ISO Insurance Services Office of Israel, Ltd.
Amot Bituach Building, Building B, 6th floor, Derech Menachem Begin 48, Tel-Aviv 66184, Israel
Telephone (972) 3 687 6536, Fax (972) 3 687 6542, E-mail info@iso-israel.co.il, Internet www.iso-israel.co.il
Database for the Compulsory Vehicle Insurance in Israel
Proposed Tariffs for April 2007
18 January 2007 Version
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Table of Contents
ADVICE AND RECOMMENDATIONS REGARDING THE APRIL 2007 TARIFF FOR
COMPULSORY AUTOMOBILE INSURANCE ............................................................................. 4
SUMMARY OF RESULTS ...................................................................................................................... 4
DATA USED FOR THE OVERALL COUNTRYWIDE TARIFF LEVEL DETERMINATION............................ 4
Losses ............................................................................................................................................. 4
Exposures ....................................................................................................................................... 5
DERIVATION OF THE COUNTRYWIDE TARIFF LEVEL CHANGE .......................................................... 6
Determination of Ultimate Losses ................................................................................................. 6
Adjustment for Missing MADA Payments ..................................................................................... 7
Discounting .................................................................................................................................... 7
Adverse Deviation Provisions........................................................................................................ 8
Loss Trend...................................................................................................................................... 9
Calculation of Pure Risk Premiums ............................................................................................ 12
COUNTRYWIDE TARIFF LEVEL INDICATIONS ................................................................................... 14
Initial Indications......................................................................................................................... 14
Additional Considerations ........................................................................................................... 15
FINAL RECOMMENDATION FOR COUNTRYWIDE TARIFF LEVEL CHANGE ....................................... 18
Derivation of Changes by Vehicle Type ...................................................................................... 18
SUPPLEMENTAL MOTORCYCLE ANALYSIS ...................................................................................... 20
FINAL TARIFFS ................................................................................................................................. 21
ANALYSIS OF THE POOL EXPERIENCE FOR COMPULSORY VEHICLE INSURANCE IN ISRAEL ........... 21
ADVICE AND RECOMMENDATIONS REGARDING THE APRIL 2007 TARIFF FOR
COMPULSORY RAILROADS INSURANCE ............................................................................... 24
DATA USED FOR THE RAILROADS ANALYSIS................................................................................... 24
ISRAELI RAILWAYS ANALYSIS ......................................................................................................... 24
Determination of Ultimate Incurred Losses ................................................................................ 24
Analysis of Paid Losses ............................................................................................................... 24
Comparison of Paid Losses Developed to Nine Years to the Current Estimate of Incurred
Losses ........................................................................................................................................... 25
Determination of Ultimate Incurred Losses ................................................................................ 26
Determination of Ultimate Discounted Losses ............................................................................ 27
Determination of Tariff by Segment ............................................................................................ 28
TREND ANALYSIS ............................................................................................................................. 29
Pure Premium .............................................................................................................................. 29
Calculation of Loss Per Exposure ............................................................................................... 30
Final Recommended Pure Risk Calculation ................................................................................ 30
CARMELIT HAIFA ............................................................................................................................. 31
APPENDIX A – FINAL PAID MACK’S AGE-TO-AGE FACTORS .......................................... 33
APPENDIX B -- ANALYSIS OF MISSING MADA PAYMENTS .............................................. 35
APPENDIX C - EXPERIENCE PERIOD FOR TARIFF DETERMINATION AND
DETERMINATION OF TREND FACTORS ................................................................................. 36
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APPENDIX D - DERIVATION OF AVERAGE CLASS FACTORS .......................................... 38
APPENDIX E -- CHANGE IN THE RETIREMENT AGE .......................................................... 40
APPENDIX F - INCREASED SUBROGATION EFFORTS OF THE INII ............................... 43
APPENDIX G -- CHANGES IN LAW AFFECTING THE SETTLEMENT OF CLAIMS ...... 45
APPENDIX H -- THE "LOST YEARS" ......................................................................................... 47
EXHIBITS
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Advice and Recommendations Regarding the April 2007 Tariff for
Compulsory Automobile Insurance
As part of ISO Israel’s role as the operator of the Data Bank for Compulsory Automobile Insurance,
ISO Israel is required to provide advice and recommendations regarding the pure risk premium for
April 2007. The following contains ISO Israel’s analysis and proposal regarding the appropriate pure
risk premium level for April 2007. This proposal includes input received from the Israeli insurance
companies and the Ministry of Finance in 2006.
Please note that this document reflects the changes for the Pool tariffs effective January 2007. As a
result of those very recent changes, ISO Israel is not proposing any further revisions to the Pool
tariffs at this time.
Summary of Results
ISO Israel performed an analysis of the indicated changes to the current ISO Israel tariff levels with
consideration of discounting, since the Ministry of Finance has requested that the calculation of
investment income be provided for in the pure risk premiums (i.e., the tariffs). Additionally, this
analysis includes a provision to account for the possibility of adverse loss deviations. Based on ISO
Israel’s initial analysis, the countrywide tariff level indication of -17.1%, as displayed on Exhibit 9,
is the appropriate indicated change for the April 2007 Israel tariffs prior to consideration of recent
changes in the Israeli market such as changes in the retirement age, increased subrogation
efforts by the INII, changes in the law affecting the settlement of claims, the lost years court
rulings, and the recent changes in hospitalization costs. While some of these changes are already
in effect, they are still not adequately reflected in the historical loss experience underlying this
review. Thus, as explained further in this document, ISO Israel's recommendation is to implement a
-6.0% countrywide tariff change for April 2007.
Details on the data and analysis methods used for this review follow below.
Data Used for the Overall Countrywide Tariff Level Determination
Losses
ISO Israel used the following two sources of loss data for this year's tariff analysis:

Loss data accumulated in the ISO Israel Database for underwriting years 2002, 2003 and
2004.

The end of 2002, end of 2003 and end of 2004 reports by Professor Yehuda Kahane of
Actuarial and Financial Consulting dated February 5, 2003, March 22, 2004, and February 3,
2005, respectively.
The ISO Israel paid loss data contains data for the totality of the compulsory insurance market. It
includes all claim payments made through December 2004 by the insurance companies, including the
Compulsory Automobile Insurance Pool; loss data from Karnit is not included even though they were
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accumulated in the ISO Israel database, as the pure risk premium used in our analysis does not
include the Karnit provision. However, ISO Israel started collecting compulsory insurance
information for policies having inception dates of October 2001 and later. As a result, the ISO Israel
Database contained only 3 complete underwriting years of data at the time of this analysis -underwriting years 2002, 2003 and 2004. Thus, ISO Israel relied on the Kahane report to provide
historical compulsory insurance loss data for earlier underwriting years.
Kahane's report is based on, and contains data for, the totality of the compulsory insurance market.
The data from Professor Kahane’s report includes all claim payments made through December 2004
for underwriting years 1977 to 2002, by the insurance companies and Avner, including the
Compulsory Automobile Insurance Pool; loss data from Karnit is not included.
Exposures
ISO Israel used the following two sources of exposure data for this year's tariff analysis:

Exposure data accumulated in the ISO Israel Database for the years 2002, 2003 and 2004.

Ministry of Transportation vehicle counts for 1998 through 2004.
ISO Israel relied on the 2002, 2003 and 2004 exposure totals derived from the ISO Israel Database
for this countrywide tariff level review. Both voluntary and Pool experience were used for this
analysis. The ISO Israel Database underlying this analysis includes experience reported in detail
through the ISO Israel statistical plan, as well as experience reported in aggregate by some
companies for specific instances where statistical plan reporting could not be completed in time for
this review.
Since ISO Israel exposure data has the same short-term issue as the losses -- it is currently available
only for the latest 3 years (2002, 2003 and 2004) -- ISO Israel relied on the MoT data to approximate
insured exposure counts and pure risk premiums for the earlier years. That is, ISO Israel determined
1998 - 2001 pure risk premiums by adjusting the 2003 ISO Israel pure risk premiums by the overall
change in vehicle counts over time, obtained from the MoT data. This process is explained further in
the discussion of the derivation of the current pure risk premium level below.
Before proceeding with its analysis, ISO Israel reconciled the 2002, 2003 and 2004 exposure totals
from the ISO Israel Databank to the MoT vehicle totals. However, since the Ministry of
Transportation database includes information on all vehicles registered in Israel, whether or not
compulsory insurance is ultimately purchased, while the ISO Israel Databank contains exposure
information only on actual compulsory insurance policies purchased, consideration must be given to
the anticipated percentage of uninsured vehicles in Israel when performing this comparison. Based
on prior Karnit pricing provisions, ISO Israel expects the uninsured vehicle percentage in Israel to be
around 5%.
Once the uninsured vehicle population is taken into consideration, the reconciliations revealed that
the underwriting year 2002, 2003 and 2004 written exposure totals derived from the ISO Israel
Database (determined based on the effective and expiration dates on the detailed premium records)
reconcile fairly well to the MoT data for those years on an overall basis. That is, on an overall basis,
the ISO Israel exposures for years 2002, 2003 and 2004 were lower than the MoT vehicle totals, by
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an amount that could reasonably be explained by the uninsured vehicle population in Israel, with the
exception of the special vehicles. In the case of special vehicles, it is known that the MoT database
does not contain information for certain vehicles types (e.g., forklifts and mechanical engineering
vehicles). Exhibit 1 provides a summary of the comparison of the ISO Israel exposures to the MoT
vehicle counts for the 2002, 2003 and 2004 years.
Derivation of the Countrywide Tariff Level Change
Determination of Ultimate Losses
ISO Israel performed an independent analysis of the ultimate incurred losses for the period 19852004 using five variants of the chain ladder method. For this analysis, ISO Israel used the paid losses
contained in the Kahane report, except for 2002, 2003 and 2004 where data from the ISO Israel
Database was used. All data was indexed to November 2004. At this stage in the analysis, losses are
not discounted and do not contain a provision for adverse deviation.
Historical losses for underwriting years prior to 1985 were eliminated from this analysis, as they
exhibited a very different development pattern than the more recent years, particularly in the early
evaluations. Thus, ISO Israel does not believe they are appropriate for use in estimating development
factors for the more recent years. However, ISO Israel does recognize that limiting the number of
underwriting years in the historical loss development triangle also limits the number of evaluations
used in the analysis. As a result, ISO Israel has applied a tail factor of 1.003 to the final evaluation to
account for the development expected for compulsory insurance beyond 20 years. This tail factor was
selected based on a review of the earlier underwriting years of data available in the Kahane report,
using the Mack method recommended for the tariff evaluation (below), and is shown on Exhibit 2-6.
The five variants of the chain ladder method differ only with respect to the method of calculation of
the overall age-to-age loss development factors from the individual years' link ratio factors. Age-toage loss development factors were calculated as follows:





