GENERAL INSURANCE. Annual Report 2000

Transcription

1 GENERAL INSURANCE Annual Report 2000 D

2 CONTENTS Introduction Analysis of Business Results in Property Motor-Vehicle and Comprehensive Homeowners Insurance The Compulsory Motor-Vehicle Insurance Reform A. Memorandum of Understanding between the Ministry of Finance and the Insurance Companies B. Amendment to the Motor-Vehicle Insurance Law C. April 2001 Rates D. Regulation of Compulsory Motor-Vehicle Insurance Rates through January E. Crossover Order Health Insurance A. Introduction B. Analysis of Illness and Hospitalization Insurance Business Results C. New Types of Health-Insurance Plans D. Dental Insurance E. Purchase of Private Health Insurance F. Group Health Insurance Appendices Appendix 4.1 Memorandum of Understanding, November 13, Appendix 4.2 Aids to the Consumer in Buying Health Insurance Appendix 4.3 Shopping for Health Insurance: Comparison of Plans Appendix 4.4 Shopping for Nursing-Care Insurance: Comparison of Plans Tables Table 4.1 Distribution of Insurance Premiums, by Insurance Lines Table 4.2 Risk Rates in Compulsory Motor-Vehicle Insurance, April

3 Figures Figure 4.1 Distribution of General Insurance Premiums, by Insurance Lines, Figure 4.2 Annual Earnings in Property Motor-Vehicle Insurance, Figure 4.3 Total Premiums in Property Motor-Vehicle Insurance, Figure 4.4 National Automobile Fleet, Figure 4.5 Motor-Vehicle Thefts, Figure 4.6 Annual Earnings in Comprehensive Homeowners Insurance, Figure 4.7 Total Premiums in Comprehensive Homeowners Insurance, Figure 4.8 Loss Ratios in Property Motor-Vehicle and Comprehensive Homeowners Figure 4.8 Insurance, Figure 4.9 Business Results in Illness and Hospitalization Insurance, Figure 4.10 Market Shares in Illness and Hospitalization Insurance,

4 INTRODUCTION The General Insurance Department phrases policy and applies regulation and ongoing supervision in all lines of insurance except for life insurance, and its goal is to ensure a proper market structure based on fair competition. General-insurance lines include property insurance, compulsory and comprehensive motor-vehicle insurance, liability insurance, financial insurance (credit, sales guarantees, etc.), and health insurance (illness and hospitalization, individual accidents) Total premiums collected in 2000 were NIS 13.5 billion, All sums in this chapter are adjusted to December 2000 prices. of which motor-vehicle insurance accounted for approximately 60 percent. As Figure 4.1 shows, between 1997 and 2000 there was a an average annual decline of 0.7 percent in insurance premiums collected in general insurance, with most of the decline in premiums, 1.5 percent, between 1997 and Between 1998 and 2000, the annual decrease was 0.3 percent. 1 All sums in this chapter are adjusted to December 2000 prices. 4

5 Table 4-1 Distribution of General Insurance Premiums, by Insurance Lines (Percent) Type of insurance / Year change General Insurance Premiums (pcg.) Business property loss\and comprehensive 1,413,878 1,214,319 1,100,374 1,092, Comprehensive homeowners 966, , , , Compulsory motor-vehicle 3,575,149 3,770,831 3,697,825 3,759, Property motor vehicle 4,830,772 4,678,734 4,543,498 4,380, Employers liability 293, , , , Other liability lines 882, , , , Individual accident 242, , , , Illness and hospitalization 699, , ,450 1,005, Aircraft and marine vessels 34,073 27,094 27,037 26, Cargo in transit 151, , , , Engineering insurance 274, , , , Credit insurance 89,805 98, ,772 68, Other risks 367, , , , Business originating abroad 2,816 1,189 1, Total 13,823,275 13,616,519 13,579,769 13,540, Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division 5

6 1. Analysis of Business Results in Property Motor-Vehicle and Comprehensive Homeowners Insurance Property Motor-Vehicle Insurance Property motor-vehicle insurance covers property damage sustained by the insured s motor vehicle or property damage caused by the insured to a third party. The profitability of property motor-vehicle insurance increased between 1997 and 2000 (Figure 4.2), despite an average annual decline of 3 percent in premiums (Figure 4.3). Several factors affected premiums and profitability in property motor-vehicle insurance in different ways. Competitiveness in the industry motivates insurance companies to lower insurance rates. However, the growth of the national automobile fleet (Figure 4.4) may contribute to an increase in insurance premiums collected by the industry, while the decrease in vehicle thefts (Figure 4.5) reduces the payout of insurance proceeds and, consequently, helps to lower premiums. As the following figures show, earnings from this form of insurance business rose between 1997 and 2000 even as premiums collected decreased. Concurrently, the vehicle fleet expanded by 13 percent, from 1.62 million vehicles in 1997 to 1.83 million in 2000, and thefts declined by 37 percent, from 46,018 vehicles per annum to 29,038 per annum, respectively. 6

