LIFE INSURANCE Annual Report 2000 C
CONTENTS Introduction.....................................................................5 Analysis of the Life-Insurance Industry.............................................6 Premiums and Distribution of Types of Insurance......................................6 The Life-Insurance Assets Portfolio................................................9 General Remarks.................................................................9 The Participating Portfolio........................................................13 Insurance Companies Yields.....................................................19 Multifund-Investment Insurance Policies..............................................19 Comparison of Yields Insurance and Provident Arrangements...........................20 General Survey of the Israeli Life-Insurance Industry 2000.........................28 Life-Insurance Industry Developments in 2000........................................28 Changes in Life-Insurance Plans...................................................28 Adjustment of Life-Insurance Rate Structure.......................................28 Mechanism for Improved Surrender and Termination Values.........................28 Termination Values............................................................29 The 2000 Economic Arrangements Law.............................................30 Recommendations of the Public Committee on Tax Reform (the Ben-Bassat Committee, May 2000) in Respect to Retirement Saving...............................32 Approval of New Policies........................................................34 Unit-Linked Executive Policies.....................................................34 Lump-Sum Wage-Indexed Policies..................................................34 The Lump-Sum Rider............................................................35 General Issues.................................................................37 1. Pension-Type Plans..........................................................37 Background................................................................37 2
Factors that Affect Insurers Ability to Promise a Pension (Life Expectancy, Interest Rates, and Decisions and Preferences of the Insured....................................... International Comparison......................................................38 Conditions for Pension-Type Policies............................................39 Pension Coefficients (at the End of the Insurance Term)...........................40 2. The Risk Savings Ratio in Preferred ( Adif )-Type Policies.......................42 3. Contributions to Executive Insurance Plans.......................................44 Tables Table 3.1 Gross Premiums by Types of Insurance and Rate of Change, 1998 2000........6 Table 3.2 Life-Insurance Premiums, by Groups, 1998 2000............................7 Table 3.3 Quarterly Distribution of Gross Premiums, 2000.............................8 Table 3.4 Distribution of Life-Insurance Portfolio Assets, 1998 2000...................10 Table 3.5 Distribution of Life-Insurance Portfolio Assets, North America and the Netherland.......................................11 Table 3.6 Distribution of Participating Portfolio Assets, 1998 2000.....................13 Table 3.7 Centralization Indices, 1999 2000........................................16 Table 3.8 Gross Weighted Yield, Net Weighted Yield, and Management Fees, 1998 2000..17 Table 3.9 Gross and Net Yields, by Insurance Groups, 1998 2000.....................18 Table 3.10 Direct Insurance, Ltd. Gross and Net Yields, 1999 2000, by Investment Funds..................................................19 Table 3.11 Clal Insurance, Ltd. Gross and Net Yields, 1999 2000, by Investment Funds..................................................20 Table 3.12 Highest and Lowest Gross Yields, 1996 2000.............................22 Table 3.13 Table 3.14 Comparison of Cumulative Gross and Net Yields, Provident Funds and Participating Life-Insurance Plans, 1996 2000.....................26 Distribution of Severance-Pay and Benefit Contributions between Savings and Risk.....................................................44 3
Figures Figure 3.1 Distribution of the Life-Insurance Assets Portfolio, 1996 2000.................9 Figure 3.2 Quarterly Cash and Cash-Equivalents in Total Investment Portfolio, 2000.......14 Figure 3.3 Distribution of Participating Portfolio Assets, 1998 2000.....................15 Figure 3.4 Distribution of Participating Portfolio Assets, by Groups, 2000................15 Figure 3.5 Insurance Companies Gross Yield, Net Yield, and Management Fees, 2000.....21 Figure 3.6 Insurance Companies Quarterly Gross Yields, 2000.........................23 Figure 3.7 Gross Yield, by Groups, 2000..........................................24 Figure 3.8 Gross Yield of Insurance Companies, by Size of Companies, 1996 2000.......25 Figure 3.9 Cumulative Gross Yield of Insurance Companies, by size of Companies, 1996-2000...........................................................25 4
INTRODUCTION The Life Insurance Department of the Capital Market Division regulates and applies enforcement vis-à-vis insurance companies in respect to life insurance. The department is responsible, among other things, for reviewing life-insurance plans that are submitted to the Commissioner of Insurance for approval, regulating the life-insurance industry in various respects, and handling professional inquiries from the public in this field. Developments in the Life-Insurance Industry in 2000 Conditions in 2000 made it possible to approve several new types of insurance plans, such as the lump-sum rider, multifund-investment plans, and lump-sum wage-indexed policies. Furthermore, existing insurance plans were modified and adjusted to current industry conditions. The changes were reflected, among other things, in changes in insurance rates, surrender value of policies, and disclosure requirements for the insured. 5
ANALYSIS OF THE LIFE-INSURANCE INDUSTRY This part of the chapter analyzes the life-insurance industry in terms of premiums, types of insurance available, the assets portfolio (especially the participating portfolio), and returns on the insurance companies investments in 2000. Premiums and Distribution by Types of Insurance Life-insurance plans are offered to the public in several general forms: 1. individual plans; 2. executive plans (by means of employer) for salaried employees, indexed to the Consumer Price Index or to wage; 3. group plans. Table 3-1 Gross Premiums by Types of Insurance and Rate of Change, 1998 2000 (NIS millions) Year-onn-Year percent change Insurance in Premiums, Type of insurance 1998 1999 2000 1998-1999 1998-2000 1998-2000 Personal endowment 1,866 1,898 1,974 1.7 4.0 108 Personal preferred 1,130 1,197 1,246 6.0 4.0 116 Executive endowment 954 939 970-1.6 3.3 16 Executive preferred 5,071 5,609 6,449 10.6 15.0 1,378 Group insurance 817 847 829 3.7-2.2 12 Subtotal 9,838 10,491 11,467 1,629 Loss of working cpacity 908 925 980 1.9 5.9 72 Other( 1 ) 217 265 347 21.9 31.1 130 Total 10,963 11,681 12,794 1,831 Source: Data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division 6
The types of insurance discussed in this analysis include classical life-insurance policies that do not cover loss of working capacity, health insurance, and long-term care insurance, which some insurance companies treat as part of the life-insurance line. As Table 3.1 shows, life-insurance premiums are continuing to grow by 9 percent between 1999 and 2000 after 6.5 percent growth in the year-previous period. Between 1998 and 2000, premiums rose by 16.6 percent. In 2000, 67 percent of gross premiums were generated by Adif ( preferred )-type life-insurance plans, endowment plans generated 25 percent, and group insurance arrangements brought in 8 percent. In executive insurance plans, the uptrend in the share of preferred -type policies continued. These plans exhibited a real growth rate of 27 percent between 1998 and 2000. The proportional increase in Adif-type executive-insurance plans accounted for 61 percent of total growth in the industry during that time. This occurred for several reasons: a. After the Economic Arrangements Bill was passed into law, 1 insurance companies began to offer lump-sum Adif-type plans, which addressed the needs of insureds who wished to receive their money in form of a lump sum at the end of the insurance term. b. Preferred -type plans offer a broader range of possibilities and greater flexibility than endowment plans and, in a large majority of cases, a higher return, and are preferred for that reason. Endowment-type executive plans also showed an increase in performance, partly due to the growth of the insurance market all told. In individual insurance, there has been no significant change in recent years and no preference of either Adif or endowment plans. 1 See details below. 7