Method 1: Average of all years' link ratios
Method 2: Average of all years' link ratios except the largest and smallest
Method 3: Average of the latest five years' link ratios
Method 4: Average of the latest three years' link ratios
Method 5: According to the Mack method (see Appendix A)
Exhibit 2 displays, for each of the above five methods, the derivation of the ultimate loss
development factors and the resulting ultimate undiscounted losses by year. The table below
compares the ultimate losses generated by each of the above 5 methods for the last 7 years (losses are
in thousands of NIS):
Year
1998
1999
2000
2001
2002
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Ultimate Undiscounted Losses, Excluding Any Provision for Adverse Deviation
Method 1
Method 2
Method 3
Method 4
Method 5
2,800,550
2,786,987
2,812,344
2,824,921
2,797,444
2,752,897
2,739,565
2,776,977
2,804,446
2,749,843
2,669,021
2,656,094
2,692,366
2,721,357
2,663,747
2,699,564
2,688,653
2,696,866
2,736,986
2,685,553
2,597,206
2,584,863
2,526,136
2,554,326
2,570,826
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Ultimate Undiscounted Losses, Excluding Any Provision for Adverse Deviation
Year
Method 1
Method 2
Method 3
Method 4
Method 5
2003
2,833,616
2,817,063
2,712,330
2,753,275
2,784,877
2004
2,522,686
2,506,588
2,500,308
2,626,718
2,454,632
7 Year Average
2,696,506
2,682,830
2,673,904
2,717,433
2,672,417
The Mack Method provides a seven-year average estimate that is fairly consistent with the estimates
derived from the other chain ladder methods. Additionally, the Mack Method has a distinct
advantage over the other methods -- it provides a theoretical estimate of the standard error and
coefficient of variation for the outstanding loss reserve estimates. For these reasons, ISO Israel has
decided to continue using the Mack method for its tariff analysis.
Adjustment for Missing MADA Payments
During our discussions with the Israeli insurance companies in 2005, it was brought to our attention
that the Israeli insurance companies are in dispute with MADA, such that there has been a
withholding of payments by insurers to MADA starting with underwriting year 2003. It is ISO
Israel’s understanding that this dispute had not yet been resolved at the time of this analysis, which
means that the paid loss data reported to the ISO Israel Database for underwriting years 2003 and
2004 as of December 2004 does not include any payments to MADA. However, historically the
majority of MADA payments were made by the 12 month evaluation for any given underwriting
year. Furthermore, the historical loss development factors to be applied to the 2003 and 2004
underwriting year paid losses are based on historical data that includes MADA payments. As a result,
an adjustment needs to be made to the paid losses for underwriting years 2003 and 2004 to account
for the missing MADA payments. Appendix B contains a detailed analysis of the impact of the
missing MADA data. As Appendix B explains, ISO Israel has determined that the reported
underwriting year 2003 paid losses as of December 2004 need to be increased by about 1.7%, and the
reported underwriting year 2004 paid losses as of December 2004 and the reported underwriting year
2003 paid losses as of December 2003 need to be increased by about 7.4% in order to account for the
missing MADA data. This MADA adjustment is included in the paid loss totals displayed on
Exhibits 2-1 through 2-5.
Discounting
Since the Ministry of Finance has requested that the tariffs reflect investment income, ISO Israel has
performed this analysis on a discounted basis.
The discount rate used for the tariff calculation should be the risk-free rate that prevails in Israel. As
was done for the tariff analysis that became effective in October, 2005, ISO Israel considered the
yield of ten-year bonds as a proxy for the risk-free rate. Additionally, this year, ISO Israel also
considered the five year bond rates, as there has been evidence that the economic conditions in Israel
are changing. Historical ten year and five year bond rates in Israel are as follows:
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Date
12/01
12/02
12/03
12/04
12/05
Average
Indexed Ten-Year
Bond Rate
4.3%
5.6%
4.1%
4.1%
3.3% (*)
4.3%
Five-Year
Bond Rate
4.9%
4.8%
4.9%
3.8%
3.0%
4.3%
Data Source: Bank of Israel
(*): For 2005, the ten year bond rate is as of October, 2005.
As shown above, both the ten and five year bond rates have averaged about 4.3% over the past five
years. However, there has been some variability by year, and even more importantly, both the ten and
the five year bond rates show a considerable drop in the most recent year. As a result, ISO Israel has
selected 2.5% as the discount rate for this year’s tariff analysis.
For this analysis, losses are discounted from the midpoint of each payment year to the end of each
underwriting year. This is based on the assumption that the average date of writings, and the average
loss payment date, is July 1. Even though the average date of writings in Israel is not exactly the
middle of the calendar year, but rather closer to the beginning of the year, July 1 was chosen for ease
of application. This assumption has no effect on the final tariff indications, as the date selected as the
average date of writings is the same date used as our assumed average loss payment date -- and in
both cases we are discounting to the end of the underwriting year. So, if the true average date of
writings is earlier in the year, for example June 1 as opposed to July 1, then the true average loss
payment date would also be earlier in the year as well (June 1). Since both premiums and losses
would be adjusted accordingly, this would result in no bottom line effect on the indication. Further
details on the calculation of discounted losses are provided in Exhibit 3. Exhibits 4-1 and 4-2, display
the incremental ultimate discounted losses and the cumulative ultimate discounted losses for this
year's tariff analysis.
Adverse Deviation Provisions
To account for the possibility of adverse deviation of ultimate loss amounts, ISO Israel developed
indications that incorporate a provision for adverse deviation. This was done by adjusting the
estimated ultimate incurred losses for each underwriting year to include one standard error of the
reserves. The standard errors were calculated using the Mack method. Further details on the
calculation of the standard errors can be found in the article that is referenced in Appendix A. The
resulting standard errors and coefficients of deviation are displayed in Exhibit 5.
The application of one standard error of the reserves to the estimated losses, to account for the
uncertainty surrounding ultimate loss development, has customarily been used in other actuarial
studies in Israel, such as in the reports on the Compulsory Insurance Market as prepared by Professor
Yehuda Kahane. It provides an extra level of confidence in the ultimate loss estimates, to account for
the possibility that actual loss payments will be higher than expected based on past experience.
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Loss Trend
Since actuarial analysis involves relying on the use of historical data to price tariffs that will be in
effect in the future, the historical experience must be adjusted to reflect any anticipated economic
and social changes expected in the future. Such anticipated changes can be accounted for by the
application of loss trend factors to the historical loss data. Loss trend factors take into account
anticipated changes in both claim frequency and claim cost levels in the future.
ISO Israel evaluated four items with regard to loss trend:
Compulsory Automobile Frequency Trend
For this analysis, ISO Israel utilized vehicle counts from the MoT data and claim counts (casualties)
from the Israel Central Bureau of Statistics (CBS). ISO Israel exposure data could not be used since
only three years of exposure experience are available at this time. Even though the MoT counts
include uninsured vehicles, ISO Israel believes it is appropriate to use these to evaluate frequency
trends, since we are measuring changes in the average claim rate over time. As long as the same data
source is used for all of the underwriting years, and there is no bias in the totals provided by that data
source (i.e., the uninsured motorist percentage does not change drastically over that time period),
consistency should be maintained. Additionally, while the Israeli insurers have expressed concern
regarding the use of CBS data since it only represents a sample of all road accidents in Israel, ISO
Israel continues to believe that it can be a useful source of information for measuring relative
changes in claim frequency over time, provided that the sampling method used by the CBS is fairly
consistent over time. That is, when measuring trends, claim totals need not be complete for all
underwriting years; rather, their measurement only needs to be consistent over time.
Exhibit 6-1 displays claim frequency annual rates of change derived using various exponential least
squares fits.
Compulsory Automobile Claim Cost Trend
Since compulsory automobile tariffs in Israel are indexed to the general CPI, changes in claim costs
need to be evaluated relative to the general CPI index. Accordingly, ISO Israel evaluated claim cost
trends by examining health and wage CPI indices in excess of the general CPI index.
Exhibit 6-2 displays the claim cost annual rates of change that are derived using an exponential least
squares fit. It should be noted that the "real wage" indices were already net of general CPI changes,
and thus they did not need to be adjusted for general CPI changes like the health indices.
During our discussions with the Israeli insurers in November 2006, it was brought to our attention
that the most recent CPI changes for 2006 show an increasing trend of the health index beyond the
general CPI index. However, an article in Leumi Economic Weekly indicates that the most recent
general CPI indices are affected by three volatile components in the short term -- fuel costs which
were affected by the global oil price fluctuations, the holiday, recreation and foreign travel
component, and housing prices which were affected by the strengthening of the shekel vis-a-vis the
US dollar. Quoting Leumi Economic Weekly, "When analyzing the rise in prices excluding the
volatile components and also discounting the impact of the exchange rate, it appears as though the
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rate of core inflation is at the center of the price stability target range of 1-3%. Therefore, the recent
adjustment in prices is not likely to impact the rate of inflation over the longer term." As a result, ISO
Israel is not suggesting any adjustments for this short term CPI phenomenon in the market at this
time.
Compulsory Automobile Pure Premium Trend
For this analysis, ISO Israel utilized losses from the Kahane report for underwriting years 1998
through 2001, losses from the ISO Israel Databank for underwriting years 2002, 2003 and 2004 and
vehicle counts from the MoT data. Additionally, ISO Israel used ultimate, undiscounted losses based
on the Mack method, without an adverse deviation provision. ISO Israel believes that the adverse
deviation provision should not be included in the pure premiums used for the trend analysis, as the
adverse deviation provision accounts only for the potential of upward deviations in the ultimate
losses, which increases for the most current underwriting years; thus, including the adverse deviation
provision in the pure premiums used for a trend analysis would introduce a positive bias into the
trend fits.
All trend losses are indexed to November 2004. Because the data for each underwriting year is
indexed to the same cost level, any trends derived by the comparison of one year's losses to the next
is exclusive of changes in the general CPI level. That is, the trends on Exhibit 6-3 are net insurance
trends. Thus, they are appropriate for application to the fully indexed losses in this tariff analysis.
Exhibit 6-3 displays the pure premium annual rates of change derived using exponential least squares
fit.
External Forecasts
The last several years in Israel have seen economic activity impacted by domestic and global security
situations. The impact on tourist visits has been most profound and this seems to have had a ripple
effect on the economy in general. Unemployment rates in 2002, 2003 and 2004 have exceeded 10%.
Events since January of 2005 indicate that the economic picture is improving with unemployment
rates for 2005 less than 10%, and future forecasts indicating a continued decline in unemployment
for 2007 and beyond. Given the nature of these changes in the economy and the expected relationship
of economic activity to motor vehicle use and accidents, in 2005 ISO Israel and the Insurer Panel
discussed and examined various issues and scenarios for determination of the pure risk premium
portion of the Tariff. (Also impacting the determination of trend factors were potential adjustments
in the base data for changes in data reporting for items examined separately elsewhere in this
document, such as MADA payments, INII subrogation and changes impacting the settlement of
claims.) For the purpose of this analysis, items which had uniform impacts by year for the years
considered in determining pure risk premiums, such as the INII subrogation change, were not
included in the trend analysis. In addition, any changes in settlements that would be prospective in
nature do not impact the compiled data and do not need to be considered for trend purposes.
Exhibit 6-4 presents an estimate of pure premium trend for Israel, using an econometric model and
data from Global Insight, a leading provider of worldwide economic and financial data and forecasts.
The model uses linear regression to model ultimate pure premium as a function of the unemployment
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rate. A similar model is used by ISO Israel in the United States in its annual publication "Alternative
Trend Forecasts for Commercial Automobile Liability Frequency and Pure Premium".
The rationale for the model is as follows. It is reasonable to expect that the civilian unemployment
rate is inversely related to claim frequency. When there are fewer people traveling to work, traffic
density is reduced, lowering the likelihood of accidents. Also, the volume of business activity is low
when the unemployment rate is high, which results in a decrease in the usage of commercial vehicles,
and therefore, lower pure premium.
As can be seen from the model output in Exhibit 6-4, the inverse relationship between pure premium
and unemployment is borne out. For each underwriting year, the pure premium trend factors shown
in Column (4) are equal to the ratio of the forecast pure premium for 2008 to that year's actual pure
premium. The forecast pure premium for 2008 is used because the proposed effective date of the
tariff is in 2007, and thus the average date of loss for policies written under the new rates will be in
2008. However, it should be noted that the very optimistic forecasts provided by Global Insight’s
econometric model were determined prior to the recent conflict with Hezbollah, which could have a
significant effect on future global security situations and tourist visits, potentially flattening or even
reversing some of the anticipated economic improvements.
The changes in the economic conditions throughout the experience period available for analysis raise
the question of what is the appropriate base data for determining the pure risk premium and what is
the appropriate period for selecting the trend factor. The results of various sensitivity tests varying
the source data and the different possible periods for fits are contained in Appendix C.
Final Trend Selection and Application
When measuring and selecting final loss trends, changes in historical claim frequency and claim cost
need to be considered, in addition to external changes in the environment. The following
observations of Israel compulsory claim frequency trends, claim cost trends, pure premium trends,
and external trends can be made:

Claim frequencies are decreasing.

Claim cost is slightly positive.

Pure premium trends are negative.

After a period of high unemployment, the economy appears to be rebounding with a
decreased unemployment rate for 2005 and continued decreases forecasted for future years.
But again, the very optimistic forecasts provided by Global Insight’s econometric model
were determined prior to the recent conflict with Hezbollah, which could have a significant
effect on future global security situations and tourist visits, potentially flattening or even
reversing some of the anticipated economic improvements.
Based on the above, ISO Israel has selected an annual trend factor of 0% for this year's tariff
analysis. The 0% selection reflects the fact that while negative pure premium trends are observed for
the historical data studied, the Israeli economy is rebounding; thus, we do not expect the recently
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observed decreases to continue into the future. Additionally, as explained in Appendix C, the overall
trend factor of 0% is applied to the 7 years of data used in the countrywide tariff level indication.
For each underwriting year, the annual trend factor is applied from the average date of loss for that
underwriting year to the average date of loss under the proposed tariff (i.e., the midpoint of the time
period during which losses can occur on policies written during the time that the proposed rates will
be in effect).
For each underwriting year, the average date of loss is one year after the start of the year (for
example, 1/1/2005 for underwriting year 2004.) This is because loss data is compiled on a policy
year basis. Thus, 1 year policies with effective dates between 1/1/2004 and 12/31/2004 can produce
accidents in the time period 1/1/2004 to 12/31/2005.
For each underwriting year, the average date of loss under the proposed tariff is one year past the
assumed effective date of the new tariff, which is April 1, 2007. Using one year past the assumed
effective date as the average date of loss assumes that the new tariffs will be in effect for one year,
that policies have one-year terms, and that policy writings are evenly distributed throughout the year.
While ISO Israel recognizes that there are some exceptions to the one-year policy term (i.e., some
policies in Israel are written for less than one year), a review of the data in the ISO Israel Database
has confirmed that the vast majority of compulsory automobile policies in Israel are one-year
policies. So, for underwriting year 2004, the loss trend period is from January 1, 2005 to April 1,
2008, or 3.25 years.
As a result, the trend periods for this review by underwriting year are as follows:
1998 -- 9.25
1999 -- 8.25
2000 -- 7.25
2001 -- 6.25
2002 -- 5.25
2003 -- 4.25
2004 -- 3.25
The trend factor applied to each underwriting year is equal to the annual trend factor raised to the
trend period for that year. So, for example, the trend factor for 2004 is calculated as:
(1.00) ^ 3.25 = 1.00
Calculation of Pure Risk Premiums
Calculation of 2002, 2003 and 2004 Pure Risk Premiums
The 2002, 2003 and 2004 pure risk premiums were calculated by multiplying the 2002, 2003 and
2004 written exposures (i.e., total vehicles insured for one year) in the ISO Israel Database by the
current ISO Israel tariffs in effect in Israel. As shown on Exhibit 7, separate calculations were
performed for voluntary and Pool risks, since Pool tariffs are higher than voluntary tariffs. Voluntary
tariffs are those shown in Exhibit 14 of the July 21, 2005 version of the Proposed Tariffs for October
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2005. Pool tariffs are the Pool tariffs effective January 1, 2007, as contained in MoF General
Insurance Circular 2006-1-17, dated December 11, 2006.
It should be noted that provisions were also made to accurately rate short-term policies. Specifically,
policies in effect for less than 7 days were rated at 5% of the annual tariff. Policies in effect for more
than 7 days but less than a full year were rated as
[(.05) + (.003 * the number of days in effect - 7)] * the tariff.
This short-term rating was accomplished by using vehicle counts that were adjusted for short-term
policy rating on Exhibit 7. So, for example, if a policy was in effect for 6 days, the vehicle count
adjusted for short-term rating would equal .05 vehicles. When this adjusted vehicle count is
multiplied by the annual tariff, the correct short-term pure risk premium for this risk is applied. For
standard 1 year policies, there is no adjustment applied. That is, the vehicle count after adjusting for
short-term policy rating is equal to the initial vehicle count and thus there is no effect on the pure risk
premium calculation.
Since the current ISO Israel tariffs were at a May 2005 index level, these tariffs are re-indexed in
Exhibit 7 to a November 2004 level, to be consistent with the indexing used for the losses.
In addition, pure risk premiums for privately owned vehicles, corporately owned vehicles and
privately owned motorcycles insured in the voluntary market and privately owned motorcycles
insured in the Pool were multiplied by average class factors. Average class factors are applied to the
pure risk premium to reflect the current ISO Israel Risk Classification Plan, which was implemented
on October 1, 2005. The average class factors reflect the following rating variables:

Privately Owned Automobiles (voluntary risks only) - age and gender, years licensed,
number of accidents, number of major convictions, airbags and engine size (although
currently all engine size groupings have class factors of 1.00 in the ISO Israel class plan).

Privately Owned Motorcycles (voluntary and pool risks) - age and gender, years licensed,
number of accidents and number of major convictions.