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8 Comprehensive Homeowners Insurance Comprehensive homeowners insurance covers buildings and their contents against damages such as those caused by fire, theft, water, and earthquake. Insurance taken out by means of the mortgage banks, as a security that the banks require against the loan, accounts for a large proportion of homeowners insurance. Earnings slipped from NIS 221 million to NIS 146 million (34 percent) in 1998 but have been stable since then. 8

9 Loss Ratio in Property Motor-Vehicle and Homeowners Comprehensive Insurance The loss ratio is the ratio of claims (claims paid during the year plus changes in pending claims) to net premiums earned (total premiums plus changes in the residual risk reserve). Figure 4.8 shows that the ratio is 76 percent on average in property motor-vehicle insurance and 41 percent in homeowners comprehensive insurance. The ratio in property motor-vehicle insurance corresponds to international norms, but the ratio in homeowners comprehensive insurance is much lower than that standard. This is an indication of market inefficiency, caused mainly by the way mortgage banks sell this insurance as a side-product in the issuance of housing loans. The Capital Market, Insurance, and Savings Division is working on regulations that will increase competition in this insurance line. 9

10 2. The Compulsory Motor-Vehicle Insurance Reform 2 In July 1997, the Motor-Vehicle Insurance (Insurance under Conditions of Managed Competition, Transitional Arrangements, and Directives regarding Avner) Law, 1997 (hereinafter: the Managed Competition Law), opened the compulsory motor-vehicle insurance industry to competition. At the core of the model is the transfer of full insurance responsibility (risks in the industry alongside the likelihood of earnings) from the public to the insurance companies. The existing premium-adjustment mechanism foists all risk on the insured at large, whereas after the industry is opened up to competition, the insurance companies will themselves be responsible for setting premiums on the basis of statistical information, under the supervision of the Commissioner of Insurance. This managed competition will be reflected foremost in the abolishment of the standard rate and competition for customers business in the compulsory motor-vehicle insurance market. The premium will be determined in accordance to a series of explanatory parameters that will more accurately reflect the insurance risk of each insured. Main Objectives of the Reform 1. To establish a competitive structure in compulsory motor-vehicle insurance in order to enhance economic efficiency and reduce insurance premiums. 2. To encourage careful driving by using parameters that reflect insurance risk in order to set insurance premiums and prevent subsidization, so that all insureds pay their own risk premiums. A. Memorandum of Understanding between the Ministry of Finance and the Insurance Companies In view of apprehensions expressed in the Knesset about claims by insurers and other parties regarding the industry s readiness to implement the provisions of the law in full, the Ministry of Finance and representatives of the insurers reached an agreement concerning phased implementation of the Managed Competition Law. A Memorandum of Understanding between representatives of the Commissioner of Insurance and representatives of the insurance companies was drafted (see Appendix 4.1) and was approved under the signatures of all insurance companies that offer compulsory motor-vehicle insurance. The Memorandum of Understanding was based on the following principles: 1. On April 1, 2001, the first stage of the reform will begin with the repeal of Paragraph 17 of the Compensation for Traffic Accident Casualties Law, 1975, and the provisions of the Erlich letter will lapse. As of that date, the standard rate set by the Minister of Finance will no longer be in effect and insurers will be allowed to set rates within 10 percent of the average rate that is determined on the basis of data in the database. Thus, as of that date, the insurers will assume full responsibility for insurance rates and will have no mechanism to 10

11 compensate them for loss. From September 2000 on, the companies sold at a loss in order to reimburse the public for excess profits. Henceforth, it will also be necessary to adjust the rate so as to reflect the average risk in the industry, as based on the recommendations of the database operator, while ceasing to absorb past earnings On January 1, 2003, the reform will be implemented in full and the compulsory motorvehicle insurance industry will be open to managed competition. Insurers will bear the full insurance risk and premiums will be set in accordance with a series of explanatory parameters that will reflect the insurance risk of each insured. 3. The division of responsibility between the insurance companies and Avner, to be applied as part of a coinsurance arrangement, is set at 70 percent for insurers and 30 percent for Avner in 2001 and 80 percent vs. 20 percent, respectively, in On January 1, 2003, the coinsurance arrangement with Avner will come to an end and every insurer will bear the full insurance risk on the policies it issues. On that day, Avner will cease functioning as a coinsurer and its only function will be to settle run-off claims on policies that were issued to that time. 4. Avner s outstanding liabilities or surplus assets will be transferred to Karnit, which will assume said liabilities or assets as if it were Avner. This entails solvency and regulatory mechanisms to ensure appropriate, sound management of the process of settling claims while preserving Avner s assets for the public good. These mechanisms include the appointment of a supervisory accountant for Avner, who will supervise the company s income and expenditures starting in January 2001, the appointment of most members of the board of directors by the Ministry of Finance during 2001, and the appointment of a special manager who will have the authority of an authorized manager as stipulated in the Regulation of Insurance Transactions Law, This will take place in January B. Amendment to the Motor-Vehicle Insurance Law Pursuant to the Memorandum of Understanding between the Ministry of Finance and the insurers, the Motor-Vehicle Insurance (Insurance under Conditions of Managed Competition and Transitional Arrangements) Law (Amendment 2), 2000, was passed in December Its purpose is to apply the understandings reached between the Ministry of Finance and the insurers. 2 For full details about the need for reform in compulsory motor-vehicle insurance, the structure of this insurance line, the meaning of Paragraph 17, Erlich letter, the absorption of past profits, and transactions carried out during the transfer period, see the Report of the Commissioner of the Capital Market for 1999, <htto:// 11