Table 3-2 Life-Insurance Premiums, by Groups, 1998 2000 (Percent) Group 1998 1999 2000 Migdal 33.5 32.8 32.7 Clal 22.9 23.2 23.2 Phoenix 16.5 16.9 17.0 Harel 10.1 13.8 13.7 Menorah 9.3 9.1 9.0 Other 7.7 4.3 4.5 Total 100.0 100.0 100.0 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. Note: Other includes Eliahu, ILDC, Direct Insurance, and A.I.G. I 1998, Zion was included in other, but in 1999 2000 it was included in the Harel group, which acquired it. As Table 3.2 shows, the structure of the market is largely unchanged, although the Migdal group continued to lose market share slowly (by 0.8 percentage point in cumulative terms) and the Phoenix group continued to gain moderately (by 0.5 percentage point) in the past three years. Table 3-3 Quarterly Distribution of Gross Premiums, 2000 (Percent) Qtr.1 Qtr.2 Qtr.3 Qtr.4 Total 24.3 23.9 25.1 26.7 100 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. Table 3.3 shows that the quarterly distribution of premiums was relatively smooth, at about NIS 3.2 billion per quarter. Premiums increased in the fourth quarter because seasonal factors, such as end-of-year contributions by self-employed insureds and employers to some types of provident funds (for the self-employed and for severance pay), in order to qualify for tax benefits, result in larger contributions in the fourth quarter than in other quarters. 8
The Life-Insurance Assets Portfolio General Remarks The public s assets are managed by institutional intermediaries (insurance co+mpanies, pension funds, provident funds, etc.) and by individuals. The total assets of the public at the end of 2000 were NIS 1,107 billion, and assets in life-insurance plans were NIS 70.1 billion, 6.3 percent of the total. By comparison, pension funds held 9.9 percent of total assets and provident and advanced-training funds held 14 percent 2. Notably, the total portfolio of assets in life-insurance plans in 2000 was 16.2 percent of Gross Domestic Product that year. Assets in life insurance are divided between assured-yield funds (Funds A-H) and the participating portfolio (Funds I-J and track-oriented funds). In 1996 2000, the total assets portfolio in life-insurance increased in real terms from NIS 45 billion to NIS 70 billion a real growth rate of 55.3 percent. In 1999 2000, the portfolio grew in real terms by NIS 5.5 billion (8.6 percent) as against 12.3 percent real growth in 1998 1999. The growth slowdown was evidently due to the state of the economy in 1999 2000, as the assets in the participating portfolio did not match their 1998-1999 yield. 2 See Figure 1.15 in Chapter 1 of this publication. 9
The share of assured-yield funds in the total portfolio has been decreasing since 1992. In 2000, assured-yield funds held NIS 41 billion in assets and accounted for 58.6 percent of the total portfolio; in 1999, their assets, NIS 40.6 billion, were 63 percent of the total portfolio. The participating portfolio grew steadily in the five years between 1996 and 2000, climbing from NIS 9.4 billion to NIS 29 billion, because only participating policies have been issued since 1992. Table 3-4 Distribution of Life-Insurance Portfolio Assets, 1998 2000 (Percent) Type of asset 1998 1999 2000 Indexed-life bonds 54.7 48.2 41.4 Other government bonds 16.6 17.6 18.5 Other debt certificates and other 2.0 2.6 3.0 Shares 2.7 4.9 6.1 Bank loans and deposits (excl. demand deposits) 17.2 18.2 20.6 Cash and demand deposits with banks 1.9 2.9 4.0 Rental real estate 1.0 1.1 1.3 Investment in subsidiaries and insurance brokers 0.7 0.8 0.7 Premiums due and agents balances 0.7 0.6 0.7 Accounts receivable and credit balances 0.3 0.3 0.3 Deferred acquisition costs 2.4 2.8 3.2 Total assets and credit balances (NIS billion) 57,466.5 64,552.4 70,124.2 Source: from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. The composition of the total life insurance assets portfolio is indicative of typical changes in this industry in recent years. The proportion of earmarked government bonds ( Indexed-Life ) declined from 54.7 percent in 1998 to 41.4 percent in 2000 and the share of assets invested in the unrestricted capital market such as shares, other government bonds, loans, and bank deposits increased. Furthermore, now that insurance companies are allowed to invest in foreign assets, they will probably enter this field gradually. 10
For a comparison, Table 3.5 shows the distribution of investments in the life-insurance portfolio in 1998 of European and North American insurance companies. Table 3-5 Distribution of Life-Insurance Portfolio Assets, North America and the Netherlands (Percent) Type of asset U.S. Canada Netherlands Israel Cash and deposits 2-2 2 Bonds 77 44 62 87 Mortgages 12 22 21 - Shares 6 20 8 3 Real estate 1 4 7 1 Other 2 10-7 Note: Insurers assets include investments against compulsory capital in life-insurance transactions. According to the Israeli rules, in contrast, assets against capital are shown separately. Source: Moody s Industry Outlook and Capital Market, Insurance, and Savings Division. Investment in Bonds and Shares Typical insurance plans in the U.S. assure a minimum yield. Due to this liability, insurance companies prefer to invest most of their assets in fixed-yield bonds and similar vehicles. In Canada, in contrast, as in Israel, most liabilities of insurance companies on account of lifeinsurance policies are based on participation in the investment risk. This market structure affects the composition of the assets portfolio so that the component of shares is higher than in the United States. Mortgage-Backed Loans The structure of the mortgage market in developed countries and the financial tools that have been developed there have encouraged the growth of a market of mortgage-backed bonds. These assets account for much of the portfolio of insureds assets in those countries. The flow structure of these bonds, coupled with the collateral for the property, encourages insurers who wish to acquire fixed-yield and relatively low-risk assets to purchase them. 11
The structure of Israel s mortgage market is hindering similar developments in this country. However, the costlier bank capital becomes, the more likely it is that something similar will occur in Israel. Therefore, insurers will probably be investing a larger share of their portfolios in such assets. In the U.S. and Canada, banks charge higher interest for mortgages than insurance companies do. Therefore, much of the life-insurance assets portfolio is invested in this manner. In Israel, insurance companies and banks offer similar mortgage terms. Thus, the share of the Israeli assets portfolio that is invested this way is not significant. 12
The Participating Portfolio In the portfolio of assets in participating life-insurance plans (the participating portfolio ), all earnings or losses on account of investments, less management fees, are credited or debited to the insured. Insurers invest this portfolio under the provisions of the Control of Insurance Transactions (Methods of Investment of Insurer s Capital and Funds and Management of Insurer s Liabilities), 5761-2001 (hereinafter, Methods of Investment Regulations ) and rules stipulated by the Commissioner of Insurance. This part of the chapter reviews the distribution of assets in the participating portfolio and examines various investment vehicles. Table 3-6 Distribution of Participating Portfolio Assets, 1998 2000 (NIS millions) Pct. of Pct. of Pct. of Pct. of Pct. of total total total total total assets in assets in assets in 1998-1998- Type of asset 1998 1998 1999 1999 2000 2000 1999 2000 Indexed-life bonds 597 3 629 3 635 2.2 5.2 1.0 Other government bonds 8,857 50 10,601 44 12,043 41.4 19.7 13.6 Other debt certificates and other 884 5 1,258 5 1,648 5.7 42.3 31.0 Shares 1,562 9 3,177 13 4,310 14.8 103.3 35.7 Bank loans and deposits (excl. demand deposits) 3,917 22 4,930 21 5,736 19.7 25.9 16.4 Cash and demand depositsv with banks 593 3 1,213 5 1,723 5.9 104.5 42.0 Rental real estate 73 0.4 187 1 424 1.5 155.1 126.0 Investment in subsidiaries and insurance brokers 173 1 161 1 148 0.5-6.7-8.1 Premiums due and agents balances 234 1 316 1 357 1.2 34.9 13.1 Accounts receivable and credit balances 44 0.2 111 0.5 131 0.5 149.4 18.4 Deferred acquisition costs 896 5 1,378 6 1,900 6.5 53.7 37.9 Total assets and credit balances 17,835 23,964 29,060 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. 13
