Life Insurance
Annual Report 2005
The Capital Market, Insurance and Saving Division
Contents
Introduction........................................................................................................................ 4
1. Structure of the life insurance sector............................................................................ 6
2. Operational characteristics........................................................................................... 8
Profit from life insurance transactions......................................................................... 8
Life insurance premiums.............................................................................................. 12
Life insurance reserves................................................................................................. 15
Management fees in life insurance policies................................................................. 17
Agent commissions and other life insurance expenses................................................ 21
Life insurance programs............................................................................................... 24
Life insurance assets portfolio...................................................................................... 26
Insurance company returns........................................................................................... 29
3. Risk Management......................................................................................................... 33
Reinsurance.................................................................................................................. 33
Policy redemption........................................................................................................ 34
Canceling and clearing insurance policies................................................................... 35
List of Table
Table
Table C-2
Table C-3
Table C-4
Table C-5
Table C-6
Table C-7
Table C-8
Market share of insurance companies in 2005 .......................................... 6
Concentration indices for life insurance companies in the
life insurance sector in 2005....................................................................... 7
Profits from life insurance transactions in 2003-2005, rate of change in
profit and market share in 2005 . ............................................................... 11
Life insurance premiums by company, 2003-2005 ................................... 12
Insurance company market share – insurance reserves in the
participating portfolio in 2003-2005 ......................................................... 16
Insurance company market share – insurance reserves in the
guaranteed return portfolio, 2003-2005 .................................................... 17
Management fee and life insurance income for participating portfolio
by company and ratio of income from management fees to total life
insurance profits in 2003-2005 . ................................................................ 19
Share of life insurance profits of total life insurance reserves by
insurance company in 2003-2005 ............................................................. 20
Annual Report 2005
Life Insurance
Table C-9
Table C-10
Table C-11
Table C-12
Table C-13
Table C-14
Table C–15
Table C-16
Table C-17
Table C-18
Ratio of agent commissions to life insurance premiums, in 2003-2005 ... 22
Ratio of administrative and general expenses to total reserves
and pending life insurance claims in 2003-2005, by company ................. 23
Gross premiums by insurance type in 2003-2005 and rates of change ..... 25
Distribution of the life insurance assets portfolio in 2003-2005................ 28
Participating portfolio – gross weighted return, net weighted return
and management fees in 2000-2005 . ........................................................ 29
Net / gross returns, and the average return for 2000-2005
by insurance company . ............................................................................. 30
Highest and lowest gross returns in 2000-2005 ........................................ 30
Residual premium out of total life insurance premiums in 2000-2005 . ... 33
Life insurance redemptions and ratio of policies redeemed
to average reserve in 2003-2005 ............................................................... 34
Rate of cancelled and surrendered policies out of total policies
issued in 2000-2005 .................................................................................. 36
List of Charts
Market share of premiums for policies issued in 2005 compared with
previous years............................................................................................. 14
Management fees for life insurance programs in the participating
portfolio out of total profits from life insurance transactions in 2003-2005 .....18
General and administrative expenses vs. reserves and pending life
insurance claims by company, in 2005 ..................................................... 24
Gross premiums by life insurance type in 2005......................................... 26
Distribution of the assets portfolio in the life insurance sector
between the participating portfolio and the guaranteed return
portfolio in 2001-2005............................................................................... 27
Development of gross returns in the participating portfolio (Fund Yud)
in 2005 . ..................................................................................................... 31
Annual Report 2005
Chart C-1
Chart C-2
Chart C-3
Chart C-4
Chart C-5
Chart C-6
Annual Report 2005
The Capital Market, Insurance and Saving Division
Introduction
The Life Insurance Department of the Capital Market, Insurance and Savings Division handles
a range of issues involved in the regulation and supervision of life insurance companies
and agents. Among other things, the Department is responsible for reviewing life insurance
programs submitted to the Commissioner of Insurance for approval.
The life insurance sector consists of 14 companies, five of which hold about 95% market
share, both in terms of assets and receipts from premiums.
Compared with 2004, there was an increase of about 12% in life insurance sector profits,
primarily due to higher returns posted on life insurance assets. This increase led to rise in
management fees collected in 2005 compared with 2004. The ratio of management fees of
total profit from life insurance transactions rose to 67.5% (compared with 51% in 2004). The
average profit ratio out of total sector reserves remains as it was in previous years, standing
at around 2%.
The insurance companies’ life insurance assets portfolio consists of guaranteed return policies
and participating life insurance policies.
The guaranteed return portfolio is the assets portfolio for policies issued up until 1991 and
these were guaranteed a fixed return on investment, which is insured by investing monies
from savings in earmarked government bonds (LI bonds).