12 C. April 2001 Rates In February 2001, in the wake of the aforementioned understandings and legislation, the Minister of Finance issued the Regulation of Insurance Transactions (Insurance Premiums that Insurer May Charge Motor-Vehicle Insureds) Regulations, 2001 (hereinafter: the Regulations). The Regulations amended the previous regulations in the following ways: 1. By changing the method of setting rates and transferring responsibility for this action to the insurance companies in the course of which the former losses-and profits-mechanism was abolished it became necessary to set a rate that reflects the average risk in the industry. The change was reflected in a 4.5 percent overall increase in the rate, due to the cessation of absorption of past profits starting on September 1, 2002, and termination of the mechanism of compensation for past losses, should there be any. 2. The transfer of responsibility for setting rates to the insurers, as well as the principles of reform in the industry, made it necessary to set rates that reflect, as far as possible, the risk for each type of vehicle. Since the rates applied until April 2001 did not reflect variable risk components deriving from the particular vehicle insured, high-risk vehicles were subsidized by lower-risk vehicles. The rates set forth in the regulations reflect a gradual changeover to rational rates that reflect the risk. This was in accordance with the recommendations of the database operator, which were based, among other things, on the report by the actuaries Coutts and Gath. For example, a standard rate was set for private vehicles, irrespective of engine displacement (a factor that had previously been taken into account), and the rates for commercial vehicles, buses, and taxis were adjusted as warranted. The rates for motorcycles take into account crossover agreements that took effect on April 1, 2001, between motor cycles and all other vehicles. These agreements reflect the appreciable differences between motorcycles and all other vehicles in terms of damage caused. The main changes in the risk rates, as shown in Table 4.2, were the following: standardization of rate for all private vehicles regardless of engine displacement, raising the effective rate for motorcycles by 37 percent, and reducing the rate for private buses (up to twenty passengers) and minibuses by 49 percent. 3. The maximum rate of management fees, including agents commission, profit, and so forth that an insurer may charge was raised from percent to 13.5 percent (since the Karnit component was removed from the insurance premium, the increase is percent). 3 For details, see the 1999 Report. 12

13 4. The standard rate was abolished; each insurance company may set rates within a 10 percent range below or above the average benchmark rate stipulated in the Regulations. Finally, the Regulations enshrined the arrangement between the Commissioner of Insurance and the insurers that had been in effect since According to the arrangement, the insurers transfer to Avner an amount equivalent to percent of net premiums to cover Avner s expenses. D. Regulation of Compulsory Motor-Vehicle Insurance Rates through January 2003 As stated, the Regulations set an average risk rate for each type of vehicle, from which each insurance company may deviate by up to 10 percent in either direction, based on parameters that the company chooses from a closed internal list. In February 2001, the Commissioner of Insurance issue a circular entitled Procedure for Submitting Rates for Approval in the Compulsory Motor-Vehicle Industry, which stipulates the method of regulation of the compulsory insurance rates from April 2001 to December Among other things, the circular rules that insurers may use the following variables in setting premiums: engine displacement, driver s age, number of years the driver has been licensed, use of vehicle, number of previous accidents, number of license revocations, and airbags in vehicle. The circular instructs insurance companies to submit the rates they wish to charge to the Commissioner for approval. Companies may choose parameters from the list and determine their weight on the basis of actuarial rationale, provided that the final rate for each insurer remains within a 10 percent range of the rate set in the Regulations and that one risk rate is set for all insureds who have the same characteristics. 13

14 Table 4-2 Compulsory Motoer-Vehicle Insurance Risk Rates, April 2001 (NIS) Type of vehicle Subgroupv no. of vehicles Previous rate (incl. asborption) of past New rate (without absorption of past profits Change (NIS) Change (pct.) profits Private car Up to and incl. 1,050 cc 84,566 1,302 1, Up to and incl. 1,550 cc 446,993 1,414 1, Up to and incl. 2,050 cc 616,125 1,484 1, Over 2,050 cc 60,405 1,770 1, Motor-cycles Up to and incl. 50 cc 33, , Up to and incl. 250 cc 24,993 1,749 2, Up to and incl. 500 cc 6,497 1,952 2, Over 500 cc 6,204 1,952 2, Buses Private up to and incl. 9,135 4,356 2,242-2, passengers Private, over 20 passengers 649 4,414 4, Taxis Up to 6 seats 8,703 4,254 4, Over 6 seats 2,389 6,380 7, Commercial Up to and incl. 1.6 tonnes 80,467 1,738 1, vehicles Up to and incl. 4.0 tonnes 156,793 1,834 1, Over 4.0 tonnes 31,715 3,515 3, Trains Ports and Railroads 4,830,557 4,139, , Authority passengers Ports and Railroads 1,216,260 3,255,574 2,039, Authority freight 14