In 2000, the participating portfolio was 41.4 percent of the total portfolio of assets in life insurance. Government bonds were the largest component of the participating portfolio. One who examines the changes in the composition of the participating portfolio between 1999 and 2000 should pay special attention to the component of shares. In 2000, the portfolio of shares outpaced the growth of the total portfolio, climbing from 13.3 percent of the portfolio to 14.8 percent. The growth of this component in 2000 is especially notable in view of falling prices on the stock exchange during the year. Some of these changes may be explained by noting that on June 1, 2000, the Methods of Investment Regulations were amended to raise the permissible fraction of investment in shares from 15 percent of assets to 25 percent. There seems to be a positive correspondence between the insurance companies wishes (to invest a larger portion of the portfolio in shares) and actual needs, because the companies preferred to continue expanding their investments in shares even in a bear market. The rental real-estate line increased by 126 percent between 1999 and 2000, possibly signaling an uptrend in real-estate investment due to the state of the economy, which creates investment opportunities, and the small share of this type of investment in the companies portfolio. Figure 3.2 shows that investment in cash and cash equivalents declined in the first three quarters of 2000 and climbed in the fourth quarter, from 4.9 percent of investment in the third quarter to 6.5 percent an increase of NIS 424 million evidently because short-term interest rates fell more slowly than inflation at that time, causing real interest rates on short-term assets to rise. 14
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The distribution of assets among insurers in the participating portfolio showed no structural difference relative to that of the total portfolio. In distribution by insurance groups, as of 2000 Migdal held the largest market share (NIS 10 billion, 34.5 percent of the market), followed by Clal, Phoenix, Harel, and Menorah. To examine the extent of centralization in the insurance market, we used two indices: 1. The Herfindahl-Hirshman index (H-index), calculated by a formula of the squares of the insurance companies market shares in total assets in the participating portfolio. 2. The CR3 index, which adds the market shares of the three largest insurance groups in total assets in the participating portfolio. The results follow: Table 3-7 Concentration Indices, 1999 2000 Index 1999 2000 Herfindahl 0.23 0.22 CR3 74 74 Source: Capital Market, Insurance, and Savings Division. The Herfindahl index, 0.22, indicates that centralization in the life-insurance industry resembles that in the domestic banking system, which itself is considered highly concentrated. For example, the H-index oscillates around 0.028 in Great Britain and 0.026 in the United States. What is more, the three largest insurance groups (Migdal, Clal, and Phoenix) commanded a 74 percent market share. 16
Insurance Companies Yields To create the insurance coverage, the policyholder pays a premium in accordance with the terms of the policy. A portion of the premium is used to purchase the types of insurance coverage that the policy includes, another portion is used to cover the insurer s expenses, and the rest is earmarked for savings and is invested in accordance with the Methods of Investment Regulations. The accumulated savings earn a return that corresponds to the yield on the investments. When dealing with yield, we distinguish between gross investment, which is affected by the investment policy (among other factors), and the way the policy is implemented during the relevant period. Management fees for the insurer are subtracted from the gross investment under the Management Fees Regulations. The net yield the gross yield less management fees is credited to the insured in accordance with the type of his/her policy. Insurance companies report the yield in their financial statements and in an annual report to the insured. The figure they report is the result of the investment of assets under certain assumptions 3 that are typical of the yield on a participating portfolio in which no movements are made. The yield credited to each individual insured may be different from the reported yield insofar as there is a difference between the behavior of the insured and the behavior of the portfolio from which the yield is derived. Table 3-8 Gross Weighted Yield, Net Weighted Yield, and Management Fees, 1998 2000 (Percent) Year Gross weighted Net weighted Management yield yield fees 1998 0.62-0.09 0.71 1999 13.06 10.65 2.42 2000 4.31 3.14 1.17 Source: Capital Market, Insurance, and Savings Division. The weighted yield is computed by multiplying each company s yield by its share in total assets. 3 Such as monthly deposits at the beginning of each month. 17
Yields were lower in 2000 than in 1999, mainly due to poor returns on shares and in CPIindexed assets. The management fees shown in Table 3.7 include fixed and variable components and are charged at the rate allowed by the Management Fees Regulations. Table 3-9 Gross and Net Yields, by Insurance Groups, 1998 2000 (Percent) Gross yield Net yield Avg. Avg. gross net yield in yield in Group Company past 5 past 5 name name 1998 1999 2000 1998 1999 2000 years years Migdal Migdal -9.0 13.1 5.06-5.1 10.7 3.77 5.46 4.08 Hamagen -7.0 13.2 5.09-3.1 10.8 3.79 5.46 4.08 Clal Clal 1.4 14.4 3.54 0.7 11.6 2.5 6.14 4.67 Aryeh 1.6 14.9 3.44 0.8 11.9 2.41 6.30 4.83 Phoenix Phoenix -5.0 12.8 3.75-1.1 10.4 2.68 5.32 4.05 Hadar 3.1 11 4.42 2.1 8.7 3.25 5.55 4.22 Harel Shiloah 0.4 11.1 3.94-2.0 8.8 2.79 4.79 3.54 Sahar 1.3 12 4.51 0.5 9.6 3.33 5.67 4.25 Zion 1 1 12.7 4.44 0.3 10.2 3.26 5.59 4.21 Menorah Menorah 3.2 14 4.29 2.2 11.4 3.22 6.40 4.95 Manulife- Menorah 3.2 14.2 4.4 2.2 11.6 3.23 6.49 5.00 Other Ayalon 3.8 8.2 4.15 2.7 6.4 3.01 4.99 3.74 Eliahu 3.3 9.3 3.35 2.3 7.4 2.33 4.90 3.74 ILDC 0 11.2 5.58-6.0 8.8 4.21 5.19 3.88 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. 1 Acquired by the Harel group in the course of 1999. 18
Multifund Investment Insurance Policies To date, only two insurance companies (Clal Insurance and Direct Insurance) offer insurance plans that allow the investment of premium money against investment in distinguished investment funds. Direct Insurance, Ltd., manages savings in three distinct investment funds. The company s weighted yield is computed as the weighted average of assets in respect to these three funds. Table 3-10 Direct Insurance, Ltd. Gross and Net Yields, 1999 2000, by Investment Tracks (Percent) 1999 2000 Track Gross Manage- Net Gross Manage- Net -ment ment fees 1 fees Solid (bonds and deposits) 11.14 0.00 11.14 6.75 0.00 6.75 Medium (up to 15% shares) 15.89 0.00 15.89 5.95 0.00 5.95 Share-oriented (up to 50% shares) 30.02 0.00 30.02 1.14 0.00 1.14 Average weighted yield 13.93 0.00 13.93 5.63 0.00 5.63 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. (1) The company did not charge management fees in 1999 and 2000. Clal Insurance offers a plan that allows investment in six funds. The weighted yield is computed in a manner similar to that employed by Direct Insurance. 19
Table 3-11 Clal Insurance, Ltd. Gross and Net Yields, 1999 2000, by Investment Tracks (Percent) 1999 2000 Track Gross Manage- Net Gross Manage- Net -ment ment fees 1 fees Shares (at least 85% shres) 37.42 0.35 37.07 11.18 1.40 9.78 Bonds (bodns and deposits 10.04 0.20 9.84 12.09 0.80 11.29 Forex (at least 75% indexed to exchange rates) 1.14 0.25 0.89 7.83 1.00 6.83 Solid/mixed (up to 15% shares) 13.68 0.23 13.45 9.01 0.90 8.11 Flexible/mixed (15%-50% shares) 14.69 0.28 14.41 10.07 1.10 8.97 Daring/mixed (50% 75% shares) 27.60 0.30 27.30 4.98 1.20 3.78 Average weighted yield 24.88 0.29 24.59 10.04 0.97 9.08 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. 20
As Table 3.8 and Figure 3.5 show, ILDC earned the highest net yield for its insureds in 2000 (4.21 percent) and Eliahu delivered the lowest net yield (2.33 percent). The importance of insurance companies investment management has been rising in recent years, leading to greater competition among insurers. The discrepancies among the insurers trace mainly to differences in their investment policies, reflected principally in the way they distribute their investments among the various types of assets 4. 4 See expanded discussion below, in the analysis of the structure of insurance companies investments. 21