The participating portfolio is the assets portfolio for participating life insurance policies that
were marketed as of 1992 when the government stopped issuing earmarked bonds. Their
return is derived from the returns the company achieves in the capital market for the assets in
the participating portfolio, and most of the monies are invested in a fund called “Fund ‘Yud’”
(an explanation of the funds can be found below, in Section 2).
In 2005 the life insurance companies achieved an average gross yield of approximately
14.9% on the participating portfolio. Total life insurance assets grew, in real terms, to NIS
122 billion. The participating portfolio assets constitute 61% of the total assets.
1. Including “Dikla” – a licensed company in the life insurance sector. This company operates only in the nursing
insurance line. The data presented in this chapter do not include this company. Furthermore, during 2006 all
life insurance transactions carried out by the Arieh Insurance Co. were transferred to Clal Insurance, while
all of Clal’s health insurance transactions were transferred to Arieh, and it was renamed “Clal Health.”
Annual Report 2005
Life Insurance
In the wake of reforms instituted in the life insurance products market and the structure
of agents’ commissions (leveling commissions over the life of the policy), as of 2004 old
products such as “Adif” and “Me’urav” were no longer being marketed. In their place,
companies began marketing new insurance programs with the premiums divided into three
components – savings, expenses and insurance coverage (hereinafter, “new policies”).
Savings monies from the new policies accrue in a new participating portfolio, which is called
the “New Fund ‘Yud’.”
Annual Report 2005
The total life insurance premiums in 2005 was some NIS 15 billion. The total premiums for
new products stood at NIS 1,923 million, and the majority of premiums are still due to old
products that were still marketed until the end of 2003 (“Adif” and “Me’urav”– about 72%).
In addition, commissions paid to agents continued the downward trend begun in 2004, due
to the move towards leveling of commissions, and declined to only 11% of the premiums,
compared with 16% in 2003.
Annual Report 2005
The Capital Market, Insurance and Saving Division
1. Structure of the life insurance sector
The life insurance sector is characterized by a relatively high level of concentration: the
five largest insurance groups hold about 95% of the total gross premiums and the total life
insurance assets.
Table
Market share of insurance companies in 2005
(in percent)
Name of group
Distribution of assets in the life
insurance sector
Gross distribution of premiums in
the life insurance sector
2004
2005
2004
2005
Migdal Group
35.9
35.9
32.7
30.6
Clal Group
22.9
22.9
23.1
23.2
The Phoenix Group
16.1
15.9
16.3
16.1
Harel Group
13.3
13.4
13.6
16.1
Menorah
8.7
8.6
9.4
9.4
Other
3.2
3.2
4.9
4.7
Total
100.0
100.0
100.0
100.0
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Other: Includes “Hachsharat Hayishuv ILD,” “Ayalon,” “Eliahu,” “IDI” and “AIG.”
Table C-1 indicates that the “Migdal Group” has maintained its status as the company with
the largest market share; an examination of the data for 2005 compared with 2004 shows there
hasn’t been any dramatic change in the groups’ and companies’ market shares. Furthermore,
it appears that the purchase of new pension funds by the insurance companies is expected to
cause changes in the distribution along with an increase in the companies’ ability to market
supplementary insurance products to holders of the pension funds they manage.
In order to test the degree of market concentration we used three indices:
1. The Herfindahl-Hirschman Index (HHI) – This index is calculated as the sum of squares
of each insurance company’s market share of all participating portfolio assets.
Annual Report 2005
Life Insurance
2. The CR3 Index – This index gives us a total for the market share of the three largest
insurance groups of the total assets in the participating portfolio assets.
3. The CR5 Index – This index gives us a total for the market share of the five largest
insurance groups of the total assets in the participating portfolio assets.
Table C-2
Concentration indices for life insurance companies in the
life insurance sector in 2005
Index
2005
Herfindahl-Hirschman Index
0.231
CR3
74.7
CR5
96.8
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Annual Report 2005
Compared with 2003 and 2004, there was no real change in the outcomes of the concentration
indices for insurance companies in the life insurance sector.
Annual Report 2005
The Capital Market, Insurance and Saving Division
2. Operational characteristics
In this section we will analyze the life insurance sector from several aspects describing activity
volumes: Profit from life insurance transactions, premiums, reserves, management fees and
commissions. We will also look at the scope of marketing for life insurance programs.
Beginning in 2004 life insurance policies underwent a structural change. This change
influenced the life insurance companies’ volume of activity in most areas surveyed below. The
new programs differ not only by their management fee levels, but also by the commissions
paid to insurance agents and even by the profits they accrue.