15 E. Crossover Order When the Compensation for Traffic Accident Casualties Law, 1975, was first applied, and in view of the no-fault principle, the Minister of Finance implemented arrangements to divide the burden of compensation among insurers in the event of an accident involving multiple vehicles with different degrees of damage. The principle of the arrangement was that in a road accident involving a heavy vehicle and a light vehicle, the insurer of the heavy vehicle would furnish half the compensation for which the insurer of the light vehicle is liable. The Compensation for Victims of Road Accidents (Arrangements to Divide the Burden of Compensation among Insurers) Order, 2001 (hereinafter: the Crossover Order) broadened these arrangements. The Crossover Order, issued at the start of 2001, was largely based on the order previously in effect, with the addition of an arrangement for dividing the burden of compensation is the event of an accident involving a motorcycle and another vehicle. The cost of compensation to motorcyclists is NIS 380 million, as against an expected NIS 130 million in motorcycle insurance premiums. In the estimation of the database operator (as expressed in his recommendation for April 2001 rates), the implementation of the Crossover agreement for motorcycles will reduce the liability of motorcycles for compensation for roadaccident injuries by some NIS 116 million, so that after the crossover arrangements are implemented, the expected cost on account of compulsory insurance for motorcycles is projected at NIS 270 million. 15

16 3. Health Insurance A. Introduction The growth trend in the private health-insurance market, which began after the State Health Insurance Law was passed at the beginning of 1995, 4 has led to the development of a variety of new insurance products. This process is reflected in the industry s business results, which point to continued growth in total premiums from illness and hospitalization insurance. In view of the diversification of products, coupled with greater public awareness of health insurance, we describe consumer guides devised by the Commissioner of Insurance that aim to help insureds make enlightened decisions when they purchase health insurance policies. B. Illness and Hospitalization Insurance Business Results 1. The Industry in 2000: Main Indicators Activity in illness and hospitalization insurance in 2000, as reflected in the level of premiums, indicates that the growth observed in recent years (as reviewed in the 1999 Report) is continuing. Along with the diversification of products marketed in the industry, as reviewed in this chapter, gross premiums increased by 7.4 percent over premiums and came to about NIS 1 billion. Notably, growth was slower than in 1999, when premiums expanded by 18 percent. The figures also show that the scope of illness and hospitalization premiums is much greater than the growth rate in all elementary insurance lines 0.5 percent, but lower than the growth rate in life insurance 9.5 percent. Notably, illness and hospitalization insurance does not cover all activities in the field of health insurance; some activities, such as long-term care insurance, are reported under life insurance. Expenditure ratio: The expenditure ratio the ratio of total gross expenditure (agents commissions, administration, and general) to total gross premiums was 33 percent in 2000, similar to the figure for the previous year. Loss ratio: The loss ratio is the ratio of gross claims (paid claims and change in pending claims) to total gross premiums. According to the results, the loss ratio fell by more than 2 percentage points, from 65.8 percent in 1999 to 63.6 percent in This made the industry more profitable. 4 See the 1999 Report. 5 The health insurance reported for the illness and hospitalization industry does not include long-term care insurance. 6 Claims during the period divided by premiums received during the period. 16

17 Figure 4.9 shows the main components of the financial results in this type of insurance Market Shares in Illness and Hospitalization Insurance As the industry has grown in recent years, more and more companies have been active in it and their market shares have changed. 7 Between 1997 and 2000, the cumulative growth rate was 44 percent over three years (annual growth of almost 13 percent) and much of the growth was attained by companies new to the industry. Figure 4.10 shows the insurance groups market shares in Insurance companies in the industry in each group: Harel Group: Shiloah, Sahar-Zion, Dikla Phoenix Group: Phoenix, Hadar Migdal Group: Migdal, Hamagen Clal Group: Clal, Aryeh, Ilit 17

18 Figure 4.10 shows a concentrated industry, in which about half the premiums derive from one group, Harel, and the three large groups have an 81 percent market share. Notably, concentration in the industry has been falling in recent years. For example, the market share of the three largest insurance groups in the industry was 95 percent in 1997 and that of the Harel Group exceeded 60 percent. In fact, new companies in the industry and small companies enjoyed greater growth than that of the industry as a whole. The downtrend in concentration may be to the consumer s advantage in several ways, mainly greater variety of insurance plans. C. New Health-Insurance Plans One of the characteristics of the growth in the health-insurance market is the diversification of types of policies available to consumers, as the market strives to provide insurance solutions for existing and new needs of the population and to adjust types of coverage to consumers specific needs in contrast to the past, when plans were more rigid in terms of coverage 8. This chapter reviews some of the new policies that have been added over the past two years to the health market insurance as independent policies or riders, e.g., health insurance for Israelis abroad, children s insurance, and medication insurance. 8 Such as surgery, transplants, hospitalization, and long-term care. For a more comprehensive review, see the 1999 Report. 18