Corporately Owned Automobiles (voluntary risks only) - the only rating variable is airbags.
Average class factors were derived using written exposure data from the ISO Israel Databank for
underwriting year 2004. Further details on the derivation of the average class factors can be found in
Appendix D.
For motorcycles, the tempered class factors, as implemented with the January 1, 2007 motorcycle
Pool tariff changes, were used in this analysis. However, we have also included information in
Appendix D on the average class factors that would result for motorcycles if the full classification
factors, as originally recommended in our 2005 proposed risk classification plan filing, are used for
motorcycle risks.
The total pure risk premiums for 2002, 2003 and 2004 were then derived as the sum of the voluntary
and Pool pure risk premiums, as shown on Exhibit 7-4, Exhibit 7-8 and Exhibit 7-12, respectively.
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Calculation of 1998-2001 Pure Risk Premiums
As discussed previously, at the time of this analysis ISO Israel exposures were available only for the
2002, 2003 and 2004 underwriting years. To determine aggregate pure risk premiums for
underwriting years 1998-2001, the 2003 pure risk premiums were adjusted using MoT vehicle
counts. This adjustment is necessary because the total number of vehicles, which directly affects the
total pure risk premium, has changed over the years. The aggregate pure risk premiums for 19982001 were determined by adjusting the 2003 aggregate pure risk premiums for the change in the MoT
vehicle counts from each underwriting year to 2003, separately by vehicle type. For example, 1998
aggregate pure risk premiums were determined by vehicle type as follows:
(2003 aggregate pure risk premiums) * (1998 MoT vehicle counts/ 2003 MoT vehicle counts)
This adjustment was performed by vehicle type to reflect distributional changes in vehicle counts by
vehicle type. Since the tariffs vary by vehicle type, changes in vehicle counts by vehicle type will
have different effects on the resulting pure risk premiums. Exhibit 8 displays the resulting aggregate
pure risk premiums for each year used in this analysis.
It should be noted that since the MoT data does not separately identify dealership vehicle counts, the
aggregate pure risk premiums for dealerships for years prior to 2002 were determined by using the
MoT motorcycle vehicle counts for the motorcycle dealerships, and a combination of the MoT
automobile and motorcycle vehicle counts for the auto dealerships.
Countrywide Tariff Level Indications
Initial Indications
Exhibit 9 displays the indicated change to the current ISO Israel tariff levels with consideration of
discounting, and with consideration for adverse deviation, for all seven years of experience
(underwriting years 1998 - 2004). Since premium and loss data include Pool experience, the
indicated change represents an average change that is appropriate for both the voluntary market and
the Pool combined.
Exhibit 9-A provides additional indications for informational purposes, obtained by varying the years
of experience utilized in the review. So, for example, if we use only the last five underwriting years
of data to determine the indicated tariff level changes, the indication would be -20.1% rather than
-17.1%. Alternatively, eliminating underwriting years 2000 - 2002 (which the Israeli insurers thought
were atypical based on our meetings in 2005) from this analysis changes the indication only slightly
to -14.9%. Or, eliminating underwriting year 2004 (which the Israeli insurers thought was atypical
based on our November 2006 teleconference) from this analysis also changes the indication only
slightly to -15.7%. All in all, Exhibit 9-A illustrates that varying the years used for this calculation
leads to results in a fairly narrow range, from -14.9% to -21.2%. For stability purposes, ISO Israel is
recommending that the all years indication of -17.1% be used for this year's final tariff
recommendation.
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Additional Considerations
During our discussions with the Israeli insurers while preparing the 2005 Tariff review, the insurers
raised concerns about several items that might impact the future cost of compulsory insurance. ISO
Israel recognizes that none of these items have been explicitly reflected in the tariff indication on
Exhibit 9, since the underlying data periods are prior to the time of these changes, and thus require
separate consideration:

Change in the Retirement Age -- Several insurers expressed concern about the impact that
an increase in the retirement age would have on compulsory insurance. As a result, ISO
Israel has analyzed the potential impact the increase in the retirement age would have on
compulsory insurance. Appendix E contains ISO Israel's analysis of this issue. As a result of
this analysis, ISO Israel estimates that the change in the retirement age will result in an
increase in ultimate losses of about 1.5%, which is not reflected in the countrywide tariff
level indication on Exhibit 9.

Increased Subrogation Efforts of the INII -- ISO Israel is aware of the fact that the Israeli
National Insurance Institute (INII) has recently increased subrogation efforts for claims
against insurance companies due to compulsory auto accidents. This is a relatively new
initiative, and as such the increased liability due to these efforts is not fully reflected in the
losses for the underwriting years used for this countrywide tariff level review. A sample of
Israeli insurance companies representing about 50% of the market provided ISO Israel with
information on INII payments to analyze this issue. ISO Israel's analysis of the increased INII
subrogation efforts is contained in Appendix F. As Appendix F indicates, ISO Israel
estimates that the recent increased subrogation efforts by the INII represent an increase in
ultimate losses of about 3%, which is not reflected in the countrywide tariff level indication
on Exhibit 9.

Changes in Law Affecting the Settlement of Claims -- During the course of our
discussions with the Israeli insurance companies in 2005, several proposed or actual changes
in the settlement of claims were raised. ISO Israel has consulted with claims expert(s) and
made an independent evaluation of the effects of each as well as the appropriateness of
adjusting the historical data at this time.
o
“Chok ha-Hesderim” -- At issue is the 2005 Economic Policy Act, which includes a
change to the work invalidity threshold, so that only permanent invalidity levels of 9%
and above will be entitled to a one time grant. Prior to the 2005 Economic Policy Act, a
level of invalidity greater than 5% qualified for this benefit. (The one time benefit prior
to this Act was paid on levels of invalidity between 5% and 20%.)
ISO Israel believes that the change will have a small effect on compulsory insurance
tariffs. Making the assumption that levels of disability as reported by the INII in the
general population are a fair approximation of the expected levels of disability in auto
accidents, ISO Israel found that the group with disability levels between 0 to 20% (which
really translates into 5 to 20% as currently an invalidity level of 5% or more qualifies for
this benefit), comprise 4% of all pension recipients. The number of individual recipients
at the end of 2003 was 970. Not all of these individuals were injured in auto accidents.
50% were auto accident injuries would mean that there are 485 individuals with a
disability level between 5% and 20%. Changing the eligibility level to 9% and assuming
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a uniform distribution would mean that there would have been approximately 130 cases
that would not be compensated from INII but would now need to be compensated by the
compulsory auto coverage (i.e., changing the threshold from 5% to 9% is a 4 point
increase in a range from 5 to 20,or approximately 27% of the claimants if we assume a
uniform distribution). These benefits are paid by the formula as follows:
Invalidity percentage * ¾ of monthly income prior to accident * number of months of
invalidity
The resulting value would then have a maximum of 130*.07*(.75*7,000)*43 months =
2,054,325. The cost to the Paltad of this change in 2003 would have been no more than
2,054,325 NIS. This is equal to less than 0.1% of the previously estimated ultimate
incurred losses.

Changes in the Road Accident Law -- There currently exists a proposal to increase the
limit of pain and suffering from 150,000 NIS to 280,000 NIS. This change if enacted
would impact the cost of compulsory insurance. However, the specifics of this provision
are in a private law proposal and the Knesset committee has considered the idea of a
change without making any specific recommendation.
Since the precise details of any change in this regard are not known at this time, ISO
Israel would not recommend making any adjustment to the indicated tariff at this time,
but would recommend that when such a proposal is final that the tariff be adjusted to
reflect any increase in liability.
With regard to the potential changes in the definition of a road accident, to date there are
a number of proposals that have yet to be enacted and should be evaluated at the time that
they are final.

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National Insurance -- A change has been made to increase the employer’s share of the
injury compensation from the first 9 days to the first 12 days. We believe that this impact
will be small as payment for lost income for all auto accidents represents about 20% of
all losses. In order to evaluate the impact of this change on compulsory insurance ISO
Israel examined wage loss information by length of disability in days from US auto
insurance studies conducted by the Insurance Research Council. In doing this analysis
ISO Israel calculated the insurer share under a treatment consistent with the current
Israel system where the employer would pay the disability for the first 9 days and under
the future 12 day level. The calculation indicates that this change would produce a 20%
increase in the amount of losses paid for disability compensation for work injury auto
accidents. Since the entire wage compensation portion of the losses is 20% reflecting
both work and non work auto accidents, this change could have no more than a 4% effect
if all wage compensation were for work injury auto accidents. While Avner has indicated
that historically about 10% of all road accidents are work accidents, given the lack of
detailed data available for analysis on this issue, ISO Israel has used a more conservative
assumption that 25% to 50% are work accidents. As a result, ISO Israel estimates that
this change will increase losses no more than 1% to 2%, and thus has selected an effect
of 1.5%. The details of the 20% increase are shown in Appendix G.
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
The Lost Years -- Several insurers expressed concern about the impact that recent "lost
years" rulings could have on compulsory insurance in Israel. In the "lost years" rulings, the
courts have awarded income benefits to claimants that were not previously entitled to income
benefits. The award for "lost years" represents the lost income that would have been earned
by the injured had they not died, or experienced curtailment of life as a result of a road
accident. The benefit is payable to "untraditional" beneficiaries, such as the parents or the
estate of the deceased. These awards represent a broadening of compulsory auto insurance in
Israel, following a similar broadening of tort rulings. As a result, ISO Israel performed an
analysis to estimate the impact of the lost years rulings. Appendix H provides ISO Israel's
analysis of the effect of the lost years rulings on Compulsory Insurance in Israel. As
Appendix H indicates, ISO Israel estimates that the recent "lost years" cases represent an
increase in ultimate losses of about 5.2%, which is not reflected in the countrywide tariff
level indication on Exhibit 9.

Hospitalization - On September 4, 2006 the Ministry of Health published an update of its
hospital services costs, effective as of September 1, 2006. Since hospitalization costs are part
of compulsory automobile insurance, these changes have a direct effect on compulsory
automobile tariffs. According to a simulation performed by the Ministry of Health using
Government owned hospital data for all services given by the hospitals to injureds in road
accidents (i.e., ER, hospitalization, differential services, institutes and clinics), the estimated
impact of the hospital services changes to total hospitalization costs is an 8.25% increase on
an annual basis. Additionally, based on loss data reported via the ISO Israel statistical plan
for compulsory automobile insurance, total hospitalization costs represent approximately
10% of total compulsory automobile losses. As a result, ISO Israel estimates that the changes
in the hospitalization services tariffs represent an increase in ultimate compulsory insurance
losses of about 1%, which is not reflected in the countrywide tariff level indication on
Exhibit 9.