Profit from life insurance transactions
Below are the sources of income in the life insurance sector:
1. Interest margin on guaranteed return life insurance portfolio – Against insurance reserves
pursuant to insurance programs issued from the early 1960s until 1991, insurance
companies are eligible to purchase earmarked government bonds, known as LI (Lifeindexed) bonds. These bonds are CPI-indexed and guarantee a return ranging from
6.2% (in funds A-B, which were open for enrollment of new insureds from 1962-1976),
through 5.2% (in funds C-F, which were open for enrollment of new insureds from 19761988), to 4% (in funds G-H, which were open for enrollment of new insureds from 19881989). The return guaranteed to those insureds was about 1% lower than the yield on
earmarked bonds. Therefore insurance companies had a permanent profit of around 1%
from guaranteed yield insurance reserves.
2. Management fees on participating portfolio – For participating life insurance programs
issued from 1991 through 2003, life insurance companies are permitted to collect annual
management fees from accrued assets at a rate of 0.6% of the total assets, plus 15% of
investment profits. In new programs issued as of 2004, it was determined that management
fees for savings management shall be fixed only, regardless of investment returns. Thus
the permitted management fee may reach up to 1% per year, or a higher rate as approved
by the Commissioner of Insurance, but not more than 2% per year, subject to deduction
of management fees from the premium (see Section 3 below).
Annual Report 2005
Life Insurance
2. Account management fees, also known as “policy factor” – a fixed financial payment that is collected in
addition to the premium and does not depend on the amount of the insurance or the duration of the policy.
3. Partial-year fee – a price supplement that is reflects the cost of dividing the annual premium into monthly,
quarterly or semi-annual payments.
Annual Report 2005
3. Management fee on premium – In participating life insurance programs issued through
2003, the life insurance premium usually consists of the savings premium, risk premium
and expense component of the current premium. The current premium expense component
is the management fee on the premium. In new programs issued since January 2004, the
risk component and the expense component are separate, and the maximum rate for
premium expenses (excluding the risk component) was reduced to either a fixed rate of
11%, or a progressive rate beginning at 13% and gradually declining over several years
so that the average management fee does not exceed 11%.
4. Account management and partial-year fees – In policies issued through 2003 a ‘policy
factor’ i.e., an account management and partial-year fee, was charged (about NIS 16 per
policy as of 2003). But in policies issued since 2004 no policy factor was permitted in
insurance programs approved as insurance funds, and was only permitted in individual
programs (where the policy factor was reduced to NIS 12 per policy).
5. Insurance profits from policy coverage such as death or work disability – If the aggregate
premium from all the insureds under different policy coverages exceeds the cost of paying
claims for the same coverage, then the companies realize an additional profit.
6. Surrender values profit – Withdrawal of funds by the insured prior to the end of the
insurance term is usually subject to a fine. The insured receives his money at surrender
values that are lower than its actual value at the time of withdrawal. The size of this
fine depends on the insurance program type (managers or personal insurance, ‘Adif’,
‘Me’urav’ or a new policy), on the insured’s seniority in the program as well as on the
reason for withdrawal (leaving a job, dismissal etc.).
Annual Report 2005
The Capital Market, Insurance and Saving Division
Following are the expense components in the life insurance sector:
1. Payment of claims to insureds – Upon the occurrence of the insurance event, such as
death or work disability, the insurance company must pay the insurance amounts to the
insureds.
2. Agent commissions – The bulk of the cost in operating a life insurance system is paying
commissions to insurance agents for marketing the policies, maintaining the insureds files
and collecting premiums. In policies issued prior to 2004, the lion’s share of commissions
was paid to agents in the year the policy was underwritten and in the following year. In
policies issued since 2004 the agent’s commission is evenly distributed along the life of
the policy.
3. General and administrative expenses – These expenses are mainly due to operation of the
insurer’s life insurance division, and they include salary and computerization expenses,
as well as expenses related to management of the insurer’s life insurance investment
portfolio. These costs are less volatile than commissions, which are directly related to
sales volume.
4. Reinsurance – Israeli insurance companies tend to purchase reinsurance from foreign
reinsurers, in order to reduce the insurance risk to which the insurance company may
be exposed. When purchasing reinsurance, the insurance company transfers its share of
the premium to the reinsurer, thereby reducing its income, and in exchange the reinsurer
undertakes to participate in paying claims to insureds and commissions to agents in
proportion to its share, thereby reducing the company’s expenses.