19 1. Insurance for Children In the past two years, there has been a clear trend of development in all aspects of insurance plans for children. Most insurance companies offer such policies today, either as standard ones standing or as riders, and provide a variety of types of coverage. The coverage compensates or indemnifies for health-insurance events such as developmental problems in childhood and problems characteristic of adolescence, hospitalization or a prolonged stay at home, disability caused by accident or the discovery of a serious illness, and psychotherapy following a death in the family. The policies cover diverse risks that are typical of certain age groups, as opposed to a particular type of risk. Some plans allow insureds to transfer, without underwriting, 9 to a health plan that the company offers at the time after they have completed military service or reached the age of Insurance for Israelis Abroad Local and global economic growth in the past decade has led to an increase in the number of Israelis, such as employees of high-tech companies, government representatives, businesspeople, and students, who spend extended periods abroad from several weeks a year to several years. Overseas health-insurance plans that provide a wider range of health service than that offered by overseas travel insurance (which mainly provides emergency medical coverage only) or standard personal insurance, and include coverage such as medical hospitalization and surgery, purchase of medication, ob-gyn care, psychological care, and more, have recently been marketed to this target population. These plans are meant as alternatives both to the basic medical coverage that many Western countries provide for their citizens only and to private health-insurance plans in those countries. The plans are intended chiefly for Israelis who live abroad on a permanent basis, and they offer limited continuity of coverage when the insureds return to Israel. These plans cost much more than private health-insurance plans in Israel, mainly because they do not rely on public health insurance that states provide for their citizens. 9 Generally speaking, an insured who wishes to join a health-insurance plan must be underwritten, an act that requires the submission of a health statement. {} 19

20 3. Medication Insurance Total household expenditure on medication in Israel is NIS 1.7 million per annum, 5.5 percent of national health expenditure. 10 The State Health Insurance Law includes a list of medicines that are covered by the basic health package. Since these medicines are stipulated, those not included, which therefore must be purchased privately without any state participation, are also defined. The insurance plans are intended to cover the purchase of medicines that are not provided by the health funds as part of the basic package or supplemental health services. Medication insurance is now offered by most insurance companies, usually as a rider in medical expense insurance plans or as an integral part of an insurance plan. D. Dental Insurance 1. Background Dental insurance covers the cost of dental care and is not included in national health insurance. Most dental insurance policies are sold in group form or as freely standing policies. The insurance period in these policies is usually three to five years; sometimes it is longer. The insured commits to a predetermined insurance period and undertakes to pay the premium for all of that time. Notably, insurance companies conclude agreements with dentists and dental clinics in regard to most policies. 2. Examination of Criteria for the Regulation of Dental Insurance A Health Ministry committee that examined criteria for the regulation of dental insurance on which a representative of the Commissioner of Insurance was a member presented its recommendations in December The committee looked into problems in the dental-insurance market and examined the performance of the policies. The crux of the committee s recommendations pertain to issues such as prevention of excessive intervention by insurers in the medical care process, exploring the possibility of allowing insureds to choose their service provider, and appropriate disclosure of details of the insurance transaction, including group policies. E. Purchase of Private Health Insurance Health-insurance plans cover impairment to the insured s health by paying for medical care in addition to that assured by national health insurance, when necessary. Israel has a multilayered system of health-care coverage the State Health Insurance Law, 11 supplemental health services 10 Central Bureau of Statistics, Statistical Abstract of Israel 2000, Table

21 that are offered by health funds (roughly akin to HMOs), and private health insurance. Additionally, private insurance plans are differentiated and are typically quite complex because they are complicated financial products that cover health risks. Usually, too, they entail greater understanding than the average consumer has. Thus, consumers who wish to buy private health insurance need assistance. The first part of this survey provides background information about Israel s health-insurance arrangements with emphasis on private coverage, and the second part stresses four phases of action that prospective purchasers of private health insurance should carry out before they go ahead with the purchase. The appendix to this chapter explains the phases in detail, including reference to specific types of coverage. Importantly, this breakdown is not meant to be a substitute for professional advice; its only purpose is to equip consumers with an additional tool that may help them. Below is an abstract of the topics covered in detail in Appendix 2.2: 1. Structure of Health Insurance in Israel Health insurance in Israel is made up of several layers that are differentiated by types of service and insurance providers (see details in the Annual Report of the Commissioner of the Capital Market for 1998): National health insurance is the basic layer a basket of services provided by the health funds under the State Health Insurance Law. According to the provisions of the law, the health services in the basket are to be delivered on the basis of medical discretion, at a reasonable level of quality, within a reasonable period of time, and at a reasonable distance from the insured s place of residence. Health funds expand the basic package of services and offer additional layers of service, such as transplants at high cost and choice of surgeon. The funds supplemental health-service plans include various forms of coverage that are limited in extent and in insurance amounts, and most services pertain to elective types of care and are implemented by service providers that have agreements with the funds. The funds are required to offer the supplemental plan to any member who wants it, irrespective of his/her state of health or economic situation. Insurance companies expand the basic package of services, offer additional layers, and provide a level of service that the basic package omits exclusively private health services, such as long-term care. The companies activity in this regard is regulated by the Regulation of 11 Which sets forth the basic health-care services to which all Israel citizens are entitled. 21