Table 3-12 Highest and Lowest Net Yields, 1996 2000 (Percent) Year Highest gross yield Lowest gross yield S.D. 1996 5.4 2.1 0.73 1997 7.8 4.7 1.13 1998 3.8-0.9 1.65 1999 14.9 8.2 1.96 2000 6.5 3.3 0.66 Source: data from insurance companies annual reports, processed by the Capital Market, Insurance, and Savings Division. The standard deviation of returns is an indicator that one may use to assess the scatter of yields for the insured. From a multiannual perspective, the standard deviation increased steadily until 1999 (inclusive) and came to 1.96 percent in 1999, attesting to a high degree of scatter in yields for insureds that year. In 2000, in contrast, the S.D. declined significantly to 0.66 percent (the lowest level during the years at issue), meaning that the differences among insurance companies yields were insignificant in 2000. The S.D. of provident funds yields was 2.4 percent in 2000, much higher than that of insurance companies that year. This indicates that the differences in the yields of provident funds were rather large (as against smaller differences among insurance companies yields). I 22
To compare the insurance companies yields in 2000, it is worth noting that the General Bond Index rose by 6.4 percent whereas the indices of indexed and nonindexed bonds increased by 2 percent and 12 percent, respectively. The low inflation environment and expectations of continued price stability reinforced the public s preferences for nonindexed assets at the expense of indexed ones. Indexed bonds showed low yields during that time. Insurance companies, like investors at large, preferred to invest their money in nonindexed deposits, in which delivered stronger yields, and in nonindexed bonds. The insurance companies earned positive yields in the first three quarters of the year. However, when the General Share Index took a severe downturn in the fourth quarter, this type of investment showed a negative return that included the returns of insurance companies that quarter. The effect of the last quarter was severe enough to lower significantly the yield for 2000 all told. It is important to preface the examination of the trend in returns for the full year by noting that the returns on insurance companies investments should be measured over time and that conclusions should not be drawn on the basis of performance during a single year. Figure 3.7 shows the distribution of returns attained by the insurance groups in the four quarters of 2000. 23
The data show that there is no standard pattern for small insurance companies, those aggregated under the title Other. Some companies in this category show the strongest returns in the insurance industry and others attain the lowest. 24
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The Migdal and Clal groups are classified as large insurance companies while the Phoenix, Harel, and Menorah are classified as medium ones. The other insurance companies are categorized as small. Examination of the various insurers gross yields in the past five years, arrayed by size of insurance company, indicates that medium insurance companies have an edge although not a statistically significant one over large companies, which consistently outperformed the small ones. When the data for Direct Insurance, Ltd., are sterilized from the group of small companies, the discrepancy actually widens. As we recall, Direct Insurance had not been active in life insurance until the past two years. The way Direct Insurance manages its investments and the extent of accumulation that it amasses are different from the norm in the group to which this company belongs. (Direct Insurance invests in several funds and accumulation is relatively small.) Comparison of Returns Insurance and Provident Funds One may compare the insurance companies yields with market alternatives. Table 3.13 compares the cumulative return in 1996 2000 on the basis of an investment of NIS 100 at the beginning of 1996 in a provident fund and an identical investment in a participating insurance plan. Table 3-13 Comparison of Cumulative Gross and Net Yields, Provident Funds and Participating Life-Insurance Plans, 1996 2000 (Percent) Provident fund Insurance Plan Year 1/1996 = NIS 100 Gross Net Gross Net 1996 102.32 101.1 103.11 102.1 1997 110.24 108.2 110.50 107.8 1998 112.52 109.7 111.19 107.8 1999 127.36 123.7 125.71 1119.3 2000 131.66 127.1 131.13 123.0 Source: Capital Market, Insurance, and Savings Division. 26
According to Table 3.13, there is little cumulative difference in gross yield between insurance companies and provident funds. The cumulative difference in net yield, however, is 4.1 percent to the advantage of the provident fund. Although the investment regulations of the provident funds were more flexible, this is apparently not reflected in the yield obtained during the period reviewed. However, the liberalization of investment rules (which was applied to insurance companies in April 2001 and will soon apply to provident funds as well) will level the playing field in this regard and reveal more clearly the differences in the respective sectors management qualities, if any. Examination of net yield shows that life-insurance plans charge higher management fees than provident funds. 27
GENERAL SURVEY OF THE ISRAELI LIFE-INSURANCE INDUSTRY 2000 In the course of 2000, the Commissioner of Insurance approved life-insurance plans that enhanced the variety of offerings in this industry. The insurance companies were also asked to adjust some of the terms of their currently available life-insurance plans, including pension-type policies. At the end of 1999, the Knesset passed the Economic Arrangements Bill into law (see expanded discussion below) and in May 2000 the Ben-Bassat Committee published its recommendations on tax reform, including reference to tax benefits for retirement saving. Life-Insurance Industry Developments in 2000 Changes in Life-Insurance Plans The adjustment of life-insurance plans focuses mainly on the following: Adjustment of the Rate Structure in Life-Insurance Plans The life-insurance rate is made up of two components 5 : (1) death risk (net premium); (2) insurer s expenses and earnings (load factors). These two components make up the gross premium. The premium is computed on the basis of a life-expectancy table that represents the insurance risk that the company incurs. As they adjusted their rates, the insurance companies were asked to update the life-expectancy tables that they use in insurance plans so that the tables would correctly reflect the increase in life expectancy and, consequently, the change in the insurers risk. Mechanism for Improved Surrender and Termination Values The surrender value is a sum of money to which the policyholder/the insured is entitled if the insurance policy is cancelled before the end of the insurance term. (This mechanism exists only in policies that include a savings component.) When an insurance policy is sold, the insurance company incurs sales expenses (which are higher in the first few years of the policy). Thus, when an insured cancels the policy before the end of the insurance term, especially in the first few years of the policy, the company regards this as a loss of future consideration and, therefore, sets the surrender value at less than 100 percent of accumulated savings. 5 For a detailed description of the structure of the insurance rate, see report of the Commissioner of the Capital Market, Insurance, and Savings for 1999. 28