10
Annual Report 2005
Life Insurance
Table C-3
Profits from life insurance transactions in 2003-2005,
rate of change in profit and market share in 2005
(in NIS thousands and percent)
Rate of change in profit
from life insurance
Market
transactions
share 2005
2003-2004 2005-2004
-36.2%
38.9%
28.7%
-62.6%
171.1%
3.5%
-38.7%
46.6%
32.2%
13.6%
-5.8%
15.5%
13.2%
61.7%
3.0%
13.5%
1.1%
18.5%
-10.6%
13.4%
13.3%
15.8%
6.1%
6.4%
-3.1%
10.9%
19.7%
-9.7%
5.7%
16.2%
-2.0%
-19.2%
9.8%
-5.1%
27.4%
1.9%
Company
2003
2004
2005
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
The Phoenix
Hadar
The Phoenix Group
Harel Group
Menorah
Eliahu
Hachsharat Hayishuv
ILD
Ayalon
IDI
AIG
TOTAL
666,383
70,943
737,326
298,555
34,101
332,656
270,040
106,390
376,430
349,132
254,647
32,045
425,464
26,515
451,979
339,084
38,614
377,698
241,534
123,240
364,774
315,127
249,631
30,396
590,834
71,876
662,710
319,388
62,428
381,816
273,913
130,787
404,700
333,166
201,647
38,736
15,028
8,494
3,021
-43.5%
-64.4%
0.1%
21,052
5,981
-2,644
2,121,653
26,625
8,642
965
1,834,331
20,271
9,725
3,716
2,059,508
26.5%
44.5%
-136.5%
-13.5%
-23.9%
12.5%
285.1%
12.3%
1.0%
0.5%
0.2%
100.0%
Profits in the life insurance sector stood at approximately NIS 2 billion in 2005, a 12.3%
increase compared with the profits seen in 2004. This increase may be explained by the
approximately 5.9% increase in the total premium collected by the companies, and the 6.3%
rise in returns on participating portfolio assets in 2005 compared with 2004 (in 2004 the
gross return was 8.6% compared with 14.9% in 2005). As a result the management fees
collected in 2005 rose by some NIS 547 million (an increase of 49%) compared to 2004.
11
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Annual Report 2005
The Capital Market, Insurance and Saving Division
Life insurance premiums
The premium paid by the insured has three major components:
1. Risk – Insurance coverage against the risk of death or work disability;
2. Savings – accrued by the insured for retirement;
3. Management fee on premiums – a sum or percentage collected from the premium to
cover for the insurance company’s expenses and profit.
The allocation of premiums to the various components varies between insurance companies
and insurance programs. In the long term, the older the policy the lower the insurance
company’s expenses (primarily the agent commission component), and income from
management fees on the savings component are higher as savings balances rise.
Table C-4
Life insurance premiums by company, 2003-2005
(in NIS thousands and percent)
Rate of change in
premium
Premiums
Company
2003
2004
2005
2004-2003 2005-2004
Migdal
3,893,463 3,969,736 3,999,048 2.0%
652,380
643,864
657,207
-1.3%
Hamagen
Migdal Group
4,545,843 4,613,600 4,656,255 1.5%
2,889,062 2,972,156 3,098,615
2.9%
Clal
375,726
406,411
432,685
8.2%
Arieh
3,264,788 3,378,567 3,531,300
3.5%
Clal Group
1,305,270 1,326,141 1,363,572
1.6%
The Phoenix
1,027,674
1,081,265
5.9%
Hadar
970,855
3.4%
The Phoenix Group 2,276,125 2,353,815 2,444,837
Harel Group
1,941,539 2,021,259 2,445,361 4.1%
1,307,921 1,333,564 1,424,406
2.0%
Menorah
Hachsharat Hayishuv
277,177 242,078 237,709 -12.7%
ILD
197,307
204,742
216,801
3.8%
Ayalon
Eliahu
147,785 152,071 169,302
2.9%
50,778
74,787
93,245
47.3%
IDI
13,097
16,122
19,558
23.1%
A.I.G.
TOTAL
14,022,360 14,390,605 15,238,774 2.6%
Market share
2003
2004
2005
0.7%
27.8%
27.6%
26.2%
2.1%
4.7%
4.5%
4.3%
0.9%
32.4%
32.1%
30.6%
4.3%
20.6%
20.7%
20.3%
6.5%
2.7%
2.8%
2.8%
4.5%
23.3%
23.5%
23.2%
2.8%
9.3%
9.2%
8.9%
5.2%
6.9%
7.1%
7.1%
3.9%
16.2%
16.4%
16.0%
21.0%
13.8%
14.0%
16.0%
6.8%
9.3%
9.3%
9.3%
-1.8%
2.0%
1.7%
1.6%
5.9%
1.4%
1.4%
1.4%
11.3%
1.1%
1.1%
1.1%
24.7%
0.4%
0.5%
0.6%
21.3%
0.1%
0.1%
0.1%
5.9%
100.0%
100.0%
100.0%
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
12
Annual Report 2005
Life Insurance
As of 2003 there was a moderate increase in life insurance premiums. Table C-4 shows that
premium revenues in 2005 were greater compared with premium revenues in 2004, with
totals of some NIS 15.2 billion and NIS 14.3 billion, respectively.
The rate of change in premium revenues for 2004-2005 was 5.9%, which was higher than the
rate of change of 2.6% for the period 2003-2004.
