Capital Market, Insurance and Savings Division Annual Report 2002
Preface
Preface Preface Like its predecessors, the 7th Annual Report of the Capital Market, Insurance and Savings Division reviews the diverse activities of the Division and its departments. The main effort of the Division in the area of pensions concentrated on a plan for saving the older pension funds running a deficit. Following the Government s decision of March 1995, and facing a heavy NIS 130 billion actuarial deficit (at a capitalization interest rate of 3.55%) presented by the old pension funds, the Ministry of Finance formulated, as part of the general recovery plan for Israel s economy, a plan to salvage the deficient pension funds in order to safeguard continued pension payments for current and future retirees. The salvation plan set principles for members participation in deficit financing. Based on an averages computing method, an egalitarian and uniform entitlement system was determined for all members. Government aid of about NIS 73 billion and a safety net of up to NIS 15 billion were provided. Special administrators were appointed for the funds, and it was decided that the retirement age would rise gradually over the years and that changes would be made in the investment policy. During the year, Commissioner s circulars emphasized expanded protection of pension funds members rights and obligations. Provisions that enabled subrogation of members accrued funds between new pension funds were set, as well as provisions to follow up on disability pension beneficiaries, and agreements to prohibit extra benefits not based on fund rules were signed, in order to minimize damage to the general members community due to extra benefits awarded to specific member groups in these funds. In 2002, reform of the compulsory motor-vehicle insurance was continued. A draft recommendation of updated rates was published (including recommendation for additional average rate reduction), and a Road Accident Casualties decree (fund financing) was set, regulating the transfer of funds that the insurance companies collect for Karnit. In January 2003, a special administrator for Avner corporation was appointed and Avner stopped issuing policies as co-insurer. Due to the importance that the Division attributes to dealing with insurance fraud and to the establishment of a central information-bank, numerous activities for the promotion of these issues were initiated, including the demonstration of a US operational system in front of relevant local authorities. µ
The Capital Market, Insurance and Savings Division During the year, the continuity of guest workers health insurance was regulated through new rules applicable to all policies sold since January 2002. The downtrend in primary and secondary market prices continued throughout 2002. In the primary market, securities and convertibles issuing slowed down (capital raising was the lowest in the last six years, and was NIS 5.7 billion compared with NIS 5.9 billion in 2001), and the low trade volume trend (including daily average trade volumes) strengthened in the secondary market. In the Tel-Aviv Stock Exchange, only one company was issued, and another seven companies were listed within the framework of dual-listing. In the primary corporate bonds market, there was a substantial increase from NIS 2.8 billion to NIS 4.8 billion, mainly due to a shortage in banking credits. The Committee for Reviewing Aspects of the Sale of Bank Leumi through the Capital Market submitted its recommendations in July 2002, after the failure to sell the control core to a foreign strategic investor. The Hauser Committee s recommendations regarding regulation of primary market makers were adopted in October 2002. In 1.1.2003 the Tax Reform became effective. Since 2002, the management of internal and external debts has been unified under one roof the Accountant General Division, and the results of the debt maintenance analysis can be found in its publications. In the area of provident funds (whose balance of accumulated assets declined at the real rate of 9% compared with 2001 and was about NIS 167 billion), two structural problems have not yet been solved: high centralization of bank management and the makeup of provident fund member populations, which make it difficult to manage the funds investments. Following the tax reform, a new structure for life insurance products sold after 1.1.2004 was defined. Following this new structure, there will be a structural separation between savings, expenses, and risk elements. During the year, the twisting issue was dealt with, in order to enhance transparency and adequate disclosure prior to insurance policy purchase. Locating beneficiaries and dealing with unclaimed assets were emphasized. In 2002, the Agents Licensing Department issued 53 corporate-insurance agent s licenses, 785 new intern s licenses and 360 new authorized agent s licenses. In addition, according to the procedure stipulated in Paragraph 29 of the Inspection Law, 12 agent and 7 insurance agency licenses were revoked.