Fraud - In discussions with insurers in 2005, concern was expressed about the lack of an
operational fraud detection mechanism. Early in 2006, , ISO ClaimSearch Israel initiated its
fraud detection operation. Utilizing data going back to 1990, ISO ClaimSearch Israel will
provide a useful tool for companies in managing their fraud exposures. As a result, no
adjustment was made to the historical data to reflect possible changes in fraud activity.
Additionally, the following should be kept in mind: The estimation of future cash flows based on
past payments is statistically uncertain. Additional uncertainty is due to possible future social and
economic developments that might affect the payment of claims under the Compulsory Automobile
Insurance system. Actuarial reserve estimates are therefore reasonable estimates resulting from the
application of an actuarial model. There is no certainty about future claim payments, and they may
differ from the reserve estimates. For this reason, ISO Israel has provided a tariff level indication for
April 2007 that includes consideration for the possibility of adverse loss deviations. Additionally,
since the Ministry of Finance has requested that investment income be reflected in the final tariffs,
these indications also reflect discounting.
The data used in the calculation of the countrywide tariff level indication included both voluntary
market and Pool experience. Because of this, the indicated change is an overall change appropriate
for both the voluntary and Pool tariffs combined.
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The analysis and recommendations of ISO Israel contained in this document are based on an analysis
of historical and projected loss experience for the entire Compulsory Auto Insurance market. To the
extent that insurers will use these pure risk premiums in determining tariff levels they will need to
evaluate the necessary expense loadings for sales, service and administration of the policy. They will
also need to evaluate the cost of reinsurance, particularly noting the type of reinsurance program they
employ and what the parameters of the program’s pricing are relative to the cost levels anticipated in
this analysis. Furthermore, each insurer must take into account the fact that the experience for an
individual insurer will differ from the market as a whole, and that generally, one may expect the
standard deviation for individual company experience to be higher than the standard deviation for the
experience of the entire market combined. ISO Israel has not provided any analysis or guidance on
these matters as these are beyond the scope of the contracted work. These factors are items that each
company needs to focus on as they determine the appropriate loadings and deviations to file to
convert the recommended pure risk base tariffs into their final filed tariff levels.
Final Recommendation for Countrywide Tariff Level Change
Based on the considerations noted above, ISO Israel believes that the -17.1% countrywide tariff level
indication, as displayed on Exhibit 9, is the appropriate initial indicated change for the April 2007
Israel tariffs, prior to consideration of recent changes in the Israeli market such as the change in the
retirement age, the increased subrogation efforts by the INII, the changes in law affecting the
settlement of claims, the impact of the "Lost Years" and the recent changes in hospitalization costs.
However, ISO Israel is not suggesting that this full indication be implemented at this time. Rather,
ISO Israel's recommendation is to implement a -6.0% countrywide tariff change for April 2007. This
selection includes consideration of the following items:
1) the estimated 1.5% effect of the change in the retirement age;
2) the estimated 3.0% effect of the recent INII claims action;
3) the estimated 1.5% effect of the changes in law affecting the settlement of claims;
4) the estimated 5.2% effect of the "lost years" cases; and
5) the estimated 1% effect of the hospitalization services cost changes.
As a result, the new indication, after consideration of the additional items noted above, is as follows:
(1 - 0.171 ) * (1 + 0.015) * (1+ 0.03) * (1+ 0.015) * (1+ 0.052) * (1 + 0.01) = 0.935, or -6.5%.
However, ISO Israel is recommending that this change be rounded up to the nearest whole
percentage, for a final recommended change of -6.0%.
ISO Israel believes that the adverse deviation provision included in the review is sufficient to cover
the possibility of adverse loss development beyond what is already accounted for in the tariff
calculation.
Derivation of Changes by Vehicle Type
Once the overall countrywide tariff level indication is determined, it is necessary to distribute this
change by vehicle type. To do so, experience by vehicle type is evaluated to determine whether the
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observed experience for each vehicle type is in line with the current ISO Israel tariff differential for
that vehicle type.
The main source of data for the vehicle relativity analysis is the ISO Israel Database. The Kahane
report cannot be used, since experience is not available in vehicle type detail. In addition, while
historical Avner data was available for analysis, the data from the Avner files has limited use,
because Avner's exposures appear to be understated. Since the understatements are not consistent by
vehicle type, using the Avner data would bias the resulting vehicle type relativities. Moreover,
vehicle type detail is missing on nearly one quarter of the Avner loss records. As a result, using
Avner loss data to determine vehicle relativities could bias the results if the loss records with missing
vehicle type information do not follow the same distribution as the total loss experience by vehicle
type (i.e., if the loss records with missing vehicle detail under or over represent any particular vehicle
type). However, the Avner loss data was utilized to analyze development patterns by vehicle type. As
Exhibit 10 illustrates, differences in development patterns by vehicle type do exist. (See Exhibit 11
for the derivation of the loss development factors by vehicle type. These factors were derived using
the Mack method, as explained in Appendix A.)
Exhibit 10 displays the calculation of indicated changes for each vehicle type, exclusive of the
overall countrywide tariff level change. For example, Exhibit 10 indicates that the current ISO Israel
tariff levels for motorcycles as a group are too low, prior to consideration of the overall tariff level
changes indicated by this review. It should be noted that the ISO Premium at Present Rates used in
this analysis reflects the Pool tariffs that went into effect January 1, 2007; thus, the indicated changes
to the motorcycles shown on Exhibit 10 are in addition to the changes that were already implemented
by the Ministry of Finance in General Insurance Circular 2006-1-17, dated December 11, 2006.
The paid loss data in Exhibit 10 includes all bi-section payments and recoveries as reported through
the ISO Israel statistical plan. However, an additional adjustment was applied to the data by vehicle
type for motorcycle bi-section. This adjustment was necessary as there is a delay in the reflection of
motorcycle bi-section recoveries. As a result, the statistical data reported to ISO Israel in 2002, 2003
and 2004 does not reflect all motorcycle bi-section recovery transactions. So, while the paid losses
were reported, the bi-section recoveries and payments across vehicle types are not yet fully reflected.
ISO Israel performed an analysis of 2002, 2003 and 2004 underwriting year data reported through
fourth quarter 2004 to estimate the full effect of the motorcycle bi-section agreement. Based on this
analysis, ISO Israel estimates that the full impact of the motorcycle bi-section agreement will be a
savings of 15% to the motorcycle risks. For underwriting year 2002, the data reported to ISO Israel as
of fourth quarter 2004 indicated a 15% savings to motorcycle risks. Therefore, no adjustment was
applied to the underwriting year 2002 losses. For underwriting year 2003, the data reported to ISO
Israel as of fourth quarter 2004 reflected a 12% savings to motorcycle risks. Therefore, the 2003
underwriting year motorcycle losses were adjusted by an additional 3%. For underwriting year 2004,
the data reported to ISO Israel as of fourth quarter 2004 reflected a 5% savings to motorcycle risks.
Therefore, the 2004 underwriting year motorcycle losses were adjusted by an additional 10%. The
savings (i.e., loss reductions) applied to the motorcycle vehicle class on Exhibit 10 were then
distributed (as loss increases) proportionally to all other vehicle types, based on the distribution of
losses by vehicle type. It should be noted that this adjustment has no net effect on the overall loss
levels -- rather, it is a distributional adjustment across vehicle types.
While Exhibit 10 indicates changes could be made for every vehicle type that is subject to
compulsory insurance, it should be noted that there is quite a bit of variability in the results from year
to year for some vehicle types. For example, for the buses, the three years of data reviewed are not
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consistent. The 2002 data indicates that the current ISO Israel bus tariffs are significantly too high,
whereas the 2004 year indicates that the current bus tariffs as a group are too low. Additionally, the
indicated changes for dealerships are very drastic, which is most likely attributable to the lack of
credibility for these vehicle types. These examples show that reliance on only one or two years of
data in a fine level of detail is not advisable, as it can lead to a situation where tariffs swing back and
forth from year to year. Furthermore, as already explained, due to the very recent changes to the Pool
tariffs, and the fact that the majority of the motorcycle risks are insured by the Pool, ISO Israel is not
recommending additional changes to the motorcycles as a whole at this time.
As a result, ISO Israel is proposing changes only to the taxis, commercial vehicles and special
vehicles at this time. As Exhibit 10 illustrates, ISO Israel is proposing a 15.0% increase to the taxi
tariffs, a 10% decrease to the commercial vehicles tariffs, and a 15% decrease to the special vehicles
tariffs. These vehicle type changes are in addition to the overall countrywide tariff level change of 6.0% that is being filed. In order to introduce these changes by vehicle type on an overall revenue
neutral basis (i.e., to ensure that these changes by vehicle type do not affect the overall selected
countrywide tariff level change of -6.0%), an offset factor must be applied to all vehicle types. As
Exhibit 10 indicates, this offset factor is 1.02. If this offset is not applied, then overall premium
levels would be reduced an additional 2% by applying the recommended changes by vehicle type.
Supplemental Motorcycle Analysis
At the request of the Ministry of Finance, ISO Israel performed an additional analysis of the
motorcycle pure risk tariffs by engine size. This analysis is based on motorcycle tariffs in effect
PRIOR to the January 1, 2007 Pool tariff changes, contained in General Insurance Circular
2006-1-17, dated December 11, 2006.
Exhibit I contains the results of this motorcycle engine class analysis. That is, Exhibit I shows the
actuarially indicated pure risk tariffs for various motorcycle engine size groups; the displayed
changes do not take into consideration the overall countrywide tariff level change of -6.0%.
The indicated changes displayed on Exhibit I are changes to the motorcycle tariffs in effect prior to
the January 1, 2007 Pool changes. Since those tariffs already had some distinctions by engine size,
ISO Israel has included the current and indicated motorcycle Pool tariffs (not reflecting the overall
tariff level change) for privately owned "all other" motorcycles in the last two columns to illustrate
the results of this analysis on the largest class of motorcycle risks (i.e., privately owned motorcycles
insured in the Pool). Any relevant surcharges (e.g., for more than 1 driver, for driving lessons, etc) or
discounts (i.e., for antiques) would have to be applied to the indicated tariffs displayed on Exhibit I.
As you can see from Exhibit I, the motorcycles with engine sizes 251 – 500 ccs are the most under
priced, followed by motorcycles with engine size 0 – 50 ccs, motorcycles with engine sizes greater
than 500 ccs, motorcycles with engine sizes 51 - 125 ccs and motorcycles with engine sizes 126 - 250
ccs.
In order to maintain consistency with the recently implemented motorcycle Pool tariff changes on
January 1, 2007, ISO Israel is recommending the following changes for the voluntary motorcycle
tariffs as well:


A 25% increase for motorcycles with engine size <= 50 ccs
A 10% increase for motorcycles with engine size in the range 251-500 ccs
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A 10% increase for motorcycles with engine size > 500 ccs
A 30% increase for corporately owned motorcycles (in addition to the changes by engine
size)
An increase in the surcharge for more than 1 driver from 20% to 25%
Final Tariffs
Exhibit 12 displays the derivation of the final proposed pure risk tariffs by vehicle type and subclass, at a November 2004 index level. As Exhibit 12 illustrates, final tariffs for all vehicle types
except the motorcycles and trains are determined by applying the countrywide tariff level change of
-6.0%, the selected vehicle type change from Exhibit 10 and the vehicle type offset factor of 1.02 to
the current tariffs. The only changes being filed to the motorcycle tariffs are the changes described
above for the voluntary motorcycle tariffs, to ensure consistency with the January 1, 2007
implemented changes for the Pool motorcycle tariffs. The train tariffs are derived separately in this
document.
Row (12) on Exhibit 12 shows that the final achieved countrywide tariff level indication resulting
from the final tariffs (excluding trains) is -5.6%. The reason this is not exactly equal to the proposed
countrywide tariff change of -6.0% is because of the fact that neither the voluntary motorcycle tariffs
nor the Pool tariffs are being reduced at this time. In fact, there are increases being implemented for
some of the voluntary motorcycle classes.
Final proposed base tariffs, at an October 2006 index, are displayed on Exhibit 13. Please note that
the motorcycle tariff classes displayed have been refined by splitting the 51-250cc engine size class
into two classes, 51-125cc and 126-250cc. This was done to match the structure of the latest Pool
tariffs effective January 1, 2007, as contained in MoF General Insurance Circular 2006-1-17, dated
December 11, 2006. At this time, the tariffs for the two classes are equal but the need for different
tariffs will be reviewed in the future.
Analysis of the Pool Experience for Compulsory Vehicle Insurance in Israel
It is important to understand that this tariff analysis is based on Pool and Voluntary data combined.
Therefore, the tariff analysis, and the final ISO Israel recommended change of -6.0% automatically,
and implicitly, funds the Pool deficit. That is, the overall selected change of -6.0% is the change
needed to ensure that future tariffs for all voluntary and Pool risks in Israel combined will cover the
losses expected to arise from all voluntary and pool risks combined.
At the request of the Ministry of Finance, ISO Israel performed a separate analysis of the Pool
experience for compulsory vehicle insurance. This analysis was based on data reported via the ISO
Israel statistical plan through December 2004.
Exhibit 14-1 displays the Pool data by vehicle type and ownership, separately for underwriting years
2002, 2003 and 2004. This exhibit provides the indicated prospective deficit of the Pool, in NIS,
using computations similar to those used in the tariff analysis to determine the indicated countrywide
tariff level change with discounting and adverse deviation. Specifically:
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
Premiums at present rates for the pool risks are as calculated in Exhibits 7-3, 7-7 and 7-11,
and discounted by multiplying these amounts by the square root of 1.025 (as done in Exhibit
9). These premiums at present rates reflect the January 1, 2007 changes to the Pool tariffs, as
contained in General Insurance Circular 2006-1-17, dated December 11, 2006.

