insurance ILDC Direct insurers Zion(1) * * * * Ilit(2) ** ** ** ** Avner Karnit Other Total Source: consolidated financial statements of insurance companies. Notes to Tables 9.12 and 9.13: (1) In 1999, Zion, Ltd., was acquired by the Harel group; therefore, the data for Zion in 1999 and 2000 are incorporated into those of the Harel group. (2) In 1999, Ilit, Ltd., was acquired by the Clal group; therefore, the data for Ilit in 1999 and 2000 are incorporated into those of the Clal group. (3) The groups data were culled from the consolidated financial statements of the insurance companies. Thus, the figures in this report are different from those cited in the Insurance Agents chapter of the 1999 repot of the Commissioner of the Capital Market, Insurance, and Savings. 28

29 Table 9.12 shows that there is reason to distinguish between the large companies (the Clal, Migdal, Phoenix, and Harel groups) and the small companies (Ayalon, Eliahu, and ILDC). The large companies paid an average commission rate of 17.6 percent during these years; the small companies paid 14.7 percent. Furthermore, in 2000, as in , Menorah had the highest commission rate among the companies (21.9 percent, 0.4 percentage point greater than in 1999) because this group sells mainly individual insurance, in which commission at point of sale are higher than in group-insurance plans. It is noteworthy that ILDC s commission rate declined in by a steep 2.3 percentage points (notwithstanding an NIS 7.9 million increase in total commissions paid to agents in 2000 as against 1999). This figure is interesting in view of the rapid increase in ILDC s commission payments and commission rate in life insurance. As for the companies share total commission payments (Table 9.13), the shares of the large companies were unchanged or declined slightly whereas the smaller companies share rose. Notably, the proportion of commissions of the Clal group in total commissions paid out by the industry increased in by 2.7 percentage points due to the acquisition of Ilit Insurance Co. in The Harel group reported an increase of 5.4 percentage points in , but this was evidently due to the acquisition of Zion, Ltd., in The share of the Phoenix group in total commissions paid declined by 2.3 percentage points relative to 1999 and this group s share in total premiums collected fell by 2.7 percentage points. No significant change occurred at the other companies. Acquisition or Formation of an Corporate Agent by an Insurance Company In recent years, there has been a trend of acquisitions or formation of insurance agencies by insurance companies. Not long ago, agents and insurance companies interrelated in two ways: (1) Some agents worked as employees of insurance companies. (2) Other agents marketed products of insurance companies and were paid on a commission basis. The new trend has developed because insurance companies wish to market to clients on their own, especially in respect to life insurance. The relationship between insurance companies and their clients is indirect, i.e., mediated by insurance agents. By acquiring or establishing insurance agencies, insurance companies create a direct relationship with their clients. This behavior has led to concern about the possibility that the insurance companies will concentrate too much of the industry in their hands. The Commissioner of Insurance gave thought to this in references to these mergers and acquisitions. During the past year, there has also been a spate of mergers among insurance agencies a development hardly known in the past. In view of rising competition in the market and the need to cut costs, this trend will probably gather momentum in the years to come. 29