Preface As part of the fight against money laundering, the Capital Market, Insurance and Savings Division established a unit for currency service providers whose mandate is to regulate, inspect and enforce provisions of the Prohibition on Money Laundering Law, its amendment and the decrees issued based on this law. During 2002, the unit dealt with 251 certification requests by currency service providers, mostly from the Gush Dan region. A 21% decline in complaints was recorded during 2002, by the Public Complaints Department (2,763 complaints compared with 3,498 in 2001). At the same time, a substantial decline took place in the number of complaints in the line of vehicle insurance (property, comprehensive and third-party) as well as an increase in the number of complaints in the line of health insurance, especially nursing care insurance. Eyal Ben-Shlush Director of the Capital Market, Insurance, and Savings Division and Commissioner of Insurance Jerusalem, July 2003
The Capital Market, Insurance and Savings Division The Activity of the Capital Market, Insurance and Savings Division, 2002 The Division acts in these four main areas: a. The capital market. b. Insurance (including pension). c. Savings (including provident funds, central severance-pay funds, study funds and savings plans). d. The fight against money laundering through provident funds, insurance companies and currency service providers. Summary of the annual Division s activity (by departments) Capital Market The Department acts towards the strengthening and perfecting of the Israeli capital market. This activity is demonstrated by the primary and secondary market regulation. Its goal is the improvement, diversification and perfection of the tradable and non-tradable capital market, while removing obstructions and promoting new financial instruments. Regulation In this area, the Department promotes, together with other relevant players, these issues: market makers activity in the TASE, modification of the underwriting method, disclosure rules (Barnea Committee), examination of obstructions in the debt market in Israel Bachar Committee, secondary credit market and capital raising through municipal bonds. The Department works with these elements: 1. The Securities Authority and the TASE regarding amendments to the Securities Law and TASE s article. 2. The Ministry of Justice. 3. The International Division and the Ministry of Trade and Industry regarding international trade treaties obligations that the State of Israel assumed in the field of financial services related to entitiess supervised by the Division. 4. The Department provides the Director of the Anti-Trust Authority with a professional opinion regarding mergers in the capital market.
The Activity of the Capital Market Insurance Insurance companies stability The Department s activity is performed through these three channels: licensing of insurance companies, insurance sector regulation and supervision of insurance companies, in order to maintain the insurance companies stability, so that they will be able to meet their obligations to the insured. During 2002, draft circulars on these subjects were published: exposure to re-insurers, accumulation of special reserves for special risks and appointment of an officer in charge of fraud and embezzlement prevention. In addition, the Commissioner of Insurance published decrees mandating the actuary of an insurance company that deals with general insurance, to fill out a declaration in which he gives his opinion about adequacy of the reserves and of the rules set for an insurer s relations with an insurance agent. During 2002, licenses were awarded or revoked for insurance companies or Lloyds underwriters, as follows: 1. Israeli insurers a. Licenses of two insurance companies were expanded. b. One insurance company s license was revoked in two sectors. c. Licenses of two insurance companies were revoked (one of them due to a merger with another insurance company). 2. Foreign companies a. No change. 3. Lloyds underwriters a. One license was expanded. b. Licensses for two Lloyds underwriters active in Israel were revoked. 4. Pension a. No change. Appendix B to the chapter on Insurance companies stability, details the revoked and awarded licenses. Life Insurance The Life Insurance Department deals with a variety of issues related to the regulation and supervision of insurance agents and companies activity in the field of life insurance. The Department is in charge of the examination and approval of life insurance plans submitted to the Commissioner of Insurance, regulation of various life insurance related issues and dealing with public complaints in this field. π