There are two types of surrender values: ordinary surrender value (offered in individual, executive, and self-employed policies) and special surrender value (in executive insurance plans only), including the surrender value in a case where the insured terminates his or her employment with the policyholder. Ordinary surrender values are substantially lower than special ones, because an insured who leaves his/her place of work does not always do so at his/her own initiative. When this occurs, it is not the insured who initiates the cancellation or suspension of the insurance plan. Therefore, such an insured is entitled to a higher surrender value. In this situation, the insurer assumes some of the employee s risk in the employee s contractual arrangement with the employer. According to the current practice, ordinary surrender values are low (especially in the first few years of the policy) and rise to 100 percent only after a lengthy period of time (usually ten years). Insurance companies have recently been asked to increase surrender values so that they will be higher in the first few years of the policy and climb to 100 percent within a five-year period. Termination Values Termination value is the surrender value of a policy if the insured elects to cancel the policy and to leave the accumulated savings with the insurance company. Traditional policies, such as endowments, provide termination values in cases where the insured stops paying the premiums on a regular basis. The insured is entitled to coverage at the original level of the policy and the cost of the insurance is subtracted from the balance accrued to his/her credit with the insurance company. In Adif-type policies, it is the practice to set surrender values for insureds who stop paying premiums but leave the accumulated balance with the company on the basis not of the date of withdrawal but of the time when the insured stopped paying the premiums. In this case, the insured has no incentive whatsoever to leave the accrued savings with the insurance company. Furthermore, even if he or she left the money with the company, and even if he/she did so for twenty years, he/she is entitled to the surrender value that would have been awarded if he/she had removed the money from the insurance company in the very first year of the policy. The Commissioner of Insurance asked the insurance companies to propose better models that would provide higher surrender values even for insureds who stop paying premiums, or underpay them, and elect to leave their money with the insurance company. In view of the Commissioner s request, two models for a solution were prepared: 1. The surrender value of the policy would rise as long as the insured leaves his or her money with the company, but at a rate that falls short of 100 percent of the sum accrued to the insured s credit. 29
2. The surrender value would be set at a rate of the relevant value on the day the money is withdrawn from the insurance company, irrespective of the time when premium payments are halted. Economic Arrangements Law On December 31, 1999, the Knesset enacted the State Economic Arrangements Law (Legislative Amendments to Attain Goals of the Budget and Economic Policy for Fiscal 2000), 5760-1999 (hereinafter, the law or the Arrangements Law ). The law was meant to correct distortions in tax benefits for general-purpose and pension-type provident funds at the points of contribution and withdrawal. The need to make these corrections was indicated by the State Comptroller in Report 47 and reflected the wish to apply (partly) the recommendations of the Brodet Committee. The law amended clauses of the Income Tax Ordinance (hereinafter, the Ordinance ) and revised the rules that pertain to pension-type provident funds (pension funds and pension-type life-insurance plans Adif, Gimla, etc.). Furthermore, the double tax benefit that individuals received if they chose with take their pensions in lump-sum form was revoked, and a maximum level of employers contributions to pension-type provident funds was stipulated. Below are the amendments in the Arrangements Law that are relevant to this discussion. Addition to Paragraph 3(e3) of the Income Tax Ordinance Paragraph 3(e3) deals with employers benefit contributions to pension-type provident funds. The legal situation preceding the Arrangements Law is set forth in Paragraph 3(e1) of the Ordinance. This paragraph limits employers benefit contributions to a benefit-type provident fund to 5 percent of the employee s monthly wage or the qualifying income, whichever is lower. Paragraph 3(e3) limits employers benefit contributions to a pension-type provident fund to at 5 percent in the case of an insurance fund (and 6 percent in the case of a pension fund) of the employee s monthly wage or of a sum equal to four times the national average wage, whichever is lower. Wherever these limits are breached, the excess contribution shall be charged to the employee as labor wage at point of contribution. Incidence all contributions to insurance policies and pension funds starting on January 1, 2000. 6 The wording is informative only; the binding version is that of the relevant statute. 30
Amendment to Paragraph 9(a7)(g)(2) of the Ordinance Before the Economic Arrangements Law went into effect, an employee upon retirement was entitled to withdraw the severance pay as a tax-exempt benefit and earmark the rest of the money for pension ( pension continuity ). If the employee renounced the option of pension continuity, he or she was entitled to a supplemental tax exemption at 20 percent for each year from the sixth year to the twentieth year. The amendment did away with the possibility of obtaining a supplemental exemption at the time of renunciation of pension continuity. Thus, persons who exercised the exemption up to the limit at point of retirement may not benefit from a supplemental exemption of any kind on account of this money. Incidence for those who retired by December 31, 1999, and applied for approval to renounce pension continuity, the old rules shall apply. For employees who apply for pension continuity after January 1, 2000, the new rules shall apply. Amendment to Paragraph 9a of the Ordinance Under the provisions of this Paragraph, an employee who receives a pension from his or her employer is entitled to a tax exemption at 35 percent of the level of the pension, up to the maximum qualifying pension. To prevent double taxation of this money at point of contribution and again at point of withdrawal the legislator added to this paragraph a tax exemption for pension sums that originate in contributions that were already taxed. The amendment also defined the concept of recognized pension : a pension originating in employer s contributions that had been taxable at point of contribution under Paragraph 3(e3) or in employee s contributions for which the employee was not eligible for a deduction under Paragraph 47 of the Ordinance. The new exemption is set at 35 percent of the qualifying pension or the sum of the recognized pension, whichever is higher. Discounting of an exempt pension is tax-exempt provided that the rate of discounting does not exceed 35 percent of the qualifying pension or the recognized pension, whichever is lower. Incidence any pension paid after January 1, 2000. Amendment to Paragraph 87 of the Ordinance According to Paragraph 87 of the Ordinance and the amendments based thereon, a lump-sum withdrawal of pension money in a pension-type provident fund, where such withdrawal takes place not at the end of the term, is tax-exempt. 31
To prevent early withdrawal of sums that were earmarked for pension use when contributed, the Paragraph was amended so that money paid out by a pension-type provident fund in a manner other than pension shall be considered unlawful and shall be taxed at a rate no lower than 35 percent or at the insured s marginal tax rate, whichever is higher. (The tax rate may be as high as 50 percent.) Incidence all payments into new policies and existing policies from January 1, 2000. Recommendations of the Public Committee on Tax Reform (the Ben-Bassat Committee, May 2000) in Respect to Retirement Saving On October 31, 1999, the Minister of Finance appointed a committee to examine the direct-tax system in Israel (hereinafter, the committee ) and named the Director-General of the Ministry to be its chair. The committee was asked, among other things, to review the system of tax exemptions and benefits for the purpose of narrowing the tax base and solving the typical problems of the current tax system. When the committee released its recommendations in May 2000, it prescribed changes in regard to retirement saving and advanced-education funds, e.g., allowing tax benefits for retirement saving only, making employers contributions to advanced-training funds fully taxable, and standardizing the maximum levels for contributions and credits for employees with provident and pension funds. The logic behind these recommendations was to make the tax laws and the long-term savings programs fair and simple, and to stimulate competition in the market. The committee s main recommendations in regard to tax benefits for retirement saving follow 7 : 1. Tax benefits should be given only for retirement savings with benefit-type and pensiontype provident funds. Benefit contributions to provident funds that may be redeemed before retirement age should not receive tax benefits. 2. Contributions to benefit-type provident funds that may be redeemed before retirement age should be treated as the employee s taxable income. 3. Employees should be fully taxed for employers contributions to advanced- education funds. 4. Ceilings for pension and benefit contributions to provident funds should be standardized. 7 For the full version of the committee s recommendations, see Report of the Committee, presented to the Minister of Finance in May 2000. 32