Paid losses for the pool risks were adjusted similar to the loss adjustments applied in the
tariff analysis. That is, the 2003 paid losses (as of December 2004) were multiplied by 1.017
and the 2004 paid losses (as of December 2004) were multiplied by 1.074 to account for the
missing MADA payments, the paid losses were developed to an ultimate settlement basis
using the Mack method, the losses were discounted as explained in the tariff document to
account for investment income, and the losses were adjusted to include a provision for
adverse deviation. Additionally, paid losses include bi-section payments and recoveries as
reported through the ISO Israel statistical plan; however, motorcycle bi-section adjustments
were applied to the paid losses by underwriting year to account for the delayed reflection of
motorcycle bi-section recoveries. Losses were not trended in this analysis since our final
selected trend factor for this tariff analysis was 0.0%, and thus has no impact on the results.
An indicated prospective Pool deficit/surplus is calculated by vehicle type and ownership in Column
(7) by subtracting the discounted premiums at present rates from the ultimate incurred discounted
losses with adverse deviation. However, since this is based on historical data, this does not reflect the
items raised in our tariff analysis that are expected to have an impact on the future cost of
compulsory insurance -- namely, the recent change in the retirement age, the increased subrogation
efforts of the INII, the changes in law affecting the settlement of claims, the effect of the lost years,
and the recent changes in hospitalization costs. As a result, Column (8) displays the indicated
prospective Pool deficit/surcharge by vehicle type and ownership after consideration of the estimated
effects of these additional factors:
the estimated effect of the change in the retirement age *
the estimated effect of the recent INII claims action *
the estimated effect of the changes in the law affecting the settlement of claims *
the estimated effect of the lost years *
the estimated effect of the changes in Hospitalization services fees
OR
(1 + 0.015) * (1 + 0.03) * (1 + 0.015) * (1 + 0.052) * (1 + 0.01) = 1.127
As Exhibit 14-1 illustrates, the overall indicated average annual prospective Pool deficit is about
132,815,290 NIS, based on an average of underwriting years 2002, 2003 and 2004 data.
Exhibit 14-2 displays the corresponding experience for the Voluntary risks by vehicle type and
ownership for information purposes, mostly to illustrate the effects of the motorcycle bi-section
adjustments (i.e., to show that the motorcycle bi-section adjustment has an overall net zero effect on
the losses).
As can be seen on Exhibit 14-1, ISO Israel estimates that the indicated prospective Pool deficit will
result in approximately a 4.4% Pool subsidy on the voluntary tariffs. This estimate was determined
by dividing the average Pool deficit by the average current premium at present rates for Voluntary
risks, or
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132,815,290 / 3,012,452,107 which = 4.4%
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18 January 2007 Version
Proposed 2007 Base Tariffs
Israel Compulsory Vehicle Insurance
Advice and Recommendations Regarding the April 2007 Tariff for
Compulsory Railroads Insurance
During 2006, ISO Israel continued to study and evaluate the methods used to develop the tariff for
passenger and cargo trains in Israel.
Data Used for the Railroads Analysis
The loss data used for the Railroads analysis is for Accident Years 1997 through 2004. This is a
change from prior Railroad Tariff determinations. The Railroads data is being reviewed on an
Accident Year basis for this year's analysis due to the extension of the policy for Underwriting Year
2003 to 3/31/2004. This extension resulted in a 2003 Underwriting Year of fifteen months which is
inconsistent in length with the prior Underwriting Years. The Accident Year data is being evaluated
as of 12/31/2005, which is the most recent evaluation of the data available. The 2005 data as of 12
months is not used because an analysis of previous Accident Years indicated that the 12 month
evaluation for this segment was quite immature and subject to large variation in the movement from
12 month to subsequent evaluations. Because of this variation the latest Accident Year used is
evaluated as of 24 months to minimize the possibility of the impact on the tariff of an immature year
being highly levered by the applied loss development factor and impacting the projected pure loss
premium.
Israeli Railways Analysis
Determination of Ultimate Incurred Losses
Prior ISO analyses of the Tariff for Compulsory Railroad Insurance have relied on the use of
underwriting year paid loss data developed to an ultimate settlement basis. Because of circumstances
mentioned above, the data in this analysis has been compiled on an Accident Year basis. In addition,
data supplied to ISO shows that the current estimate of the Accident Year incurred losses for the
eight years included in this analysis, evaluated as of 12/31/2005 (prior to any consideration of loss
development) are greater than the Accident Year estimates of ultimate based on the paid data
developed through all the available data. Because of this, ISO Israel has based our analysis of the
Tariff for Railroads on the incurred losses developed to an assumed ultimate basis of nine years.
Analysis of Paid Losses
We have constructed a paid loss development triangle to estimate the development of paid losses to
an ultimate settlement basis. In determining the average and cumulative paid loss development
factors we utilized Method 5, the "Mack Method" which was selected for use in the compulsory
insurance analysis in the earlier chapter. The data in Railroads Exhibit 1 are for undiscounted paid
losses, evaluated as of 12/31/2005, indexed to November 2004, in NIS. While the data for the
railroads is available to construct a paid loss triangle, it is available for only nine evaluations of the
eight years of experience included in this analysis.
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Based on our understanding of this coverage, our a priori expectations relating to loss development
patterns for railroads, given sufficient claim volume, are:
1) It is generally expected that substantial loss development should occur during the first 12
months after the initial evaluation.
2) After the first 12 months, it is expected that there should be less development in each
subsequent 12 month period.
3) The underlying loss development curve is expected to be concave up until it converges to
unity.
In developing the April 2007 tariff for passenger and cargo trains, we have relied upon the reported
railroad data to the extent that it was deemed credible based upon reasonable a priori expectations.
However, when examining the average paid '6-7' year-to-year link ratio (1.228) calculated from the
available data, we noted that this link ratio was higher than the average paid '3-4', '4-5' and '5-6' yearto-year link ratios in the railroad data. As mentioned above, we generally expect to see less
development in the latter evaluations of a loss development triangle than is observed during the
earlier evaluations. When examining the individual paid year-to-year link ratios used in the
development of the average paid '6-7' year-to-year link ratio, we note that the high average paid '6-7'
year-to-year link ratio is being driven by the ratio for the 1997 Accident Year (1.393). We believe
this 1997 paid year-to-year link ratio is resulting in the overstating of the true underlying average
paid '6-7' year-to-year link ratio due to the limited volume of railroad data available (the average paid
'6-7' year-to-year link ratio is based upon only two years of experience with a limited volume of
railroad claims contained within each year of experience). ISO Israel has judgmentally selected
1.080, which is in line with our a priori expectations, to be used as the average paid '6-7' year-to-year
link ratio for this year's railroad tariff analysis. Similarly, when examining the average paid '7-8' yearto-year link ratio (1.006) calculated from the available data, we noted that this ratio appeared to be
understated due to the limited volume of railroad data available (the average paid '7-8' year-to-year
link ratio is based upon a single year of experience with a limited volume of railroad claims). While
the average paid '7-8' year-to-year link ratio meets our a priori expectations discussed earlier, we
believe that loss payments will continue beyond nine years. Therefore, ISO Israel has judgmentally
selected 1.030 to be used as the average paid '7-8' year-to-year link ratio for this year's tariff analysis.
Comparison of Paid Losses Developed to Nine Years to the Current Estimate of
Incurred Losses
Because we know that losses used for the automobiles Tariff determination continued to develop
beyond nine years, we felt it was necessary to see if the ultimate loss determined by the paid loss
development is an appropriate estimate of the ultimate losses. In addition to the paid losses by
Accident Year, ISO Israel had received the undiscounted incurred losses for each Accident Year. All
paid losses and case reserves are evaluated as of 12/31/2005, indexed to November 2004, in NIS. We
compared the latest evaluation of the undiscounted incurred losses for each Accident Year to the
estimate of undiscounted paid losses developed to nine years, from Railroads Exhibit 1, for each
Accident Year. This comparison is provided below:
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Accident
Year
Undiscounted
Paid Losses Developed To Nine
Years
Undeveloped
Undiscounted
Incurred Losses
Difference
1997
1998
1999
2000
2001
2002
2003
2004
3,256,756
1,943,701
4,815,541
8,889,859
3,838,213
4,091,912
3,700,640
5,815,034
4,275,545
2,471,939
7,281,841
11,127,553
4,187,239
4,389,643
6,444,200
8,692,185
-1,018,789
- 528,238
-2,466,300
-2,237,694
- 349,026
- 297,731
-2,743,560
-2,877,151
When examining the data presented above, we noted that the undiscounted paid losses developed to
nine years are lower than the current estimates of incurred losses for every year included in the
railroads analysis.
Determination of Ultimate Incurred Losses
Since the incurred losses are evaluated as of 12/31/2005 for each Accident Year, we have also
reviewed the loss development on an incurred basis. While we do not have the data in adequate detail
to create a complete incurred loss development triangle, we were able to review the most recent four
evaluations of data for the incurred triangle. We utilized a method that averaged all year's year-toyear link ratios equally in order to determine the average incurred year-to-year link ratios. The data in
Railroads Exhibit 2 is for undiscounted incurred losses, evaluated as of 12/31/2005, indexed to
November 2004, in NIS.
When reviewing the available incurred loss development link ratios we noted that the average
incurred year-to-year link ratios do not completely meet our a priori expectations. Specifically, we
noted that the average incurred '1-2', '3-4' and possibly the '5-6' and '6-7' year-to-year link ratios may
be understated based upon our a priori expectations of link ratio behavior. When examining the
individual incurred year-to-year link ratios for the '1-2' evaluation, we noted that even though there is
a limited volume of railroad data available (the average incurred year-to-year link ratio is based upon
only three individual incurred year-to-year link ratios, in addition, as mentioned earlier there is a
limited volume of railroad claims contained within each Accident Year), the year-to-year link ratios
for each individual year of experience are consistent (1.158, 1.127 and 1.152). Due to the consistency
in the incurred year-to-year link ratios for the '1-2' evaluation, ISO Israel decided to use the indicated
average incurred year-to-year link ratio for the '1-2' evaluation for this year's tariff development.
When examining the individual incurred year-to-year link ratios for the '3-4' evaluation, we noted that
there was a great deal of variability among the three available ratios (they range from 1.108 to 0.881).
Since one of the three available ratios was 1.010, for the 1999 Accident Year, ISO Israel decided to
use the indicated average incurred year-to-year link ratio (1.000) for the '3-4' evaluation since we did
not have enough information available to support a different selection. Similarly, when examining
the individual incurred year-to-year link ratios for the '5-6' evaluation, we noted that there was again
a good deal of variability among the three available ratios (they range from 1.084 to 0.920). Since
one of the three available ratios was 1.005, for the 1999 Accident Year, ISO Israel decided to use the
indicated average incurred year-to-year link ratio (1.003) for the '5-6' evaluation since we did not
have enough information available to support a different selection. Finally, since there were only two
available incurred year-to-year link ratios for the '6-7' evaluation, ISO Israel decided to use the
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indicated average incurred year-to-year link ratio (0.968) for the '6-7' evaluation since we did not
have enough information available to support a different selection.
When reviewing the cumulative incurred year-to-year link ratios we noted that there does not appear
to be significant incurred loss development after seven years. Based on the nature of the coverage
provided and the type of claims involved we believed that there could be further development of the
incurred losses after nine years, however, due to the low claim volume and the limited years of
experience available for railroads incurred loss data, we are unable to verify any a priori assumptions
as to whether the continued development would be above or below unity, based upon the known
incurred year-to-year link ratios. That is, due to the limited volume of railroad experience we do not
know whether the ultimate realized losses, once all claims are settled, will be greater than or less than
the developed estimate of incurred losses after nine years. Since we do not know how the railroad
incurred losses are expected to develop after nine years and that there does not appear to be
significant incurred loss development after seven years, we have assumed that the estimates of
developed incurred losses after nine years are a reasonable representation of what the ultimate
realized losses will be once all claims are settled. That is, we have assumed that there will be no
incurred development after nine years.
The cumulative incurred loss development factors, developed in Railroads Exhibit 2, were applied to
the incurred undiscounted losses in order to estimate the undiscounted incurred losses after nine
years. Since the railroad data used in this year's tariff analysis is evaluated as of 12/31/2005, this is
the second evaluation of the 2004 Accident Year. Therefore, we applied the '1-2' cumulative incurred
loss development factor to the 2004 Accident Year, the '2-3' factor to the 2003 Accident Year, etc….
This incurred data can be found in Railroads Exhibit 2.
Determination of Ultimate Discounted Losses
At this point we compared the estimated undiscounted paid railroad losses after nine years,
developed in Railroads Exhibit 1, to the estimated undiscounted incurred railroad losses after nine
years, developed in Railroads Exhibit 2, and calculated the difference. The difference is the
undiscounted estimates of future payments that will be made after nine years. This data is
summarized below:
Accident Year
Estimated
Undiscounted
Incurred Losses After
Nine Years
Estimated
Undiscounted Paid
Losses After Nine
Years
Undiscounted Estimate
of Future Payments
After Nine Years
1997
1998
1999
2000
2001
2002
2003
2004
4,275,545
2,466,995
7,034,258
10,782,599
4,559,903
4,780,321
8,693,226
13,438,118
3,256,756
1,943,701
4,815,541
8,889,859
3,838,213
4,091,912
3,700,640
5,815,034
1,018,789
523,294
2,218,717
1,892,740
721,690
688,409
4,992,586
7,623,084
In order to consider the income earned by investment of the case reserves, the values have been
adjusted to a discounted basis. As noted in the compulsory tariff, the selected interest rate is 2.5%.
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The incremental undiscounted paid losses in Railroads Exhibit 3 show the losses that have either
already been paid or are expected to be paid for each Accident Year, up to nine years. The
incremental undiscounted paid losses in Railroads Exhibit 3 were then all modified by the selected
interest rate to provide incremental discounted losses. The incremental discounted paid losses to date
are shown in Railroads Exhibit 4 while the incremental discounted estimate of future payments
through nine years are shown in Railroads Exhibit 5. The number of years to discount assumes that
loss payments are uniformly distributed within each payment period, thus the average payment date
is July 1 of that year. The discount factor was calculated by the same calculation shown on Exhibit 3
of the compulsory tariff, (1 / 1.025) ^ (N), where N is the number of years to discount.
Since we are using the 12/31/2005 evaluation for this year's railroad analysis, this is the second
evaluation of the 2004 Accident Year. As a result, the incremental paid losses to date in Railroads
Exhibit 4 go back eight time periods instead of only seven. Similarly, the incremental estimate of
future payments through nine years in Railroads Exhibit 5 go forward seven time periods instead of
eight.
At this point, the undiscounted estimates of future payments in time periods after nine years still need
to be discounted. Since we have no historical information to rely upon to help us predict when these
estimated future payments will actually be made, we have made two assumptions while discounting
these future payments. The first assumption is that all claims will be settled by the end of the
twentieth year after having been incurred. The second assumption is that these loss payments will be
uniformly distributed throughout the future period from 12/31/2005 to twenty years after having been
incurred. We have discounted the undiscounted estimates of future payments after nine years based
upon these assumptions. The discounted estimates of future payments after nine years are shown in
Railroads Exhibit 6.
The discounted estimates of future payments after nine years have then been added to the discounted
paid losses to date and the discounted future payments through nine years in order to produce
discounted total losses indexed to November 2004. The discounted total losses are shown in
Railroads Exhibit 7.
These calculations have provided us with estimates of the appropriate discounted total losses for each
Accident Year.
Determination of Tariff by Segment
In order to calculate the appropriate Tariff the estimate of the discounted total losses must still be
split between passenger and cargo operations. To produce an estimate of the ultimate discounted
losses, we developed a series of paid Loss Modification Factors (LMFs) that modify the paid losses
to date for each Accident Year, in order to account for loss development and the impact of
discounting. The LMFs were developed by dividing the discounted total losses by the non-discounted
total paid losses to date for each Accident Year (since they will be later applied to non-discounted
paid Passenger and Cargo losses). The development of the paid LMFs can be found in Railroads
Exhibit 8.
The data provided for the review did not include a specific breakdown into cargo and passenger
operations, but did include the engine number on many records. By comparing the engine number
with the roster of train engines ISO Israel has assembled, it was possible to separate the claims into
four categories: Cargo, Passenger, Mixed, and Unknown. Cargo and Passenger denotes engines that
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are used solely for cargo or passenger operations. Mixed consists of the G-12 type engines which are
used for both cargo and passenger operations while the Unknown category includes data without a
reported valid engine number. The Mixed and Unknown data has been split based on volume
comparisons. Based largely upon the relationship between the known passenger operations losses and
the known cargo operations losses for Accident Years 1997-2001, where the losses are more mature,
we judgmentally assumed that 75.0% of these Mixed and Unknown losses applied to passenger
operations while the remaining 25.0% applied to cargo operations. The underlying data, as well as,
the resulting 75.0% / 25.0% split of the Mixed and Unknown losses into passenger operations and
cargo operations, respectively, is provided in Railroads Exhibit 9.
In order to produce the Ultimate Discounted Losses, the losses were then multiplied by the Loss
Modification Factors (LMFs) derived earlier. Due to the low volume of data and since there does not
appear to be any reason for the losses to develop differently, the same factors were used for both
passenger operations and cargo operations. The Ultimate Discounted Losses can be found in
Railroads Exhibit 10.
Trend Analysis
Pure Premium
As noted in the earlier chapter of the tariff document, loss trends are a particularly important aspect
of prospective ratemaking. That is, the historical experience must be adjusted to reflect any
anticipated economic and social changes expected in the future (when the developed tariff will be in
effect). Due to the limited volume of railroad data, we have relied upon the analyses provided in
Exhibit 6 (Sheet 2) and have made a trend selection to be used in the April 2007 Israel Railroad
Tariff Analysis.
While the historical data compiled by the Central Bureau of Statistics shows a decreasing frequency
trend for automobile claims (Exhibit 6 Sheet 1), we do not believe it is appropriate to expect that
railroads will follow a similar pattern. Given the limited number of railroad claims, a consistent
selection of 0.0% frequency trend will tend to stabilize the trains ratemaking process from year to
year, especially given the leveraged effect that changes in trend selections have on the indications.
When examining the claim cost trends (Exhibit 6 Sheet 2), we note that the "Excess Insurance Costs
over General CPI" trends indicate that a positive claim cost trend may be appropriate for tariff
development purposes; however, there is not a clearly defined indicated claim cost trend. The 3-point
fit indicates a trend of +1.7% and the longer term 6-point fit indicates a trend of +1.5%, while the 4point and 5-point fits indicate trends of +0.8% and +1.1%, respectively. Based largely upon the 4point and 5-point fits we have selected a claim cost trend of +1.0% for use in the Railroad tariff