The rise in premium revenues seen during the last four years is a continuation of the reversal
of the trend that began in 2002 (see the Commissioner’s Report for 2004). This reversal can
be explained by the economy in general recovering from a period of recession. The recession
was characterized by massive redemptions and surrenders of policies, and we can see that
in 2005 all of the companies, except for “Hachsharat Hayishuv ILD” posted an increase in
their premiums compared with 2004. “Hachsharat Hayishuv” saw a 1.8% drop in premium
revenues during the last year, and a drop of 14.5% in the last two years. “IDI” and “AIG”
had the highest increases compared with other companies – 24.7% and 21.3%, respectively.
However we cannot ignore the fact that the absolute size of the insurance portfolios of these
companies is quite small compared with the other companies. “Harel Insurance” posted the
highest increase among companies with a more traditional marketing system, with a rate of
change of 21%.
13
Annual Report 2005
Regarding market share of premiums for policies issued in 2005 (in contrast with the market
share of premiums for all policies issued in previous years, as described in Table C-4 above),
Chart C-1 indicates that “Clal Insurance” has the largest premium market share for policies
issues in 2005, a share of 24.4% which is NIS 398.6 million; while “Migdal Insurance”
posted a drop in premiums for policies issued in 2005 compared with previous years, when
it had the highest market share.
Still, “Migdal Group” continues to hold about one-fourth of the Israeli insurance market.
“IDI” and “AIG” have the smallest market share, even though they posted the highest rate of
market share increase in the past three years.
Annual Report 2005
The Capital Market, Insurance and Saving Division
Chart C-1
Market share of premiums for policies issued in 2005 compared with
previous years
(in percent)
30%
25%
20%
15%
10%
5%
0%
Clal
Migdal Menorah
Harel
Phoenix
Hadar
Premium for 2005
Arieh Hamagen Ayalon
IDI
Eliahu
ILD
AIG
Premium for years prior to 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Chart C-1 presents the changes in insurance companies’ market share of premiums received
for policies issued in 2005 (for policies that have been approved for marketing since 2004),
and the premiums received for policies issued in previous years (mainly “Adif” and “Me’urav”
policies). Total premiums in the life insurance sector reflects many years of historical data,
while the data presented in Chart C-1 specifies the premium distribution based on new sales
during 2005 and reflects the companies’ activity for the last year only. The figures show
that the “Clal Group,” “Menorah,” “Ayalon,” “IDI,” “Eliahu,” “Hachsharat Hayishuv” and
“AIG” increased their market share, while the “Migdal Group,” “the Phoenix Group” and
“Harel Group” had a reduced market share.
The chart further indicates that the “Clal Group” saw the highest premium share from policies
issued in 2005. In comparison, “AIG” posted the lowest premium share of all policies issued
in 2005.
The marketing of new policies types of in 2004 and the discontinued sale of “Me’urav” and
14
Annual Report 2005
Life Insurance
“Adif” policies required that companies reorganize, and this slowed the marketing of new
policies in the first half of 2004, particularly among the larger companies. But in 2005, as
opposed to 2004, there was an increase in the number of policies issues.
If we compare the market share of policies issued in 2005 compared with policies issued
prior to 2005 (mostly “Adif” and “Me’urav” policies), we see that generally speaking, each
company maintained its market share. This indicates that company size is an important factor
in predicting future market share and that insurance companies enjoy an economy of scale.
Life insurance reserves
Life insurance reserves are held against an insurance company’s insurance liabilities, and are
reported on its balance sheets. According to the provisions of the law, insurance companies
keep life insurance assets separate from other company assets. Tables C-5 and C-6 below
show the insurance companies’ market share compared to their life insurance reserve, which
reflects the company’s obligation to its policyholders, in both the participating insurance
portfolio and the guaranteed return portfolio.
15
Annual Report 2005
In 2005 the upward trend in the volume of the participating life insurance portfolio continued.
At the end of 2004, life insurance reserves in the participating portfolio made up 59% of
all life insurance reserves, and at the end of 2005 the rate had increased to 62% of all the
reserves. This trend corresponds to the fact that guaranteed return insurance policies backed
by earmarked bonds had already stopped in 1991, as described above. In 2005 insurance
companies achieved a 14.9% return on the participating portfolio (compared with a return
of 8.6% in 2004). In contrast, the guaranteed return portfolio has a fixed return, since it
is invested mostly in earmarked bonds yielding between 4% and 6.2% interest. Thus the
increase in share of participating reserves vs. guaranteed return reserves also stems from the
different returns they posted in 2004-2005, not only as a result of new, higher deposits.
Total life insurance reserves in the participating portfolio in the “Migdal” and “Clal” Groups
for 2004-2005 rose by 21.3% and 21.6%, respectively.