30 The following mergers were recorded in 2000: 1. Mivtah Shamir Insurance agencies (1998), Ltd., with Binyan Agencies, Ltd. 2. Mivtah Shamir Insurance agencies (1998), Ltd., with Simon and Wiesel Insurance Agencies, Ltd. 3. Betah, Ltd., with Elidov Insurance Agencies, Ltd. 4. ILDC Agency Holdings, Ltd., with Doron Pinhas ILDC Agency Holdings, Ltd., with Sarfati Insurance Agency (1995), Ltd. 6. ILDC Agency Holdings, Ltd., with Canaan Insurance Agency, Ltd. The Commissioner of Insurance approves such mergers on the basis of legal and economic criteria. According to the Antitrust Law, corporate mergers should be opposed or subjected to conditions if there is reasonable concern that, as a result of the proposed merger, competition in the industry will be impaired significantly or the public will be adversely affected in one of the following respects: 1. the price level of a good or service; the quality of a good or service; 3. the quantity provided of a good or the quality of a service, or the regularity and terms of delivery thereof. The basic purpose of the law is to assure unhindered economic activity and to protect the public from economic distortions that originate in overconcentration in specific markets. The underlying value in the law is competition that will assure efficacy and maximum efficiency in resource allocation. Therefore, an examination is needed in order to determine whether the merger will significantly impair competition in the industry of intermediation in life and elementary insurance. As part of the inquiry, other insurance companies holdings in insurance agencies are examined. Several the tests are used to measure the significance of the harm caused: Pursuant to this merger, an corporate agent called Doron Insurance Giant Insurance Agency, Ltd., was formed. 12 Paragraph 1 of the law defines a good as including chattels, real estate, and rights; the acquisition of an insurance agency apparently meets this definition. 13 The binding phrasing is that set forth in Civil Appeal 2247/95, Commissioner of Antitrust v. Tnuva, Supreme Court Rulings 55,

31 1. The concentration test this test looks into the extent of concentration of control in the industry by one producer or marketer or by several, as against dispersion of control among a relatively large number of rivals, none of which is so dominant as to functioning as a monopoly. In this issue, two questions come up: (1) the extent of control and concentration (market share) of a given insurance company in writing life and elementary insurance policies in Israel. (2) the extent of said company s concentration in and control of insurance agencies in Israel. The test is performed both for vertical merger (examining the effect of the merger on the company s control of the insurance industry) and for horizontal merger (examining the effect of the merger of competing companies on the level of competition in the insurance industry). 2. The entrance-barrier test this test asks whether control and concentration are preventing or inhibiting potential rivals from entering the relevant industry. This test is also meant to balance and moderate monopolistic behavior on the part of firms already in the market and to bring the price of the product back to the competitive equilibrium. These barriers usually occur due to objective difficulties or hardships that originate in monopolistic behavior by firms in the market. For example, a company that holds a monopoly in the sale of a given product will inform companies that use its product to manufacture another product that it will stop selling them product if they buy it from a new competitor that offers it at a lower price than that demanded by the monopoly but in smaller quantities than those sold by the company that has held the monopoly until that time. An insurance company may threaten to withhold its products from new insurance agencies if they also market the products of another insurance company or may lower the price of the product in the market by an extent that will make it unprofitable for new players to enter the insurance market. In view of all this, a joint team of the Antitrust Authority and the Commissioner of Insurance is reexamining the Division s policy on these issues. Training of Agents The Control Law and its attendant regulations do not set threshold conditions for the formal schooling of prospective insurance agents. Would-be agents do not need to have completed a minimum number of years of schooling, let alone a matriculation certificate. This state of affairs is unacceptable in view of the complexity of insurance products. Consequently, and in consideration of the recommendations of the Spivak Committee, the Commissioner of Insurance is developing a program in which persons who wish to become insurance brokers will be 31

32 required, among other things, to undergo a period of study that will equip them with the knowledge they will need to meet the requirements of the field adequately. The program is meant to make sure that future insurance agents will have appropriate schooling that will prepare them to tailor insurance plans to their clients optimally. Licensing Regulations Licensing procedures are procedures for the bestowal of an intern, agent, or corporation license. Some licensing procedures are stipulated explicitly in primary and secondary legislation, but others are interpretations of the provisions of the law or attempts to achieve the purposes of the law. A government authority must operate according to clear, fixed, recognized, and egalitarian procedures. Otherwise, there will be uncertainty and vagueness in its area of responsibility. It is vital to have clear and known procedures for the licensing of insurance agents. Notably, the procedures are revised periodically to make them more efficient and to adapt them to changes in legislation and the insurance market. The procedures are presented in the appendices to this chapter. 32