5. The maximum wage for employer s provident-fund contributions that will not be taxed at point of contribution should be set at four times the national average wage, whether the contribution is made to a pension plan or to a benefit plan. The ceiling should apply to the total contributions for benefits and pension at retirement age. (The ceilings should not be cumulative.) 6. Standardization of rates of contribution: employers should be allowed to deposit for employees, with a pension-type provident fund until retirement age, up to 14.33 percent of the employees wage without said contributions being regarded as taxable income of the employee at point of contribution. 7. Standardization of employees tax credits: a tax credit at 35 percent of employee s contributions should be awarded at a rate of up to 5 percent of wage, limited by the qualifying income, irrespective of whether the contribution is made for pension or for benefits. 8. Tax benefits for the self-employed at point of contribution: the maximum income on which the contribution is made, in regard to contribution of up to 7 percent of the selfemployed taxpayer s income, should be raised from NIS 9,300 per month to the level of four times the national average wage. 9. Provident funds for benefits and pension should be tax-exempt on their earnings at point of accumulation. 10. Employers contributions that were not taxable at point of contribution should be taxable at point of withdrawal. 33
Approval of New Policies In its efforts to make the insurance market more efficient and meet insureds needs, the Commissioner of Insurance approved policies that have new characteristics. Unit-Linked Executive Policy Pursuant to the approval of unit-linked policies for individuals and the self-employed, which allow insureds or policyholders to choose the types of investment in which the accrued savings will be placed as the insured prefers policies of these types were approved for salaried employees as well. Unit-linked policies have the following characteristics: a. They combine a pension track and a lump-sum track (in regard to saving) with additional types of coverage. b. They allow the insured to divide the benefit and severance-pay money that he/she and his/her employer have deposited between the two plans (pension and lump-sum) and, at several points during the policy term, to change the mix of programs for future contributions. Lump-Sum (Nonrecurrent) Wage-Indexed Policies Until these plans were approved, the only wage-indexed plans available in the market were for pension (the Adif type). In the lump-sum policies, the savings proceeds are paid at the end of the term in a nonrecurrent manner. In these plans, the basic ratio of the policy was changed as well, to 80 percent saving and 20 percent risk instead of 72 percent and 28 percent, respectively, in the old Adif plans. (Insureds may, of course, change the ratio as their needs and preferences indicate.) The request to approve lump-sum wage-indexed policies was made by the insurance companies as a result of the 2000 Economic Arrangements Law. These policies responded to the needs of insureds who wished to receive the insurance proceeds as a lump sum at the end of the insurance term. 8 See Report of the Commissioner of the Capital Market, Insurance, and Savings for 1999. 34
The Lump-Sum (Nonrecurrent) Rider After the 2000 Economic Arrangements Law introduced new tax provisions in regard to pension-type plans that had been taken out in the past, the insurance companies asked the Ministry of Finance to approve the addition of a lump-sum rider to policies that are recognized as pension-type provident funds for wage-earners. They made this request because the Arrangements Law stated, among other things, that money to be deposited with a pensiontype provident fund may be withdrawn solely as a pension. (Money withdrawn in a lump sum would be taxable.) In response, many insureds chose to take out new Adif-type lump-sum policies and to reduce or terminate their current contributions to pension-type funds. By adding the rider insureds could change the future ratio of pension savings and capital savings in their existing policies. The rider is essentially an add-on to the basic policy that is built on the basis of the mechanism of a Adif-type policy. After the lump-sum rider is tacked on, the policyholder may earmark some of the contributions to the rider, receive the money that accumulates in this segment at the end of the insurance term in a lump sum, and receive the rest of the savings in the original policy in pension form. Several rules apply to the lump-sum rider: 1. The rider may be added only to Adif-type policies and participating pension policies, of Types A and B, that were issued before August 31, 2001. 2. The rider is not considered a new policy (but is approved as a new provident fund). 3. For the purposes of surrender value, money to be transferred from the basic policy to the lump-sum rider is calculated on the basis of the original date of deposit with the basic policy and not the day on which it was transferred to the lump-sum rider. (This underscores the attitude toward the lump-sum rider relative to the basic policy: not a new policy but an addendum to the terms of the existing policy). 4. The risk-savings ratio remains as set forth in the original policy. 5. The lump-sum rider is based on updated life-expectancy tables that reduce the cost of the risk. Consequently, the amounts of insurance are higher than in the original policy. The higher insurance sums create a situation in which insureds are not screened. In fact, they allow ill insured to take out a larger amount of insurance without new underwriting. The insurance companies tackled this problem in two ways: a. If the amount of insurance is increased by the full rate of increase occasioned by change in the life-expectancy basis, a qualifying period is set forth, during which the heirs of the beneficiary, if he/she dies, are not entitled to the extra insurance resulting from the rider. If the beneficiary dies during the qualifying period, the premiums that were paid out for the increase in amount of insurance are refunded to the beneficiary s heirs. 35
b. Holding the amount of insurance to a specified level (e.g., 80 percent of the insurance sum in the policy) and letting the insured earmark the rest of the premium for saving. If the insured is interested in increasing the amount of insurance, underwriting is performed for the difference. 36
GENERAL ISSUES 1. Pension-Type Plans Background In Adif-type plans, the insurance sum is received at the end of the insurance term in the form of a monthly pension for a period specified in the policy. In Adif-type plans that are available today, the pension payment is assured at the time the insurance contract is signed and the insured is able to know, at the time he/she buys the policy, approximately how large a monthly pension he/she will receive at the end of the insurance term. (The pension coefficients of the accumulated pension saving are determined at point of purchase, and the level of savings is determined in view of the level of contributions and the return on investment of the money.) Since existing insurance policies do not take account of the increase in average life expectancy, the insurers are committed to delivering a pension at the stipulated level. The matter could have been assured without the companies taking unnecessary risks, among other things, because the terms of the policy allowed the policyholder to redeem the money owed him/her shortly before the end of the term in the form of a tax-exempt lump sum. The large majority of insureds preferred this form of withdrawal over a taxable monthly pension. The 2000 Economic Arrangements Law stipulated, among other things, that money earmarked for pension-type plans shall be paid out in pension form only and that lump-sum withdrawal shall be considered unlawful and, accordingly, liable to sanctions. The law is applicable to new policies and to new contributions to existing pension policies from January 1, 2000. Pursuant to the change, it became more likely that beneficiaries of Adif-type policies would withdraw their retirement savings in pension form and the option of promising pension coefficients acquired a different economic value that forced the insurance companies to redeploy. In view of these two factors, and to cope with the new situation, the companies asked the Commissioner of Insurance to allow them to sell new pension-type plans that would take a different approach toward the pension promise. Factors that Affect Insurers Ability to Promise a Pension (Life Expectancy, Interest Rates, and Decisions and Preferences of the Insured a. Life Expectancy The steady increase in life expectancy has aroused concern that the basis of the life-expectancy 37