Annual Report 2005
The Capital Market, Insurance and Saving Division
Table C-5
Insurance company market share – insurance reserves in the participating
portfolio in 2003-2005
(in NIS thousands and percent)
Company
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
Phoenix
Hadar
The Phoenix Group
The Harel Group
Menorah
Hachsharat Hayishuv
ILD
Eliahu
Ayalon
IDI
TOTAL
Reserve
amount
2003
Reserve
amount
2004
Reserve
amount
2005
15,105,218
3,115,005
18,220,223
10,530,870
1,161,193
11,692,063
4,660,406
3,754,836
8,415,242
6,609,110
4,661,621
17,587,948
3,647,210
21,235,158
12,238,465
1,447,079
13,685,544
5,459,192
4,375,140
9,834,332
7,677,858
5,351,608
21,333,157
4,419,921
25,753,078
14,868,753
1,769,123
16,637,876
6,609,093
5,239,884
11,848,977
9,204,151
6,603,114
739,622
824,599
940,025
363,516
412,912
499,900
570,412
690,402
856,739
37,313
63,400
100,823
51,309,122 59,775,813 72,444,683
Change
Change in
Market in market
reserves
share 2005
share
(percent)
2004-2005
21.3%
29.4%
0.1%
21.2%
6.1%
0.0%
21.3%
35.55%
0.1%
21.5%
20.5%
0.2%
22.3%
2.4%
0.9%
21.6%
23.0%
0.3%
21.1%
9.1%
-0.1%
19.8%
7.2%
-1.2%
20.5%
16.36%
-0.6%
19.9%
12.7%
-1.1%
23.4%
9.1%
1.8%
14.0%
1.3%
-5.9%
21.1%
24.1%
59.0%
21.2%
0.7%
1.2%
0.1%
100.0%
-0.1%
2.4%
31.2%
0.0%
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
The combination that makes up the life insurance reserves also has an impact on the
companies’ profits. Management fees in the participating portfolio for policies issued up to
December 31, 2003 add up to 0.6% of assets plus 15% of investment profits. Therefore, in
years where much higher yields are achieved – as was the case in 2005 – management fees
increase dramatically.
Table C-6 below shows the insurance companies’ market share for reserves in the guaranteed
return portfolio, whose investments yield an interest margin of about 1% (the difference
between return the government gives to the insurance companies, and the return guaranteed
to the individual policyholder). Compared with reserves for the guaranteed return portfolio,
reserves for the guaranteed return portfolio remained at levels similar to previous years (the
rate of change was 21.2% compared with 5%, respectively), leaving a gap of some NIS 30
16
Annual Report 2005
Life Insurance
billion between participating portfolio reserves and guaranteed return portfolio reserves,
within a period of only three years –due to the superior returns posted in the participating
portfolio and due to the fact that guaranteed return policies backed by government bonds are
no longer being marketed.
Table C-6
Insurance company market share – insurance reserves in the guaranteed
return portfolio, 2003-2005
(in NIS thousands and percent)
Company
Reserve
amount
2003
Reserve
amount
2004
Reserve
amount
2005
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
Phoenix
Hadar
The Phoenix Group
The Harel Group
Menorah
Hachsharat Hayishuv ILD
Eliahu
Ayalon
IDI
TOTAL
13,432,554
1,255,391
14,687,945
8,559,743
872,586
9,432,329
5,055,296
1,225,079
6,280,375
5,293,255
3,439,512
482,649
447,488
186,988
5,850
40,256,391
13,856,070
1,289,879
15,145,949
8,776,773
828,581
9,605,354
5,139,470
1,039,605
6,179,075
5,304,356
3,415,188
500,962
435,347
184,381
386
40,770,998
14,597,332
1,348,520
15,945,852
9,263,693
828,581
10,092,274
5,366,275
1,070,296
6,436,571
5,714,617
3,449,722
543,654
432,811
186,694
527
42,802,722
Change in
reserves
(percent)
2004-2005
5.3%
4.5%
5.3%
5.5%
0.0%
5.1%
4.4%
3.0%
4.2%
7.7%
1.0%
8.5%
-0.6%
1.3%
36.5%
5.0%
Market
share
2005
34.1%
3.2%
37.3%
21.6%
1.9%
23.6%
12.5%
2.5%
15.0%
13.4%
8.1%
1.3%
1.0%
0.4%
0.0%
100.0%
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Management fees for participating life insurance policies issued up to 2004, could be
collected in one of the following two ways:
1. Collecting 0.84% per year of the estimated value of the portfolio;
2. Collecting 0.6% per year of the estimated value of the portfolio plus 15% of the real
portfolio yield after deducting fixed management fees.
17
Annual Report 2005
Management fees in life insurance policies
Annual Report 2005
The Capital Market, Insurance and Saving Division
In reality, all insurance companies chose the second option.
As part of the reforms instituted in early 2004 in the life insurance sector (see the Division’s
Report for 2003), the Regulations for Supervision of Insurance Business (Insurance Contract
Terms) 5741-1981 were amended. According to this amendment an insurer is permitted
to collect management fees of no more than 1% of the estimated value of the investment
portfolio annually, unless the Commissioner of Insurance has otherwise allowed. Under no
circumstances is the fee to exceed 2% of the estimated value of the investment portfolio.