22 Insurance Transactions Law, 1981, which stresses their obligation to meet future commitments to insureds, and by the Insurance Contract Law, which regulates relations between insurers and insureds. 2. Points of Emphasis in the Process of Buying Health Insurance Below are suggested stages in the process of buying health insurance: a. Defining needs: The first step in buying private health insurance is to define the needs that the insurance is supposed to meet in respect to coverage of general medical services, such as private surgery or transplant, and to coverage of specific needs, such as medications or alternative medicine. b. Comparison of types of coverage: After the needs are defined, the consumer should examine several different programs and compare them in view of the needs defined. It is also important to check out the restrictions in the policy. c. Examination of costs: Since most individual health-insurance policies are long-term, their premiums are also spread over a lengthy period often for all of one s life. The consumer should examine the cost of the policy, including the deductible, limits of insurer s liability, etc., in consideration of his/her sources of household income. d. Comparison and purchase of the insurance, on the basis of the table in the Appendix. As stated, the Appendix describes the stages in full and discusses specific forms of coverage. F. Group Health Insurance Group insurance designed for a group of individuals who have specific features in common. One reason to conclude a collective insurance contract for a groups is to cut costs, e.g., by reducing the cost of collecting premiums and dealing with claims. In this form of insurance, the policyholder draws up the contract with the insurer and negotiates the terms of insurance for all insureds. The policyholder in a group insurance arrangement plays several roles: providing enrollment forms, collecting premiums, keeping the list of insureds up-to-date, etc. The en bloc joining of group members also affects the medical underwriting process, which is usually different from the underwriting process in individual insurance, as we explained below. Notably, 60 percent of group insurance arrangements are made by employers who conclude them in order to insure their employees. The group health insurance field has been developing in recent years. Below is a survey of types of coverage in group health insurance, based on insurance companies reports to the Commissioner of Insurance about group health-insurance policies that were issued up to the end of Notably, the data provide only a partial picture of the group insurance business because a new reporting format was used. 22

23 Underwriting When people join a group insurance plan, the extent of medical underwriting is usually held to a minimum if it takes place at all since the members of the group join en bloc and are not examined by the insurance company. Restrictions that absolve the insurer of responsibility for pre-existing medical conditions exist in 40 percent of group policies. The others carry no such restriction and individualized underwriting in group policies is very rare. Insurance Term and Insurability The insurance term in group insurance is stipulated in the agreement between the policyholder and the insurance company and is time-limited. This distinguishes between group policies and individual policies, in which the insurance term usually lasts for the lifetime of the insured, the insured does not have to meet any conditions for renewal, and the insurer cannot cancel the policy unless the insured fails to pay premiums, where the law permits this. The insurance term in group health-insurance policies (i.e., the initial period of the agreement) ranges from two years to ten years, with three to five years as the most typical range. About half of policies allow the insured to buy individual insurance from the insurance company without new underwriting in the event that he/she leaves the group, and in a few cases the insured may acquire individual insurance if the group does not renew the insurance or moves to a different insurer. Qualification Period Health insurers use an underwriting tool in addition to the stipulation concerning pre-existing medical conditions: the qualification period, during which the insured pays premiums in regular fashion but is ineligible for coverage. Any medical condition discovered during the qualification period is considered pre-existing and insurance benefits are not paid on its account. The qualification period is usually three months from the beginning of coverage, in both individual and group policies. Extemt pf Cpverage About 600 group health-insurance agreements are in effect in Israel. More than half of them include coverage for surgery in Israel and abroad and transplants and special treatment abroad, and more than one-third cover long-term care. Major medical coverage and accidental death and disability are covered in 10 percent of the agreements and dental care is covered in 35 percent of policies. Analysis of the group arrangements in terms of numbers of persons insured shows that 25 percent of members of group health-insurance plans are covered for surgery in Israel and abroad and for transplants and special treatments abroad. Most insureds are covered for long-term care. 23

24 In sum, the reports received indicate that, evidently, most group health-insurance policies are drawn up for groups of workers and cover surgery, transplants, and long-term care. The continuity of coverage, an important condition in health insurance, is limited in group policies to a period stipulated in the agreement between the policyholder and the insurance company. These plans provide no solution for cases in which the insurance runs out and the policyholder does not renew it with another insurer. The Commissioner of Insurance is looking into this problem at present time in order to devise an appropriate structural way to meet the needs of participants in group health-insurance arrangements. 24