development.
Trend
Selected
Frequency
Claim Cost (Severity)
0.0%
+1.0%
Pure Premium (Frequency x Severity)
+1.0%
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In order to adjust the historical Railroads loss experience so that it reflects the expected prospective
loss level, we have applied a pure premium trend factor of 1.0% to the Ultimate Discounted Losses.
The trended losses are equal to the Ultimate Discounted Losses, presented in Railroads Exhibit 10,
multiplied by (1.010)^N, where N is equal to the number of years from the average date of loss of the
experience period to the average date of loss underlying the prospective experience period. The
trend effective date for the Railroad policy is 4/1/2007. The computations are provided in Railroads
Exhibit 11.
Calculation of Loss Per Exposure
Following the methodology used in prior reviews, two values were needed to estimate losses for
2007. First the passenger–kilometers of the system were estimated for passenger operations in 2007,
and then the average loss per passenger–kilometer was determined. For cargo operations, cargo–tonkilometers were used in place of passenger-kilometers.
It is expected that there will be continued growth in the actual number of passengers being carried by
Israeli Railways in 2007. The expected continued growth can be partially attributed to more seats and
trains being offered daily. However, there have also been additional stations opened on existing
railway lines, and new lines have been established. We expect the average distance traveled per
passenger for 2007 to be similar to that of 2005 and 2006.
In order to utilize the passenger-km estimate provided by Israeli Railways, a measure of the loss per
passenger-km is needed to be calculated. In Railroads Exhibit 12, a summary of the loss data for
passenger operations and the average loss per passenger-km from 1997 to 2004 is provided. Due to
the high variability of the values under the loss per passenger-km, no obvious trend could be derived.
A weighted average (weighted on Passenger-Kilometers) was calculated to estimate the expected
Loss Per 1,000 Passenger-Kms.
In 2005, it was expected that there would be a decrease in the actual cargo-ton-kms hauled by Israeli
Railways in 2005 as more of the commodities such as coal, gravel and grain were being hauled by
truck, as opposed to railway. The actual cargo-ton-kms hauled by Israeli Railways did decrease,
though not by as much as expected (original estimate: 1,056,000 [in 000’s]; actual: 1,138,014 [in
000’s]). In 2007, it is expected that there will be an increase in the actual cargo-ton-kms hauled by
Israeli Railways, when compared to 2005, due to an increase in the volume of sand, garbage and
minerals being hauled.
In order to utilize the cargo-ton-km estimate provided by Israeli Railways, a measure of the
loss per cargo-ton-km needed to be calculated. In Railroads Exhibit 12, a summary of the loss
data for cargo operations and the average loss per cargo-ton-km from 1997 to 2004 is
provided. Due to the high variability of the values under the loss per cargo-ton-km, no
obvious trend could be derived. A weighted average (weighted on Cargo-Ton-Kms) was
calculated to estimate the expected Loss per 1,000 Cargo-Ton-Kms.
Final Recommended Pure Risk Calculation
The estimated loss for passenger operations is obtained by multiplying the estimated 2007 passengerkilometer value (in 000's) by the loss per 1,000 passenger-kilometers value. Likewise, the estimated
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loss for cargo operations is the product of the estimated 2007 cargo-ton-kilometers and the loss per
1,000 cargo-ton-kilometers.
Once the estimated losses were calculated, a catastrophe surcharge was assessed and the Pool
subsidy was applied. The catastrophe surcharge is equal to 24.92% of the estimated losses. The
catastrophe percentage was computed in 1996, based on premium requested by a re-insurer that was
given the loss data of Keter (which at that time received cargo service from the Israeli Railways). It
was not verified otherwise, as up to now there is no statistical data regarding catastrophes in Israel.
ISO Israel will continue to investigate the possibility of updating the catastrophe surcharge. The Pool
subsidy load is approximately 4.4%, as explained in Exhibit 14-1 of the compulsory tariff.
It should be noted that there are two different types of exposure for catastrophic losses for both cargo
and passenger operations. The first type is an upset of the train itself. In this case, a cargo train might
be hauling hazardous materials, while a passenger train could have a full load of passengers who
could be injured. We believe that the exposure associated with this type of occurrence should be
roughly equal. That is, while the losses caused by hazardous materials would likely have a higher
claim payout, we also believe that it is less likely than a passenger train upset, simply because only a
limited subset of the cargo trains are involved with hazardous materials and the overall volume of
cargo traffic is smaller. The second type is if the train collides with another vehicle carrying
hazardous materials. We believe that the exposure associated with this type of occurrence should also
be roughly equal for cargo and passenger trains. That is, in this instance, either a cargo or a passenger
train could impact the vehicle, and the resulting catastrophic losses due to a chemical spill from the
vehicle would have to be absorbed, at least partially, by the train. We note that the passenger train
would have an additional exposure associated with the passengers on board, while the cargo train
may have an additional exposure to reflect that the cargo train may also be hauling hazardous
materials that could spill. As mentioned above, while the losses caused by hazardous materials
hauled by the cargo train would likely have a higher claim payout, we also believe that it is less likely
than a passenger train occurrence, simply because only a limited subset of the cargo trains are
involved with hazardous materials and the overall volume of cargo traffic is smaller. For these
reasons, the catastrophe surcharge has been applied equally to both cargo and passenger operations.
The computation of the final tariff for the pure risk is provided in Railroads Exhibit 13.
Once the catastrophe surcharge and the Pool subsidy load were applied, the estimated losses for
cargo operations needed to be split between ICI, Sherut and the Israel Railway system. According to
estimates provided by Israeli Railways, using data by ton-kms, ICI is expected to carry 59% and
Sherut 22% in 2007. The losses were then split according to this assessment.
Carmelit Haifa
In addition to the tariffs for Israeli Railways, Sherut and ICI, a tariff was also developed for the
Carmelit.
An implicit exposure was developed for the Carmelit by dividing the recommended ISO Israel tariff
for the Carmelit, from April 1, 2001, by the corresponding Tariff per Exposure for passenger
operations, developed at that time. The calculation and the resulting implicit exposure are provided
in Railroads Exhibit 14.
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Reviewing the data received from the Carmelit, we noted that the total paid losses from 1993 through
2004 were 34,600 NIS. In addition, we noted that there were no claims incurred for 2003 and only a
single claim was incurred for 2004, which has been settled for 3,000 NIS. These paid losses were
generated from a total of 10 claims. This experience results in an average of 2,883 NIS per year and
an average of 3,460 NIS per claim. Please note that these losses have not been indexed and are
therefore at the level at which they were paid. In addition, these losses have not been discounted.
We also noted that there are inherent differences in the risk assumed by the Carmelit as compared to
Israeli Railways. Specifically, the Carmelit is a very limited cable railway system that is entirely
enclosed underground (it does not cross roads or intersections). As a result, the Carmelit cannot be
involved in any occurrence with another vehicle (except possibly one of their own rail cars - due to
safety systems that are in place, there should be minimal risk of this occurring).
To better reflect the consistently good overall experience, as well as, to better reflect the differences
in risk assumed by the Carmelit and Israeli Railways, the tariff per exposure used to calculate the
April 2007 tariff for the Carmelit was judgmentally reduced by 40%. The resulting tariff per
exposure and the final recommended Carmelit tariff are provided in Railroads Exhibit 14.
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Appendix A – Final Paid Mack’s Age-to-Age Factors
The final paid age-to-age factors were calculated using the chain ladder method as described in
“Measuring the Variability of Chain Ladder Reserve Estimates” by Thomas Mack. The paper can be
found on the Casualty Actuarial Society’s website at
http://www.casact.org/pubs/forum/94spforum/94spftoc.htm.
The age-to-age factors, fk, were obtained by taking a weighted average of the observed individual
development factors. The age-to-age factors are calculated by
I k
fk 
C
j 1
j , k 1
,
I k
C
j 1
j ,k
where I is the total number of accident/underwriting years, and Cj,k is the Year j accumulated total
losses at development year k. Using data from Exhibit 2-5, the following is an example of how the f1
age to age factor was calculated.
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Total
Age-to-Age
Factor
Age
0
1
34,791
43,252
61,985
61,627
62,097
75,143
93,626
108,732
100,822
94,365
105,002
122,066
115,882
101,776
109,025
103,852
100,421
77,983
97,628
1,670,074
207,057
240,094
311,480
345,135
370,787
423,215
506,758
555,200
545,855
575,329
541,885
560,201
596,071
586,721
579,625
574,626
551,339
508,072
563,302
9,142,750
9,142,750
1,670,074 = 5.474
The cumulative loss development factors by underwriting year are calculated by multiplying all of
the age-to-age factors for the years not yet paid out for each specific underwriting year. As shown on
Exhibit 2-5, the cumulative paid loss development factor for the 2004 losses, 27.069 , was calculated
by taking the product of all of the age-to-age factors ( 5.474 x 1.814 x 1.395….x 1.003). Multiplying
the 2004 paid losses by the cumulative paid loss development factors produces the ultimate
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undiscounted loss estimate without adverse deviation for the year 2004, as displayed in the last
column on Exhibit 2-5. That is, the 2004 undiscounted ultimate losses are calculated as follows:
90,702 x (5.474 x 1.814 x 1.395….x 1.003) = 2,454,632.
A major benefit of the Mack Method is that it provides a means to calculate standard errors and
coefficients of variation for the outstanding loss reserve estimates. This is important, as ultimate
losses can never be forecasted exactly, as they are estimates. The equations and steps used to derive
the standard errors for Israel can be found in the paper referred to on the previous page. Exhibit 5
shows the final results, including estimated total reserves, estimated ultimate losses, standard errors,
and coefficients of variation for each of the underwriting years from 1985 to 2004.
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Appendix B -- Analysis of Missing MADA Payments
During our discussions with the Israeli insurance companies in 2005, it was brought to our attention
that they are currently in dispute with MADA, such that there has been a withholding of payments by
insurers to MADA starting with underwriting year 2003. It is ISO Israel’s understanding that this
dispute had not yet been resolved as of the end of 2004, which means that the paid loss data reported
to the ISO Israel Database for underwriting years 2003 and 2004 as of December 2004 do not include
any payments to MADA. However, historically the majority of MADA payments were made by the
12 month evaluation for all prior underwriting years. Furthermore, the historical loss development
factors to be applied to the reported 2003 and 2004 underwriting years are based on historical data
that includes MADA payments. As a result, an adjustment needs to be made to the reported
underwriting year 2003 and 2004 losses to account for the missing MADA payments.
In 2005 ISO Israel was able to obtain historical MADA payments from one large Israeli insurer
active in the compulsory auto market. ISO Israel divided this data by that companies' market share to
obtain an estimate of MADA payments on a full market basis. Based on prior years’ MADA payout
patterns, ISO Israel estimated the amounts of the missing MADA payments at a 12 month and 24
month evaluation. ISO Israel then calculated the effects of the missing 12 month and 24 month
MADA payments on the reported losses for underwriting years 2004 and 2003, respectively. These
calculations can be found in Exhibits B1 and B2.
As the Exhibits show, ISO Israel estimates the amount of the missing MADA payments as of 24
months to be 9,166,754 NIS for an effect of about 1.7% on the 2003 reported losses (as of 24
months). Similarly, the amount of the missing MADA payments as of 12 months is about 6,271,989
NIS for an effect of about 7.4% on the 2004 reported losses (as of 12 months). ISO Israel used these
estimated amounts to adjust the underwriting year 2003 and 2004 losses in this tariff review.
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Appendix C - Experience Period for Tariff Determination and Determination
of Trend Factors
The last several years in Israel have seen economic activity impacted by domestic and global security
situations. The impact on tourist visits has been most profound and this seems to have had a ripple
effect on the economy in general. Unemployment rates in 2002, 2003 and 2004 have exceeded 10%.
Events since January of 2005 indicate that the economic picture is improving with unemployment
rates for 2005 less than 10%, and future forecasts indicating a continued decline in unemployment
for 2007 and beyond. Given the nature of these changes in the economy and the expected relationship
of economic activity to motor vehicle use and accidents, in 2005 ISO Israel and the Insurer Panel
discussed and examined various issues and scenarios for determination of the pure risk premium
portion of the Tariff. (Also impacting the determination of trend factors were potential adjustments
in the base data for changes in data reporting for items examined separately elsewhere in this
document, such as MADA payments, INII subrogation and changes impacting the settlement of
claims.) For purpose of this analysis items which had uniform impacts by year for the years
considered in determining pure risk premiums, such as the INII subrogation change, were not
included in the trend analysis. In addition, any changes in settlement that would be prospective in
nature do not impact the compiled data and do not need to be considered for trend purposes.
The changes in the economic conditions throughout the experience period available for analysis raise
the question of what is the appropriate base data for determining the pure risk premium and what is
the appropriate period for selecting the trend factor. The results of the various sensitivity tests are as
follows:
Analysis Type
Forecasted
Unemployment
Forecasted
Unemployment
Adjust 2003 & 2004
for MADA payments
Adjust 2003 & 2004
for MADA payments
Trend Selection
3.5%
Adjust 2003 & 2004
for MADA payments
-3.0%
Adjust 2003 & 2004
for MADA payments
Adjust 2003 & 2004
for MADA payments
-3.0%
4.9%
-4.0%
-2.4%
0%
Data
7 year base; 7 year fit
for trend
5 year base; 5 year fit
for trend
7 year base; 7 year fit
for trend
7 year base; 5 year fit
for trend (exc. hi 1998
& low 2004)
7 year base (first 2
years untrended); 5
year fit for trend
5 year base; 5 year fit
for trend
7 year base; 7 year
trend selection
Indicated Change
+ 3.1%
+2.9%
-35.6%
-28.7%
-25.7%
-31.8%
-17.1%
Conclusion
ISO Israel has examined the results under the various years of data to be used and the source for the
evaluation of the appropriate trend factor. Much discussion has occurred and a good deal of
consideration has been given to the question of including the earlier (1998, 1999) mostly pre-
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recession years in the determination of the trend factors. While it is notable that the economic
activity in those two years is at a different level than the later years, any analysis that selects the
trend factors based on data from the period 2000 to 2003 because it is believed to be more
“homogeneous” should also recognize that to then include the earlier “non-representative” years
unadjusted for any difference in the base data for purpose of calculating the risk premium would be
biased. After careful reflection ISO Israel concludes that after adjustment of the 2003 and 2004 years
for MADA payments and consideration of the changes in economic activity level, the appropriate
overall trend factor is 0% applied to the 7 year data base.
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Appendix D - Derivation of Average Class Factors
To calculate the average rating factors underlying the current risk premiums, ISO Israel used
underwriting year 2004 data from the ISO Israel Database. In the case of motorcycle risks, Pool data
was used to determine average rating factors for both the Pool and the voluntary market, as the
voluntary market motorcycle data was too sparse to produce meaningful distributions. Additionally,
the average class factor used for the personally owned motorcycle risks in this analysis is based on
the tempered classification factors for motorcycle risks implemented in the January 1, 2007 Pool
tariff changes. However, for your information, ISO Israel has also included an "alternate" average
class factor for personally owned motorcycle risks which is based on the motorcycle classification
factors originally recommended in our 2005 class plan filing.
It should be noted that in some cases, the total exposure counts may vary from one rating variable to
another for a given vehicle type, due to data being bypassed for problematic statistical reporting.
Rated Driver Age and Gender Distribution
The age and gender distribution, and resulting average rating factors are displayed on Exhibit D-1 for
privately owned private vehicles and D-8 for privately owned motorcycles.
Years Licensed in Israel Distribution
The years licensed distributions, and resulting average rating factors are displayed on Exhibit D-2 for
privately owned private vehicles and D-9 for privately owned motorcycles.
Number of Accidents Distribution
The number of accidents distribution, and resulting average rating factors are displayed on Exhibit
D-3 for privately owned private vehicles and D-10 for privately owned motorcycles.
Number of Major Convictions Distribution
The number of major convictions distribution, and resulting average rating factors are displayed on
Exhibit D-4 for privately owned private vehicles and D-11 for privately owned motorcycles.
Air Bags Indicator Distribution
The air bag indicator distribution and resulting average rating factors are displayed on Exhibit D-5
for privately owned private vehicles, and D-7 for corporately owned private vehicles.
Engine Size
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The engine size distribution is displayed on Exhibit D-6 for privately owned private vehicles. Since
the engine size class factor is strictly 1.00 for all engine size classes, the average rating factor is 1.00
by default.
Once the average rating factors for each variable were determined, the overall average rating factors
by vehicle type were calculated as follows:
Privately Owned Private Vehicles Average Rating Factor =
(Age and Gender average rating factor + Years Licensed average rating factor + Number of
Accidents average rating factor + Number of Major Convictions average rating factor) x Air
Bags Indicator average rating factor x Engine Size Rating average rating factor
= (1.020 + 0.028 + 0.001 + 0.001) * 0.988 * 1.000
= 1.037
Corporately Owned Private Vehicles Average Rating Factor =
Air Bags Indicator average rating factor
= 0.983
Privately Owned Motorcycles Average Rating Factor =
(Age and Gender average rating factor + Years Licensed average rating factor + Number of
Accidents average rating factor + Number of Major Convictions average rating factor)
= 1.006 +0.019 + 0.000 + 0.001
= 1.026
Alternate Privately Owned Motorcycles Average Rating Factor
For your information, ISO Israel has calculated the average rating factor for the motorcycle risks
using the 2004 data from the ISO Israel DataBank and the motorcycle classification factors originally
recommended in our 2005 class plan filing. The alternate average rating factors by rating variable are
contained on Exhibits D-12, D-13, D-14 and D-15. The overall alternate average rating factor for
privately owned motorcycles equals:
(Age and Gender average rating factor + Years Licensed average rating factor + Number of
Accidents average rating factor + Number of Major Convictions average rating factor)
= 1.016 + 0.024 + 0.001 + 0.002
= 1.043
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Appendix E -- Change in the Retirement Age
In 2005 several insurers expressed concern about the impact that an increase in the retirement age
would have on compulsory insurance. As a result, ISO Israel has analyzed the potential impact the
proposed increase in the retirement age would have on compulsory insurance.
For this analysis, ISO Israel started with the number of seriously injured and deaths by age and
gender from the 2003 CBS Casualties in Road Accidents reports. ISO Israel believes that these are
the claimants that would most likely be eligible for long-term income benefits from compulsory
insurance. ISO Israel then calculated estimates of the total income benefits payable for these
claimants under 2 scenarios -- first with retirement ages of 65 (males) and 60 (females), and then
with retirement ages of 68 (males) and 63 (females). Comparing the total income losses in the second
scenario to those in the first scenario provides an estimate of the percentage increase in income
losses resulting from the retirement age change. Even though the legal retirement age was raised to
67 for males and 62 for females, one has to take in account that the courts often consider higher
retirement age for professional and independent business people.
Exhibits E-1 and E-2 provide an estimate of the increase in income losses due to the proposed change
in retirement age using the following underlying assumptions and parameters:

All death claims for claimants other than minors (where minors are defined as individuals
age 18 or less) result in income payments from the date of accident up to the lower of the
retirement age or the total life expectancy.

10% of the seriously injured claimants will be eligible for income payments for the rest of
their working life (i.e., from the date of accident up to the lower of the retirement age or the
total life expectancy.) The remaining seriously injured claimants will not receive income
benefits for the remainder of their working life, and therefore are not affected by the
proposed change in retirement age.

For minor claimants that are severely injured, the starting age of work would have been 18
for income benefit purposes.
Income benefits are based on the national average wage -- or 7,000 NIS per month.


Income benefits are payable on a present value basis using a discount rate of 2.5% and the
following formula:
The present value of a stream of future payments (PV) = PMT [(1 - (1 / (1 + i) ^ n)) / i],
where
PMT = amount of each payment (on an annual basis)
i = interest rate per period (on an annual basis)
n= number of periods (on an annual basis)
So, for example, for a male claimant that is killed at age 22, with an assumed retirement age
of 68, the present value of the income benefit equals:
(7,000*12) * [(1-(1 / (1.025) ^ 46 )) / .025] = 2,280,950 NIS
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For further details on the calculations underlying Exhibit E, please refer to the Exhibit E
"Notes" sheet.
ISO Israel believes that excluding income payments that are not remainder of life payments (i.e., are
not affected by the change in retirement age) from this analysis gives us the "worst case scenario" -as the partial income payments would be included in both scenarios 1 and 2 and would serve as a
ballast in the calculation, reducing the estimated increase.
As Exhibit E-2 illustrates, the estimated increase in income losses resulting from the change in
retirement age (i.e., from 65 to 68 for males and from 60 to 63 for females) using the above
assumptions and parameters is equal to 7.5% on a present value basis. However, this increase is the
anticipated increase in income losses; the bottom line effect on total compulsory losses is then
calculated as:
The increase in income losses resulting from the retirement age change * the percentage of
compulsory losses that are currently income losses
Assuming income losses are currently 20% of all compulsory losses (based on data from PIP
coverage in the state of Michigan -- the US coverage most similar to Israel compulsory auto), this
results in an increase of .075 * .20, or a 1.5% increase in total compulsory losses.
ISO Israel then performed a sensitivity analysis to test the impact of varying the following underlying
parameters on the results of this analysis:

Assuming 1% of seriously injured claimants would be eligible for income benefits for the
rest of their working life.

Assuming 50% of seriously injured claimants would be eligible for income benefits for the
rest of their working life.

Assuming all seriously injured claimants would be eligible for income benefits for the rest of
their working life.

Using a starting working age of 20

Using an average wage of 21,000 NIS (3 times the average wage) rather than 7,000 NIS for
the benefit calculation

Using a discount rate of 0% (i.e., not taking present value into consideration)

Using a discount rate of 5%

Assuming income losses currently represent 10% of total compulsory losses
The results for these different scenarios are contained on Exhibit E-3 .
As Exhibit E-3 illustrates, varying the percent of serious injuries resulting in income benefits for life,
the starting age of work and the monthly wage benefit have small effects on the resulting increase in
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income losses resulting from the retirement age change. The parameter that has the largest effect on
the results is the discount rate used in the analysis -- with the increase in income losses decreasing as
the discount rate used increases. ISO Israel believes that 2.5% is a reasonable discount rate to use in
this analysis, for the same reasons noted in our proposed April 2007 countrywide tariff level
indication. Using a 2.5% discount rate, this analysis indicates that the change in retirement age will
have approximately a 7.5% increase in income losses under compulsory insurance. This in turn
translates to about a 1% effect on total compulsory losses if we assume income losses are currently
10% of all compulsory losses and about a 1.5% effect on total compulsory losses if we assume
income losses are currently 20% of all compulsory losses. In Michigan -- the state in the US that has
a coverage most comparable to Israel's compulsory auto -- income losses represent about 20% of all
losses. Thus, ISO Israel believes that 20% is a more reasonable estimate of the percentage of total
losses that are income than 10%. As a result, ISO Israel estimates that the change in the retirement
age will have an increase in ultimate losses of about 1.5%, which is not reflected in the countrywide
tariff level indication on Exhibit 9.
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Appendix F - Increased Subrogation Efforts of the INII
ISO Israel is aware of the fact that the Israeli National Insurance Institute (INII) has recently
increased subrogation efforts for claims against insurance companies due to compulsory auto
accidents. This is a relatively new initiative, and thus the increased liability due to these efforts is not
reflected in the losses for the underwriting years used for this countrywide tariff level review. A
sample of Israeli insurance companies representing about 50% of the market provided ISO Israel
with information on INII payments in 2005 to analyze this issue. Exhibit F calculates ISO Israel's
estimate of the impact of the increased subrogation efforts of the INII, using the claim payment data
provided by these insurers.
Column (1) represents INII payments made by the insurers, as reported to ISO Israel; Column (2)
represents all payments made by these same insurers as reported to Avner, on a fully developed
basis; and Column (3) calculates the corresponding percentages. Table A shows INII payments as of
December, 2001; Table B shows INII payments as of December, 2002, and Table C shows INII
payments as of December, 2004. All three tables relate these INII payments to total payments
reported to Avner as of December 2002, fully developed to ultimate levels and indexed to December,
2004. Therefore, the percentages in Tables A through C can be directly compared to assess the
changing significance of INII liabilities over time.
It is ISO Israel's understanding that subrogation efforts can go back at most 7 underwriting years
once subrogation activity is initiated. Furthermore, based on a review of historical INII payments in
Israel, it appears that subrogation efforts begin no later than 3 years after the December evaluation of
an underwriting year, or in other words, INII activity goes back 10 underwriting years at most at any
given date. Thus, on Table A, where INII payments are as of December, 2001, underwriting years
1992 and prior should be fully developed with regard to INII payment liabilities. For Table C, as of
December 2004, underwriting years 1995 and prior should be fully developed with regard to INII
payment liabilities. Additionally, a review of INII payments from 2001 to 2004 indicates that the INII
increased their subrogation efforts significantly in 2002 and 2003. Thus, INII payments as of
December 2001 can be considered "pre-increased INII subrogation efforts".
In Table C, underwriting years 1993 through 1995 are of particular interest, as these underwriting
years were still "open" when increased INII subrogation efforts began in 2002, but should be fully
developed with regard to INII payment liabilities by December 2004. By comparing the INII
percentages for underwriting years 1993-1995 in Table C with those of underwriting years 1992 and
prior in Table A, we obtain an estimate of the increased INII percentage due to subrogation efforts.
The percentage increased from 2.4% to 4.5%
However, it can also be seen in Table C that underwriting year 1997 has an INII percentage that is
above 4.5%. This is not surprising, since this later underwriting year has had the benefit of 3 years of
increased subrogation efforts by the INII. Consequently, ISO Israel estimates that the ultimate INII
percentage for future underwriting years will be between 5.0% and 5.5%.
Due to the 10 year restriction on subrogation efforts, it follows that the INII subrogation efforts in
any calendar year will concentrate most heavily on the earliest underwriting years in that time period.
Thus, it follows that the subrogation efforts as of December 2004 (the evaluation underlying our
tariff analysis) would not be fully reflected in the most recent seven underwriting years used in our
countrywide tariff level indication. However, ISO Israel believes that since these underwriting years
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are developed to an ultimate basis, the historical loss development factors that are applied have built
in the historical INII liability provisions, such that the percentage of INII losses built in for the
underwriting years used in Exhibit 9 equals the percentage that existed prior to the increased
subrogation efforts of the INII -- or 2.4%. Therefore, ISO Israel estimates that the increased
subrogation efforts by the INII represent an increase in ultimate losses of about 3%, which is not
reflected in the countrywide tariff level indication on Exhibit 9.
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Appendix G -- Changes in Law Affecting the Settlement of Claims
During our discussions with the Israeli insurers while preparing the 2005 Tariff review, several
proposed or actual changes in the settlement of claims were raised. ISO Israel has consulted with
claims experts and made an independent evaluation of the effects of each as well as the
appropriateness of adjusting the historical data at this time.
“Chok ha-Hesderim”
At issue is the 2005 Economic Policy Act, which includes a change to the work invalidity threshold,
so that only permanent invalidity levels of 9% and above will be entitled to a one time grant. Prior to
the 2005 Economic Policy Act, a level of invalidity greater than 5% qualified for this benefit. (The
one time benefit prior to this Act was paid on levels of invalidity between 5% and 20%.)
ISO Israel believes that the change will have a small effect. Making the assumption that levels of
disability as reported by the INII in the general population are a fair approximation of the expected
levels of disability in auto accidents, ISO Israel found that the group with disability levels between 0
to 20% (which really translates into 5 to 20% as currently an invalidity level of 5% or more qualifies
for this benefit), disability comprise 4% of all pension recipients. The number of individual
recipients at the end of 2003 was 970. Not all of these individuals were injured in auto accidents.
Assuming that 50% were auto accident injuries would mean that there are 485 individuals with a
disability level between 5% and 20%. Changing the eligibility level to 9% and assuming a uniform
distribution would mean that there would have been approximately 130 cases that would not be
compensated from INII but would now need to be compensated by the compulsory auto coverage.
(i.e., changing the threshold from 5% to 9% is a 4 point increase in a range from 5 to 20, or
approximately 27% of the claimants if we assume a uniform distribution). These benefits are paid by
the formula as follows:
Invalidity percentage* ¾ of monthly income prior to accident* number of months of
invalidity (at most 43)
The resulting value would then have a maximum of: 130* .07*(.75*7,000)*43 months = 2,054,325.
The cost to the Paltad of this change in 2003 would have been no more than 2,054,325 NIS. This is
equal to less than 0.1% of the previously estimated ultimate incurred losses.
Changes in the Road Accident Law
There currently exists a proposal to increase the limit of pain and suffering from 150,000 NIS to
280,000 NIS. This change, if enacted, would impact the cost of compulsory insurance. However, the
specifics of this provision are in a private law proposal and the Knesset committee has considered the
idea of a change without making any specific recommendation.
Since the precise details of any change in this regard are not known at this time, ISO Israel would not
recommend making any adjustment to the indicated tariff at this time, but would recommend that
when such a proposal is final that the tariff be adjusted to reflect any increase in liability.
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With regard to the potential changes in the definition of a road accident, to date there are a number of
proposals that have yet to be enacted and should be evaluated at the time that they are final.
National Insurance
A change has been made to increase the employer’s share of the injury compensation from the
current first 9 days to the first 12 days. We believe that this impact will be small as payment for lost
income for all auto accidents represents about 20% of all losses. In order to evaluate the impact of
this change, ISO Israel examined wage loss information by length of disability in days from US auto
insurance studies conducted by the Insurance Research Council. In doing this analysis ISO Israel
calculated the insurer share under a treatment consistent with the current Israel system where the
employer would pay the disability for the first 9 days and under the future 12 day level. The
calculation indicates that this change would produce a 20% increase in the amount of losses paid for
disability compensation for work injury auto accidents. Since the entire wage compensation portion
of the losses is 20% reflecting both work and non work auto accidents, this change could have no
more than a 4% effect if all wage compensation were for work injury auto accidents. While Avner
has indicated that historically about 10% of all road accidents are work accidents, given the lack of
detailed data available for analysis on this issue, ISO Israel has used a more conservative assumption
that 25% to 50% are work accidents. As a result, ISO Israel estimates that this change will increase
losses no more than 1% to 2%, and thus has selected an effect of 1.5%. The details of the 20%
increase are shown on Exhibit G.
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Appendix H -- The "Lost Years"
In the "lost years" ruling, the Israeli courts have awarded income benefits to claimants that were not
previously entitled to income benefits. The award for "lost years" represents the lost income that
would have been earned by the claimant had they not died or experienced curtailment of life as a
result of a road accident. This benefit is payable to "untraditional" beneficiaries in some cases, such
as the parents or the estate of the deceased. These awards represent a broadening of compulsory auto
insurance in Israel, following a similar broadening of tort rulings. The lost years ruling is applicable
to all new cases, and also retroactively, to cases that have been submitted in the past but have not yet
been decided at this time.
While in theory the lost years could generate additional payments in curtailment of life cases, after
consultation with ISO Israel’s legal counsel (Advocate Alon Belaga), ISO Israel believes that the
effect of the lost years on curtailment of life cases will be insignificant. That is, in many curtailment
of life cases it is very difficult to estimate the life expectancy of the injured, and thus periodical
payments during the life of the injured - rather than a one-time payment - are often made. In the
Varnevski case, the Supreme Court decided to uphold the periodic payments decided on by the
regional court for this very reason. Furthermore, the Supreme Court clarified that the lost years
doctrine does not apply while periodical payments are made. In these cases a lump sum
compensation is applicable only for the lost “remainder of life”, from the actual death to the expected
non-injured life span. Consequently, even if a claimant's lifespan is expected to be shortened directly
as the result of injuries sustained from a road accident, in order for the lost years to come into play,
such a claimant would have to die before the income benefits they currently receive would stop,
which is at retirement age (age 67). (According to the Wassergrug Supreme Court Case, for
curtailment of life cases there are – if any - lost years only between the actual year of death and the
minimum age of retirement, 67). For these reasons, our legal expert has advised, and ISO Israel
agrees, that we should expect very little, if any, effect of the lost years on compensation for
curtailment of life cases.
Thus, ISO Israel believes the major impact of the lost years ruling on compulsory auto insurance will
be from death claims resulting from road accidents. For death claims, there are 3 different scenarios
for determining the lost years benefits:
Scenario 1 -- Claimant is a deceased minor
Scenario 2 -- Claimant is a deceased single adult, with no dependents
Scenario 3 -- Claimant is a deceased adult with dependents
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Scenario 1 -- Claimant is a deceased minor
Exhibit H-1 provides ISO Israel's estimate of the additional Compulsory Insurance losses expected to
result from the lost years ruling for scenario 1 -- minors who have been killed in a road accident.
Following are some notes on the analysis contained in Exhibit H1:

This analysis starts with the total number of road accident death claims expected per year,
which is estimated by using the number of deaths by age and gender from the 2004 CBS
Casualties in Road Accidents reports.

For this scenario, only the deaths for minors are considered. For this analysis a minor is
defined as someone up to age 21, as individuals are in the army until that time. Per the April
2006 Supreme Court Decision on the Hagai Fintz case, "no compensation should be given for
the lost army service years". That is, for minors, the lost years provide for loss of income
benefits from the starting age of work to retirement. Per the April 2006 Supreme Court
Decision on the Hagai Fintz case, the starting age of work is 21, and retirement age is 67.

The lost years benefits payable for minors are 30% of the average salary in the market.
Again, this is per the Supreme Court Decision on the Hagai Fintz case which indicated that
the court must study the status of the injured person at the time of death; if at the time of
death he has no dependents, he should be compensated as an injured with no dependents,
using a global rate of 30% of the average salary in the market. The court also decided that the
working assumption for minors, whose working career and earning patterns have not yet
been established, is that the income loss compensation should be based on the average salary
in the market. The national average salary in Israel is 7,472 NIS per month, based on the
2006 average through March 2006, from the Bank of Israel; when converted to a November
2004 index it is 7,277 NIS per month. .

Income benefits are payable on a present value basis using an interest rate of 2.5%. For
minors, there is "double discounting" -- meaning that first the present value of the stream of
annual payments from age 21 to age 67 is determined, and then that result is discounted to
get the present value of the benefit at the age of the claimant’s death. Again, this is per the
Supreme Court Decision on the Hagai Fintz case.

The present value of the stream of annual payments from age 21 to 67 is determined using
the following formula:
The present value of a stream of future payments (PV) = PMT * [(1 - (1 / (1 + i) ^ n)) / i],
where
PMT =amount of each payment (average lost wage on an annual basis)
i = interest rate per period (.025 on an annual basis)
n = number of periods (in year; in this case = 46 years from age 21 to age 67)
So, for minors, this benefit equals:
(7,277 * .30 * 12) * [(1 - (1 / (1.025) ^ 46 ) ) / .025] = 711,363 NIS
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Next, this total amount is discounted once again, to bring it to the present value at the time of
the claimant's death, using the following formula:
(PV) =BENEFIT FROM ABOVE * [ 1 / (1 + i) ^ n)], where
i = interest rate per period (.025 on an annual basis)
n = number of periods (in years; in this case from age at death to age 21)
So, for example, for a claimant that was age 2 at the time of death, this benefit equals:
711,363 * (1 / (1.025) ^ 19) = 444,977 NIS

The total present value of the benefits resulting from the lost years by age and gender is
determined by multiplying the lost years benefit by age and gender times the number of
estimated claimants by age and gender. The overall estimated lost years benefits for scenario
1 are then determined by summing up the total benefits resulting from the lost years for all
ages for males and females combined.
Scenario 2 -- Claimant is a deceased single adult, with no dependents
Exhibit H-2 provides ISO Israel's estimate of the additional Compulsory Insurance losses resulting
from the lost years ruling for scenario 2 -- single adults, without dependents, that have been killed in
a road accident. Following are some notes on the analysis contained in Exhibit H-2:

This analysis starts with the total number of road accident death claims expected per year,
which is estimated by using the number of deaths by age and gender from the 2004 CBS
Casualties in Road Accidents reports.

For this scenario, only the deaths for single adults without dependents are considered. An
adult is defined as someone aged 21 or higher. In order to determine the number of adults
that are single and do not have dependents, ISO Israel multiplied the number of adult deaths
by the percentage of individuals never married for that age group (statistics on the percentage
never married are from the 2003 CBS Population by Marital Status report as 2004 data for
this statistic were not readily available).

For adults, the lost years ruling provides income benefits from the age of accident to the
lower of the retirement age or the total life expectancy. Retirement age is 67, as per the
Supreme Court Decision on the Fintz case.

The lost years benefits payable for single adults without dependents is 30% of the salary at
the time of death. Again, this is per the Supreme Court Decision on the Hagai Fintz case
which indicated that the court must study the status of the injured person at the time death; if
at the time of death he has no dependents, he should be compensated as an injured with no
dependents, using a global rate of 30% of the average salary in the market. Additionally, the
court noted that since the actual salary for each claimant is not known, the income benefits
for these claimants is estimated using the national average salary in Israel -- which is 7,472
NIS per month, based on the 2006 average through March 2006, from the Bank of Israel,
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converted to a November 2004 index; when converted to a November 2004 index it is 7,277
NIS per month.

Income benefits are payable on a present value basis using an interest rate of 2.5%. For
adults, the present value of the stream of annual payments from age at accident to age 67 is
determined using the following formula:
The present value of a stream of future payments (PV) = PMT * [(1 - (1 / (1 + i) ^ n)) / i],
where
PMT =amount of each payment (average lost wage on an annual basis)
i =interest rate per period (.025 on an annual basis)
n =number of periods (in years, from age at accident to age 67)
So, for example, for a claimant that died at age 32, the benefit equals:
(7,277 * .30 * 12) * [(1 - (1 / (1.025) ^ 35) ) / .025] = 606,338 NIS

The total present value of the benefits resulting from the lost years by age and gender is
determined by multiplying the lost years benefit by age and gender times the number of
estimated claimants by age and gender. The overall estimated lost years benefits for scenario
2 are then determined by summing up the total benefits resulting from the lost years for all
ages for males and females combined.
Scenario 3 -- Claimant is a deceased adult with dependents
Exhibit H-3 provides ISO Israel's estimate of the additional Compulsory Insurance losses resulting
from the lost years ruling for scenario 3 -- adults with at least 1 dependent, that have been killed in a
road accident. Following are some notes on the analysis contained in Exhibit H-3:

This analysis starts with the total number of road accident death claims expected per year,
which is estimated by using the number of deaths by age and gender from the 2004 CBS
Casualties in Road Accidents reports.

For this scenario, only the deaths for adults with at least 1 dependent are considered. An
adult is defined as someone aged 21 or higher. In order to determine the number of adults
that have at least 1 dependent, ISO Israel multiplied the number of adult deaths by 1 minus
the percentage of individuals never married for that age (i.e., 1 - the percent assumed to have
no dependents in scenario 2).

For adults, the lost years ruling provides income benefits from the age of accident to the
lower of the retirement age or the total life expectancy. Retirement age is 67, as per the
Supreme Court Decision on the Fintz case.

The lost years benefits payable for adults with dependents is based on the hands approach
and the salary at the time of death. However, the hands approach was changed such that a
savings hand was introduced effective with the Supreme Court Decision on the Hagai Fintz
case, which determined that if there are dependents the compensation will be based on the
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hands methods using the known family status with the addition of one savings hand. That is,
prior to the lost years, income benefits were paid using the hands approach as follows:
Average income * (# dependents hands + 1 household hand)
after tax (# dependents hands + 1 injured hand + 1 household hand)
However, after the lost years (specifically, with the Supreme Court Decision on the Fintz
case), income benefits are payable as follows:
Average income * (# dependents hands + 1 household hand + 1 savings hand)
after tax (# dependents hands + 1 injured hand + 1 household hand + 1 savings hand)
Since the addition of the savings hand increases the income benefits payable, the effect of the
lost years on this scenario is estimated based on the additional losses expected to be
generated by the change in the hands calculation.

In both cases, income benefits are payable on a present value basis using an interest rate of
2.5%. For adults, the present value of the stream of annual payments from age at accident to
age 67 is determined using the following formula:
The present value of a stream of future payments (PV) = PMT * [(1 - (1 / (1 + i) ^ n)) / i],
where
PMT =amount of each payment (average lost wage on an annual basis)
i =interest rate per period (.025 on an annual basis)
n =number of periods (in years, from age at accident to age 67)

Since the actual salary for each of the individual claimants is not known, the income benefits
for these claimants is estimated using the national average salary in Israel -- which is 7,472
NIS per month, based on the 2006 average through March 2006, from the Bank of Israel;
when converted to a November 2004 index it is 7,277 NIS per month. A 10% income tax
then applies.

Since the actual number of dependents for each of the individual claimants is not known, it is
estimated using the average household size in Israel. According to the 2004 CBS Report on
Households, the average number of persons per household in Israel is 3.4; thus, an injured
person would have 2.4 dependents on average.
So, for example, for a claimant with dependents that died at age 32, prior to the lost years the
income benefit equaled:
(7,277 * .90 * 12) * [(2.4 + 1) / (2.4 + 1 + 1)] * [(1 - (1 / (1.025) ^ 35) ) / .025] = 1,405,652 NIS
After the lost years, that same claimant is eligible for a benefit equal to:
(7,277 * .90 * 12) * [(2.4 + 1 +1) / (2.4 + 1 + 1 +1)] * [(1 - (1 / (1.025) ^ 35) ) / .025] = 1,482,031
NIS
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The difference in these benefits is the additional loss resulting from the lost years ruling. For
example, for the 32 year old claimant:
1,482,031 - 1,405,652 = 76,379 NIS

The total present value of the benefits resulting from the lost years by age and gender is
determined by multiplying the additional losses generated by the lost years ruling by age and
gender times the number of estimated claimants by age and gender. The overall estimated
increase due to the lost years for scenario 3 is then determined by summing up the total
additional benefits resulting from the lost years for all ages for males and females combined.
For further details on the calculations underlying Exhibits H-1, H-2 and H-3, please refer to the
Exhibit "H Notes".
As Exhibit H-4 illustrates, the estimated total additional losses resulting from the lost years ruling are
equal to the sum of the losses anticipated for scenarios 1, 2 and 3. Thus, the estimated effect of the
lost years ruling on compulsory auto insurance is calculated as:
the total losses resulting from the lost years ruling for 2004 claimants
total ultimate, discounted compulsory losses for an average underwriting year, with an adverse
deviation provision
For this analysis, ISO Israel used an average of the losses for the last 7 underwriting years to
determine the overall compulsory losses for an average underwriting year, so the calculation is:
131,536,103 = 0.052
2,544,919,341
That is, we expect the lost years to have a +5.2 % effect on compulsory auto insurance losses.
Sensitivity Analysis
In order to test the sensitivity of using one year of CBS data, ISO Israel performed this analysis three
separate times using different years of CBS data -- 2002, 2003 and 2004. The results of these three
analyses were very similar, yielding results ranging from +4.8% to +5.8%, and averaging +5.3%.
Thus, the use of a single year of 2004 CBS data appears to provide an accurate and reasonable
estimate of the impact of the lost years.
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EXHIBITS
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