Chart C-2
Management fees for life insurance programs in the participating portfolio
out of total profits from life insurance transactions in 2003-2005
(in percent)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
67.5%
51.1%
2003
50.9%
2004
2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
As Chart C-2 shows, in 2005 management fees collected for participating insurance programs
made up 67.5% of total life insurance profits. In 2003-2004 profits for the participating
portfolio were 51% of the total profit on life insurance transactions, but in the previous two
years the share of participating portfolio management fees out of total profits was lower
(about 28% and 20% alone in 2001 and 2000, respectively).
This rise in the rate of management fees points to, among other things, an increase in the
4. In addition to management fees on accrued savings, insurance companies also charge management fees on
the premium and additional expenses.
18
Annual Report 2005
Life Insurance
return posted by the participating portfolio and gives us an indication of the investment
results.
Table C-7
Management fee and life insurance income for participating portfolio by
company and ratio of income from management fees to total life insurance
profits in 2003-2005
(in NIS thousands and percent)
2003
Company
Management
fees
Profit
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
The Phoenix
Hadar
The Phoenix
Group
Harel Group
Menorah
Hachsharat
Hayishuv ILD
Ayalon
Eliahu
IDI
AIG
TOTAL
294,795
59,688
354,483
219,890
24,413
244,303
103,212
75,285
665,418
70,943
736,361
298,555
34,101
332,656
270,040
106,390
2004
Ratio
Management
fees
Profit
44.30%
84.14%
48.14%
73.65%
71.59%
73.44%
38.22%
70.76%
270,111
58,424
328,535
182,618
19,757
202,375
87,468
67,889
425,464
26,515
451,979
339,084
38,614
377,698
241,534
123,240
2005
Ratio
Management
fees
Profit
Ratio
63.5%
220.3%
72.7%
53.9%
51.2%
53.6%
36.2%
55.1%
418,921
91,051
509,972
278,722
30,151
308,873
126,593
95,299
590,834
71,876
662,710
319,388
62,428
381,816
273,913
130,787
70.9%
126.7%
77.0%
87.3%
48.3%
80.9%
46.2%
72.9%
178,497 376,430 47.42% 155,357 364,774 42.6% 221,892 404,700 54.8%
143,321 342,630 41.83% 122,955 315,127 39.0% 171,325 333,166 51.4%
133,328 254,647 52.36% 98,582 249,631 39.5% 136,736 201,647 67.8%
12,050
12,050
6,007
429
0
1,081,210
15,028 80.18% 11,638
21,052
32,045
5,981
-2,644
2,114,186
8,494
137.0% 16,305
57.24% 11,638 26,625 43.7% 15,607
18.75% 5,714 30,396 18.8% 8,199
7.17%
748
8,642
8.7%
1,232
0.00%
0
965
0.0%
0
51.14% 932,906 1,834,331 50.9% 1,390,141
3,021
539.7%
20,271
38,736
9,725
3,716
2,059,508
77.0%
21.2%
12.7%
0.0%
67.5%
The ratio of management fees for the participating insurance portfolio to total profits from
life insurance transactions remained at its high since 2003 level. In 2005, management fees
out of profits were even higher than in previous years, rising by about 17% compared with
2004.
This increase derives from three main reasons:
1. The positive trend in the capital market continued – and was also present in 2005. There
was also a 17% increase in income from management fees in the participating portfolio
19
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Annual Report 2005
The Capital Market, Insurance and Saving Division
compared with the previous year. Although the steep increases of 2003 were not repeated,
(see last year’s Report), 2005 was a positive year on the TASE – the TA25 index rose
33.4% while the TA100 index rose 29.5%.
2. Offsetting management fees for participating policies signed before 2004 – in such
policies management fees are collected in the amount of 15% of the real return. In reality,
by offsetting losses incurred in 2002 against management fees collected in 2003, total
revenue in 2003 is lower
3. Total profits from life insurance transactions declined in 2004, therefore even a 14%
decline in management fees left the share of participating portfolio management fees of
total life insurance profits unchanged.