25 GENERAL INSURANCE APPENDICES 25

26 Appendix 4.1 Memorandum of Understanding, November 13, 2000 Arrangement in Effect from January 1, 2003: 1. The insurers shall carry the full insurance risk in the industry, without coinsurance with Avner. 2. Differential rates shall be employed in accordance with rules that will be phrased after consultation with the insurance companies in professional panels that will be run by the information database operator under the rules of antitrust. The database manager shall publish benchmark rates for pure risk that are based on the results of the industry at large, including those of the pool, with detailed presentation of all components of the rate and the professional methodology used in determining it. The benchmark rates shall be determined on the basis of accepted actuarial principles. The supervisory regulations for the differential rates will go into effect on January 1, The database regulations, including the date on which the database operator will begin to receive payments, will go into effect at once (on January 1, 2001) and the date on which the insurance companies must begin forwarding data to the database shall be deferred to no later than July 1, The cost of the database shall be included in the insurers loading limit. The maximum permissible load shall be raised from 16 percent to percent per year in 2003 and shall be recalculated in accordance with actual costs in 2004 and subsequent years (on the basis of an estimate of percent). 4. The database operator s financial statements shall be forwarded to the insurers. Any decision about exercising option periods or inviting new applications for the post of database operator, as the case may be, shall be made only after consultation with the insurers. Insofar as a decision to invite new applications is made, the insurers shall be given an opportunity to express their views about improvements relative to the previous invitation. 5. A professional team under the Commissioner of Insurance, in conjunction with representatives of the insurers and the database, shall be established at once. Its purpose is recommend to the Commissioner of Insurance a method of updating the pool rate in accordance with the results of the industry and the pool. The goals of such an adjustment, among other things, are to keep the losses or the size of the pool from growing and to cope with unforeseen deviations in estimating the results of the pool. In this activity, the material function of the pool in making insurance available to the public is to be preserved. For this purpose, the team shall consider the use and integration of various complementary arrangements, including updating the pool rate, improving the correspondence between the rate and risk in the voluntary market, and introducing efficiencies in the rate structure. If the team does not complete its work by January 1, 2001, the regulations shall be enacted without an adjustment method, which shall be enacted at some subsequent time. 26

27 Avner 6. During the extra transition period, Avner will function as a coinsurer and will be entitled to provide all services that it delivers today. Concurrently, the insurers will prepare for the deactivation of Avner on January 1, 2003, in all fields at issue. 7. From January 1, 2003, Avner shall no longer engage in any activity that is not related to management of the R/O portfolio. Claims during the R/O period shall be handled in accordance with existing agreements between Avner and the companies. 8. Avner s method of R/O management, under state regulation, shall be enshrined in law. It shall be stipulated that Avner will manage the R/O process for the purpose of attaining the goals of the law and that the company s assets should suffice to cover its liabilities. 9. Avner shall be absolved of the capital requirements set forth in directives of the Commissioner of Insurance and the insurers shall be absolved of the need to make up shortfalls in Avner s insurance reserves, if any. Concurrently, the insurers (the shareholders in Avner) shall waive all entitlement to Avner s assets and any residual surpluses or rights in receivership. In the event of a surplus or shortfall as stated, the balance, as the case may be, shall be dealt with by Karnit. The provisions of Paragraph 5 of the Controlled Competition Law, concerning division of responsibility between the insurers and Avner in coinsurance, shall also be applied to payments during the R/O period, insofar as this is necessary. Since the shareholders in Avner will have waived their assets in Avner, as stated, Avner will have neither claims nor entitlements of any kind vis-a-vis its shareholders in regard to their being members of Avner. 10. To implement the provisions of this memorandum: a. From April 1, 2001, the Avner Board of Directors will be downsized and shall include only ten directors, six of whom, including the Chair, shall be appointed or replaced by the Commissioner of Insurance per approval of the Minister of Finance (hereinafter: public directors). The Commissioner shall employ directors with appropriate credentials and background. The directors will assure sound ongoing management and sound transition of the company to R/O. b. From January 1, 2001, Avner shall employ (at its expense) a supervisory accountant representing the state. Said accountant shall be empowered to supervise the corporation s income and expenditure system and, for this purpose, shall be entitled to receive any relevant information or document; to demand that the Board of Directors discuss such topics that he/she feels appropriate; and to take part in the discussions of the Board of Directors and its committees as an observer. The corporation shall make any financial undertaking larger than NIS 40,000 that is not a payment to settle a claim under the coinsurance agreement, without the accountant s approval. 27