tables on which insurance companies rely in calculating future liabilities to insureds is inadequate. Life expectancy is rising in all developed countries, and insurers in these countries are trying to cope with it and to investigate and reassess its intensity. A comprehensive study recently published in the U.K. presents erosion coefficients for life expectancy with twenty-year predictive ability. By using these coefficients, it becomes possible to assess the improvement in life expectancy in the relevant population group and to form a general estimate of the financial liability involved. b. Decisions and Preferences of the Insured The personal preferences of insureds, as reflected in their behavior concerning pension-type life insurance plans, show that most prefer to receive a lump sum at the end of the insurance term. The change in tax arrangements, as noted above, changed the insureds calculus and made it more likely that henceforth they would accept payment in the form of a pension. c. Inexperience in Estimating Life Expectancy The insurance companies still lack long-term experience in estimating the life expectancy of insureds and in paying pensions. International Comparison United States Open Market A pension-type policy that becomes portable after five years. After five years from the beginning of pension payout, the insured is entitled to receive the sum available to him/her and to move to a competing company in order to receive a pension from the new company. This allows the policyholder to shop around again, in order to compare the terms of the policy that he/she holds. The insured may influence on the deal and the terms that the insurance company offers him/her. If the offer does not meet his/her requirements, the insured will prefer to contract with another company. This policy stimulates competition among insurers and serves the wellbeing of insureds, who may choose the company that offers them the best terms and move to a different company five years after the beginning of pension payments and so on for the rest of their lives. They can switch insurance companies every year or, if the number of transfers among companies is limited, once per period. In this policy, the insured is given no promises about the pension coefficients that he/she will receive; these are determined on the basis of the coefficients that the company will be using when the insured retires. 38
United Kingdom British insurance companies make the insureds no promises until point of retirement. In this approach, the insured assumes all the risk. The company provides a given pension calculus (and commits itself to it) on the day of the insured s retirement, when it has up-to-date information about the life expectancy of the population and, for this reason, is better able to view the random factors than it was on the day the policy went into effect. Notably, insureds in the U.K. may withdraw pension money in pension form only (except for negligible lump sums). Continental Europe (Germany, Italy, France) The situation in Germany, Italy, and France strongly resembles that in the U.K.: insurance companies assume a minimum calculated risk and promise insureds a minimum sum that does not suffice to maintain the standard of living that they could attain by means of the pension paid. The balance of the sum is paid on the basis of erosion coefficients and the situation that exists upon the insured s retirement (life-expectancy test, market conditions, interest forecasts, etc.). Canada Immediate Annuity In Canada, the insured buys a policy in which he/she chooses the manner of withdrawal (lump sum or pension) only upon reaching retirement age (65). The company has to invoke considerations and make assumptions only for years following retirement age and not for a longer term, since the pension payments begin as soon as the policy is acquired. The companies are absolved from having to cope with the problem of predicting the random factors for a longer period, as would happen if they promised pension coefficients on the day the policy is acquired (e.g., thirty years before retirement). Conditions for Pension-Type Policies In view of the foregoing, several approaches toward the payment of pension benefits at the end of the insurance term were examined: 1. Promising foreknown pension coefficients the company promises the insured, when he/she buys the insurance, to use a given set of pension coefficients as the basis on which the pension will be calculated at the end of the term. 39
2. Promising pension coefficients for a predetermined period of time with the possibility of subsequent revision the company promises the insured, at the time the insurance is acquired, to honor a given set of coefficients for a predetermined period of time, after which it may adjust the coefficients and apply the adjusted coefficients to both old and new insureds. 3. No promise in regard to pension coefficients the company makes no commitment to the insured as to coefficients when the insurance policy is acquired. The coefficients for the insured are determined on the day that he/she retires. Insureds may shop among insurance companies to obtain the largest and most suitable pension. After these approaches were examined, the following minimum terms for pension-type policies were stipulated: 1. Transfer of the savings component from one company to another shall take place in accordance with the surrender values in effect at the time. The transferred savings shall be considered a nonrecurrent 100 percent surrender-value deposit with the receiving company and the receiving company may be allowed to underwrite at the point of changeover. 2. The surrender value shall be 100 percent of contributions for savings no later than five years after the beginning of the plan. 3. A termination-value mechanism shall be introduced. (If payments are stopped with no withdrawal of funds, the surrender value will increase in accordance with the mechanism that shall be devised.) 4. No other underwriting shall take place before the company begins to pay out the pension benefits. 5. Appropriate disclosure expanded disclosure requirements vis-à-vis the insured. In respect to compulsory disclosure of forecasts of accumulation in the policy, standard assumptions for all companies were set forth. Provisions concerning advertising and presentation methods in policies of this type, including references to promised and non-promised pension coefficients, were also stipulated. Pension Coefficients (at the End of the Insurance Term) Term of assured pension to maintain equilibrium between the assured pension term payment and the level of pension that is assured in policies that contain a pension coefficient promise, the insurer shall offer a pension track with an assured term of fifteen years (180 monthly pension payments) and may offer additional tracks at its discretion. 40
Setting the Pension Coefficients 1. The policy must include pension coefficients of some kind. The coefficients and any revision thereof are subject to the approval of Commissioner of Insurance. 2. The insurer may stipulate the duration of the pension-coefficient promise at its discretion (e.g., ten years). 3. Once during the life of the policy, the insured may advise the insurer of his/her intention to begin receiving a pension on account of the policy in the course of the next five years. Then, for a period of at least five years as aforesaid, the insured shall be assured the pension coefficients on the basis most recently approved by the Commissioner. Notwithstanding this, the insured serves the insurer with notice to this effect during the promise period, the insurer may limit the extra promise period so that the total uninterrupted promise period shall not exceed seven years. 4. Identical pension coefficients shall be offered to all insureds and to all persons who take out the insurance at the same time. 5. Whenever pension coefficients are changed, the company shall advertise the new coefficients and the term in which they will be in effect in two Hebrew-language daily newspapers. Additionally, the company shall include, in the annual report that it sends to all insureds who have a similar interest, a notice about said change, with reference made to the new coefficients, the duration of the promise related to them, etc. 6. Payment of the insurance sum in the event of death during the insurance term and before the onset of pension payout if the insured dies before he/she begins to receive the pension, the following rules shall apply: a. The default payout shall be the payout of a pension to survivors for at least five years. b. The company may offer additional ways of receiving the money in the event of death (lump sum, pension with coefficients, etc.), as it deems fit. c. The remaining indicators that affect the manner of pension payout under the default option (term of payment, coefficients, interest rate, etc.) shall be left to the company s discretion. 41