The Capital Market, Insurance and Savings Division During 2002, the Department dealt with the adaptation of the Income Tax Code to the tax reform and the Division s policy. Following the reform provisions and rules amendment, a new structure was defined for life insurance products to be sold starting on 1/1/2004. The new structure includes structural separation of savings, risk and expenses elements. As part of the regulatory activity and in the light of numerous public appeals received in the office of the Commissioner of Insurance regarding the substitution of current life insurance policies with new ones ( twisting ), a draft circular for regulation of the subject was drawn up and published. The goal of the circular is to promote transparency and adequate disclosure to the insured, in a way that will enable him to calculate and consider his steps, before canceling an existing policy and acquiring a new one. In addition, a circular was published, dealing with rules of locating beneficiaries and handling unclaimed assets in insurance policies. Among other things, the circular regulates management of funds in policies that the insured/beneficiaries did not claim and the ways to locate these insured/beneficiaries. In 2002 the Department approved 80 new life insurance plans. Of these, 44 were personal, self-employed and executive, and 36 were group life insurance. General and Health Insurance The General Insurance Department deals with the regulation, policy setting, and ongoing supervision of all insurance lines except life insurance, in order to ensure proper market structure based on a fair competition. The insurance lines include, among others, property insurance, mandatory and comprehensive motor-vehicle insurance, liabilities insurance (professional liability, employer s liability, third party, etc.), financial insurance (credit, merchandise guarantee, etc.) and health insurance (nursing care insurance, medical expenses insurance, transplants, personal accidents, etc.). During 2002, the Department dealt with the regulation of motor-vehicle assessment, further application of the mandatory motor-vehicle insurance reform and handling of the Avner corporation and its transfer to special administration. In the line of health insurance, the issue of personal policies in nursing care insurance was regulated, so that fair nursing coverage was ensured, while at the same time the insurance transaction s stability was maintained. Also, a draft circular regarding pre-existing health condition was published for comments. ±
The Activity of the Capital Market Agent Licensing Part of the Agent Licensing Department s function is to deal with: 1. Supervision and application of the policy of the Commissioner of Insurance in all areas of activity of those dealing with insurance as insurance agents. 2. Insurance agent licensing and monitoring of the fulfillment of the agents obligations according to the law. 3. Insurance agency (agent - corporation) licensing and monitoring fulfillment of the agencies obligations according to the law. 4. Preparing position papers as a foundation for policy setting by the Commissioner of Insurance in all issues related to the regulation of activity and responsibility of insurance agents. 5. Enforcing the provisions of the law on insurance agents and unlicensed insurance brokers and monitoring criminal records of insurance agents. 6. Arranging license exams for insurance agents maintaining and updating an exam question bank, setting dates and locations for exams, exam checking and distribution of their results. In 2002, in Israel there were 9,482 insurance agents (interns and authorized agents), and 867 insurance agencies (agent corporation), licensed in one or more insurance lines (life, elementary, accidents and marine). During 2002, licenses were issued to 53 new agent corporations, 785 new interns and 360 new authorized agents. In addition, the exams of 1,536 authorized agents and 4,825 interns were checked. In 2002, according to the procedure stipulated by Paragraph 29 of the Commission Law, licenses of 12 agents and 7 agencies (ltd.) were revoked. Pension Treatment of the pension area can be divided into two markets: Old pension fund and new pension fund markets. The old pension funds stopped admitting new members from March 1995. In this market, the Department s activity focused on dealing with the heavy actuarial deficits of some of the old pension funds. As part of the aforementioned activity, a salvage plan for these funds was formulated, a plan which is based on Chapter G 1 of the Law of Insurance Business Supervision, 1981. ±±
The Capital Market, Insurance and Savings Division The new pension funds started their activity in 1995. In this area, the Department acts to regulate and supervise the activity of the new pension funds, including regulation of the new funds set of rules, checking their compliance with the legislative arrangement, identifying and correcting failures, responding to public complaints regarding pension and additional activities whose goal is the perfection of this market. During 2002, the regulation of funds transfers among the new pension funds was completed, regulation which is an important step towards pension market perfection and improvement of the funds risk management quality. Also, in the light of the update of the actuarial assumptions used to calculate the pension factors of these funds, regulation began of the new pension and some old pension funds set of rules. In addition, nine new general pension funds were certified. Provident Funds (including central severance-pay funds and study funds) The Provident Funds Department designs the policy regarding provident fund activity and supervises it. Central areas of regulation are related to investment and accounting rules practiced by the provident funds in the State of Israel. Certification and Regulation During 2002, new investment regulations for provident funds were published, as well as were sickness compensation regulations and eight circulars on a variety of issues. In addition, the Municipality of Tel-Aviv s appeal to the High Court of Justice has been concluded, and