28 c. From April 1, 2001, any agreement, arrangement, or undertaking, or any change therein, that has a material effect on the business results of Avner shall be brought to the Board of Directors for its prior approval. Approval of said material affairs, including the realization of assets, stipulation of terms of employment or resignation of workers, or changes in their terms of employment, shall require a special majority of 60 percent of members of the board, including at least four public directors. Amendment of the company statutes or of agreements in the sense of the Controlled Competition Law shall also require the approval of the Commissioner of Insurance. In any event, no dividend shall be distributed in any matter whatsoever. Without derogating from the provisions of this Subparagraph, from the day on which the insurers endorse this Memorandum of Understanding to the time the public directors mentioned in Subparagraph (a) are appointed, any matter of this nature shall be brought to the Commissioner of Insurance for prior approval. d. From January 1, 2003, a special manager acting under the auspices of the Commissioner of Insurance shall be appointed for the company, and said manager shall be authorized to act in a manner similar to an authorized manager under the Regulation Law. 11. Avner shall not be involved in running the database that was set forth in the law. Transition Period 12. During the period between January 1 and December 31, 2001 (underwriting year), the insurers shall assume 70 percent of the insurance risk in compulsory motor-vehicle activity and Avner shall assume 30 percent. 13. During the period between January 1 and December 31, 2002 (underwriting year), the insurers shall assume 80 percent of the insurance risk in compulsory motor-vehicle activity and Avner shall assume 20 percent. 14. On April 1, 2001, the Erlich Letter and Paragraph 17, in respect to the insurers share in the coinsurance, shall become invalid. Insurers will be entitled to set rates within a band of 10 percent above and 10 percent below the average rate to be stipulated, as stated, in Paragraph 15. On that day, the insurer s maximum permissible load shall be raised from percent to 13.5 percent. 15. On the data the Erlich Letter becomes invalid, as stated, the rate shall be adjusted by 0.5 percent relative to the rate preceding September 1, From then on, adjustments will be made in accordance with recommendations of the database operator, with neither a component of absorption of past profits nor one that adds past losses. Concurrently, the rate correction effective as of September 1, 2000, in respect to some insurers, shall be repealed. Until the end of the transition period, the rate shall be adjusted in a manner that will reflect the average risk in the industry, in accordance with the database operator s recommendations, within a structure similar to that the existing rate. 28

29 Further Actions 16. The Commissioner of Insurance shall take action, in conjunction with the insurers, for progress in the following matters: a. obtaining access to main relevant databases, such as the database of traffic offenses and the database of drivers licenses, to facilitate the underwriting process; b. contending with insurance fraud, including by means of the database operator; for this purpose, the database operator s power to obtain relevant personal information shall be broadened; c. efficient reckoning with and auditing of service providers, including implementation by hiring outside auditors who will act in the service of insurers who wish this to be done; d. The foregoing will comply with the provisions of any law and will take place after coordination with the relevant players. 17. Avner shall forward all historical information in its position to the database operator. General Remarks 18. A joint team, including representatives of the insurers and of the Commissioner of Insurance, shall be established to monitor the implementation of the reform. Matters of interest and recommendations shall be presented to the Commissioner of Insurance. 19. After all relevant players signal their approval, the agreements shall be enshrined in legal arrangements, each in the manner best suited to it. The insurers, as shareholders in Avner, undertake to act toward the implementation by Avner of the provisions of this Memorandum. The binding version of the Memorandum is the Hebrew one. 29

30 Appendix 4.2 Aids to the Consumer in Buying Health Insurance Background 1. Health Insurance in Israel Health insurance in Israel is composed of several layers, divided on the basis of service providers and insurers (as surveyed in the Report of the Commissioner of the Capital Market for 1998). National health insurance furnishes the basic layer of health insurance, a basket of services delivered by health funds under the State Health Insurance Law. Health funds broaden the basic package of services and offer additional layers of service, such as transplants at high cost and choice of surgeon. Insurance companies expand the basic package of services, offer additional layers, and provide a level of service that the basic package omits exclusively private health services such as longterm care. The basic layer the health services included in the basket is delivered by health funds in accordance with the State Health Insurance Law on the basis of medical discretion, at a reasonable level of quality, within a reasonable period of time, and at a reasonable distance from the insured s place of residence. Any citizen who wishes to obtain extra services, such as personal choice of surgeon, greater availability and convenience of service, and full coverage of expenses for treatments in Israel and abroad, has to purchase them separately by buying supplemental insurance a layer on top of the basket that health funds and insurance companies offer at an extra charge. Supplemental health services by health funds the funds supplemental programs include a variety of coverages that are limited in extent and in benefit levels. Most services of these kinds pertain to elective types of care and are implemented by service providers that have agreements with the funds. The funds must offer the supplemental plan to any member who wants it, irrespective of his/her state of health or economic situation. Private insurance by means of insurance companies this activity is regulated by the Regulation of Insurance Transactions Law, 1981, which stresses the insurers obligation to meet future commitments to insureds, and by the Insurance Contract Law, which regulates relations between insurers and insureds. A characteristic feature of private health insurance is the need for underwriting, in which the insurance company examines risky characteristics of the potential 12 The binding version of the Memorandum is the Hebrew one. 30