2. The Risk Savings Ratio in Preferred ( Adif )-Type Policies In Adif-type policies, savings accumulation is kept separate from death risk insurance and the insured or the policyholder determines the way the premium is divided between them. The ratio of the two components of the policy, savings accumulation and insurance, is determined in the terms of the policy. Components of the company s expenses on account of the policy are included in the portion of the premium that is earmarked for the purchase of insurance risk coverage. There are two main kinds of Adif policies: 1. fixed-ratio; 2. fixed-coverage. Fixed-Ratio Policies In policies of this kind, the apportionment of current monthly premium deposits between savings and risk is determined on the day the policy is issued. In older policies, the conventional basic ratio is 72 percent savings and 28 percent risk and expenses. In other words, for every NIS 100 in monthly premiums, NIS 72 is earmarked for savings and NIS 28 goes toward insurance coverage and insurer s expenses. In 2000, insurers began to offer Adif-type insurance policies in which the accumulation of savings was meant for lump-sum withdrawal only. The ratio in these policies is different: currently it stands at 80 percent savings and 20 percent risk and expenses. Since this is a fixed-ratio arrangement, 80 percent of the premium is earmarked for savings and 20 percent goes toward insurance coverage and the company s expenses. Thus, the total amount of insurance changes each month commensurate with the amount that can be purchased for the 20 percent of the premium that is reserved for risk and expenses. The amount is dependent on the insured s age. The basic ratio can be changed at the insured s request, and some of the premium money that was earmarked for additional savings accumulation may be diverted to purchase of a larger amount of insurance and vice versa, by buying additional risk coverage or savings accrual. Fixed-Coverage Policies Fixed-coverage policies have a track that provides a fixed benefit in the event of death or at the end of the term, it being acknowledged that the premium (and the ratio) may change. The policy defines the benefit as the fixed amount of coverage or the cumulative balance, whichever is greater. A fixed amount of coverage is customarily offered in wage-indexed policies as a function of wage and is determined when the policy is issued. The cumulative 42
balance originates in the savings portion of the basic premium (using the ratio of 80 percent savings and 20 percent risk) and the entire premium paid for extra savings (if any). Each month, the company calculates a complementary amount of coverage, i.e., the difference between the fixed amount of coverage and the cumulative balance. At this point, two different situations arise: 1. If the amount of insurance acquired by the portion of the basic premium that is earmarked for risk is greater than the complementary amount of coverage, the difference in the premium is transferred to savings. 2. If the coverage acquired by the portion of premium earmarked for risk is smaller than the complementary amount of coverage, the company buys extra risk coverage, outside the policy, to build up to the fixed insurance sum, by charging the insured an extra premium. In this type of policy, the savings portion tends to increase throughout the insurance term and sometimes creates a situation of pure savings. In the fixed-ratio type of policy, in contrast, the premium is apportioned according to the fixed ratio that appears the fine print at any point during the life of the policy. Summary When we compare the two types of Adif policies described above, we find that each type is unique in its own way and meets different needs of insureds. In fixed-sum policies, the insured determines the amount of insurance that his/her heirs will receive in the aftermath of an insurance event (either death or at the end of the term). The advantage of this method is that it meets the needs of insureds who consider it important to receive, upon the occurrence of an insurance event, at least the sum that was stipulated from the outset as a fixed amount of coverage. In fixed-ratio policies, the insured determines the mix of risk and savings at the time the policy is issued. The advantage of this method is that it meets the needs of insureds who are interested in earmarking a certain percent of contributions to savings and a certain percent to risk without changing the ratio (e.g., if it becomes necessary to buy extra insurance coverage). 43
3. Contributions to Executive Insurance Plans Executive insurance plans are meant to protect employees at time of retirement or in the event of their dismissal or death. The insurance is based on an employee-employer relationship and on contributions by both sides (severance pay and benefits to cover the premium). The premium is meant to cover several types of insurance events death, disability, loss of working capacity, and so on but the main component of the plan is retirement savings. The conventional contribution in this type of insurance is a contribution by the employer toward severance pay and benefits (at 8.33 percent and 5 percent of wage, respectively) and a contribution toward benefits by the insured employee (at 5 percent of wage). The total contribution in most executive plans is 18.33 percent of the insured employee s wage. This, as stated, is the sum that constitutes the basic premium, which is apportioned at 80 percent for savings and 20 percent for death risk. (The ratio is fixed, in the manner mentioned in the foregoing discussion of Adif-type policies). Below is the composition of severance pay and benefits (paid by both employee and employer) for both components, savings and risk. Table 3-14 Distribution of Severance-Pay and Benefit Contributions between Savings and Risk (Percent of insured wage) Severance pay Employer s Employee s Total share share Contributions 8.33 5 5 18.33 Contributions in percent 45.44 27.28 27.28 100 Risk + expenses 0 27.70 12.73 20 Basic savings 45.44 20.01 14.55 80 Source: Capital Market, Insurance, and Savings Division. 9 For more detailed information about executive insurance, see the reports of the Commissioner of the Capital Market, Insurance, and Savings, for 1997, 1998, and 1999. 44
Below is the distribution of contributions between employee and employer, where the contribution, at 18.33 percent of employee s wage, constitutes the entire contribution, with differentiation between contribution for severance pay, benefits, and the employee s share in buying the insurance coverage. 1. Employer s contribution for severance pay 8.33 percent of 18.33 percent 45.44 percent. 2. Employer s contribution for benefits 5 percent of 18.33 percent 27.28 percent. The employer s total contribution is 72.7 percent. 3. Employee s contribution for benefits 5 percent of 18.33 percent 27.28 percent. Thus, in respect to the risk-and-expenses portion, which makes up 20 percent of the contributions, the employer s share is 7.27 percent or 10 percent of the employer s total contribution (for severance pay and benefits). The remainder 20 percent 7.27 percent = 12.73 percent is the employee s share in purchasing the insurance coverage. It should be borne in mind that the risk portion is composed of benefits (from both the employee and the employer) only. Consequently: 1. The entire contribution for severance pay is earmarked for the savings portion, which makes up 45.44 percent, as explained on Line 1 above. 2. The remainder of the employer s contribution for benefits is 20.01 percent for savings (27.28 percent less 7.27 percent that was set aside for risk). 3. The remainder of the employee s contribution for benefits is 14.55 percent for savings (27.28 percent less 12.73 percent that was set aside for risk). 4. The total savings portion, as stated, is 80 percent of the total contribution toward severance pay and benefits. 45