according to the Court s ruling, the fund will change its article based on the Division s requirements. In 2002, the founding of nine new provident funds was authorized; four of them are of the channel type. Also, the addition of 12 new channels to old provident funds was authorized. Amendments to the articles of 12 managing companies and provident funds (provident funds, central severance-pay funds and study funds) were approved, and 350 income tax approvals for provident and study funds for 2003 were renewed. Supervision and Auditing The Department performs audits on a regular basis. A very high proportion of the financial reports submitted by the provident funds are audited by the Department according to the relevant rules and circulars regarding content and editing of the reports. Each year some 330 reports are submitted to the Department. ±
The Activity of the Capital Market Each quarter, the Department performs a regular check of the securities held by the provident funds to ensure compliance with the investment regulations. More than 330 lists of securities are examined every quarter. As part of the cooperation with the Public Complaints Department, about 30 public complaints on different issues were dealt with. Savings The Department is responsible for the supervision and regulation of savings plans managed by 26 banks and other institutions. This activity is performed in cooperation with the Commissioner of Banks Division in the Bank of Israel. In 2002, 232 benefits in savings plans were approved, 18 of them were new benefits and 214 extensions of existing ones. Four benefit applications were denied for not meeting the following criteria: non-compliance with savings promotion regulations, lack of adequate disclosure and creation of inefficiency in the capital market. The tax reform actually annulled the special status enjoyed by the savings plans (tax exemption), and since 2003 these plans are taxed. Because of this, 2002 was the last year in which the Division was responsible for new savings plans regulation and supervision. Department of Currency Service Providers (new activity area) The Prohibition on Money Laundering Law stipulates that a money laundering activity is a criminal offence punishable by imprisonment and sizable cash penalties. The term money laundering refers to property or capital originating in an offense and which is implanted in the legitimate financial system, after being camouflaged in order to be recognized as legitimate capital or property. The purpose of money laundering is to prevent the exposure of the property/capital owner s identity and its origin as acquired through the commitment of an offence. Activity of the Currency Service Providers Unit The following are the main, law-mandated activity areas of the Unit: a. Registration, foundation, operation and update of a currency service providers registry. b. Issue of currency service provider certificates. c. Supervision and enforcement of law s regulations and the Decree on Money Laundering Prohibition regarding currency service providers. d. Performing inspections to ensure compliance with the Prohibition on Money Laundering Law and Decree. ±
The Capital Market, Insurance and Savings Division To this end, two departments were established within the Unit. From August 2002 (the beginning of the Unit s activity) until the end of 2002, the Registrar received 251 applications for registration as currency service provider. About 70% were private businesses and 30% were corporations. The Department also wrote work procedures and collected information in order to build a currency service providers repository which holds about 2,500 businesses. Actuarial Department The Actuarial Department deals with a range of areas and its main functions are: Counseling and Supervision Counseling in the formulation of the Division s policy regarding pension and insurance plan terms and regarding insurer and pension fund stability. Counseling to the departments on issues related to pension and insurance plans examination. On-site inspections with insurers, as part of the supervision of their stability. Counseling Ministry divisions and other government institutions regarding insurance and pension arrangements. Regulation Promotion, initiation and, if needed, setting of updated professional standards for determining rates and reserves in insurance and pension plans, as well as monitoring the stability of the plans and the insurers. A proposal of law principles regarding actuary training and a definition of a new office of appointed actuary in insurance companies and pension funds, were published in 2002. Public Complaints The Main Functions of the Public Complaints Department are: 1. Review of public complaints regarding insurance companies and insurance agents. 2. Enforcement intensification on supervised elements and formulation of the insurance supervision policy in areas related to insurer insured and agent insured relations. 3. Strengthening public awareness of the exercising of its rights. During 2002 the Department received 2,762 complaints. This data presents a 21% decrease in the number of complaints received, compared with the previous year. During the year, 2,829 complaints were resolved. 463 complaints have been found justified or partly justified (not rejected by the company) and 396 have been found unjustified. The rest of the complaints have been resolved in another manner. ±