Table C-8
Share of life insurance profits of total life insurance reserves by insurance
company in 2003-2005
(in percent)
Company
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
The Phoenix
Hadar
Phoenix Group
Harel Group
Menorah
Hachsharat Hayishuv ILD
Eliahu
Ayalon
IDI
AIG
TOTAL
2002
1.2
0.5
1.1
1.2
1.9
1.3
1.8
1.8
1.8
1.4
1.8
1.2
5.5
3.0
15.0
54.9
1.4
2003
2.1
1.4
2.0
1.4
1.5
1.4
2.5
1.9
2.3
2.6
2.9
1.1
3.8
2.4
8.4
-234.8
2.1
2004
1.3
0.5
1.2
1.6
1.7
1.6
2.2
2.2
2.2
2.3
2.8
0.6
3.6
3.0
12.2
75.5
1.8
2005
1.6
1.2
1.6
1.3
2.4
1.4
2.2
2.0
2.2
2.1
2.0
0.2
4.1
1.9
8.7
418.5
1.8
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
It is evident that for the smaller life insurance companies, whose activity is not concentrated
in life insurance programs with long-term savings components, the ratio of profits to
reserves is relatively high. By comparison, large insurance companies that typically engage
20
Annual Report 2005
Life Insurance
in extensive marketing of life insurance programs with a long-term savings component, the
ratio of profit to reserves is relatively low. This can be explained by the fact that for riskonly insurance programs, the premium includes only the cost of the risk plus the component
of the company’s expenses. Insurance reserves for risk-only are much lower than reserves
for insurance programs with a savings component because in these programs the part of
the premium directed towards savings is usually higher than the amount directed towards
insurance coverage. Without any savings components, which constitute the lion’s share of
life insurance reserves in programs with a savings component, the companies’ reserves for
activities in this sector are low.
Agent commissions and other life insurance expenses
21
Annual Report 2005
By looking at Table C-9, one can see that the reform in life insurance programs introduced
in early 2004 did, in fact, alter the commission structure. The change in Regulation 4 of
the investment regulations required insurance companies to finance from their own equity
the high sales commissions typically distributed at the beginning of the policy, rather than
using funds taken the participating portfolio, as was the previously done, causing agent
commissions to flatten. Thus, this change further intensified the trend. In total, the average
commission charged to premiums in
2005 was similar to that of 2004, and stood at about 11%.
Annual Report 2005
The Capital Market, Insurance and Saving Division
Table C-9
Ratio of agent commissions to life insurance premiums, in 2003-2005
(in percent)
Commissions paid
Ratio of commissions to
premium
Rate of change in
commissions
2003
2004
2005
20042003
20052004
507,584 439,245 423,361
13.0%
11.1%
10.6%
-13.5%
-3.6%
69,986
54,179
10.7%
9.7%
8.2%
-10.6%
-13.4%
Migdal Group
577,570 501,816 477,540
12.7%
10.9%
10.3%
-13.1%
-4.8%
Clal
438,929 349,038 401,704
15.2%
11.7%
13.0%
-20.5%
15.1%
Arieh
71,310
66,394
19.0%
13.6%
15.3%
-22.6%
20.3%
Clal Group
510,239 404,247 468,098
15.6%
12.0%
13.3%
-20.8%
15.8%
The Phoenix
233,552 125,374 110,853
17.9%
9.5%
8.1%
-46.3%
-11.6%
Hadar
218,050 112,517 105,057
22.5%
10.9%
9.7%
-48.4%
-6.6%
Phoenix Group
451,602 237,891 215,910
19.8%
10.1%
8.8%
-47.3%
-9.2%
Harel Group
360,768 282,314 270,046
18.6%
14.0%
11.0%
-21.7%
-4.3%
Menorah
272,096 167,675 164,611
20.8%
12.6%
11.6%
-38.4%
-1.8%
2003
Migdal
Hamagen
Hachsharat Hayishuv
43,993
ILD
2004
62,571
55,209
2005
40,405
40,483
15.9%
16.7%
17.0%
-8.2%
0.2%
Ayalon
29,815
22,956
22,000
15.1%
11.2%
10.1%
-23.0%
-4.2%
Eliahu
14,740
15,259
18,229
10.0%
10.0%
10.8%
3.5%
19.5%
IDI
----
----
----
----
----
----
----
----
AIG
180
54
68
1.4%
0.3%
0.3%
-70.0%
25.9%
11.6%
11.0%
-26.0%
0.3%
TOTAL
2,261,0031,672,6171,676,985 16.1%
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
The change in the commission structure also had an impact on the ranking of companies
paying the highest commissions. The company that paid the highest commissions from
premiums in 200r was “Hachsharat Hayishuv ILD” (17%). This company is followed by
“Arieh” (15.3%), “Clal” (13%) and “Menorah” (11.6%). The company that posted the lowest
commission was AIG (0.3%).
Compared with 2004, it is evident that AIG posted the highest change in commissions (25.9%).
22
Annual Report 2005
Life Insurance
In that year AIG posted the highest rate of decline (70%). This was followed by “Arieh” and
“Eliahu.” The rate of change in these companies was 20.3% and 19.5%, respectively. The
“Hamagen” company posted the highest rate of decline (-13.4%).
Table C-10
Ratio of administrative and general expenses to total reserves and pending
life insurance claims in 2003-2005, by company
(in NIS thousands and percent)
Company
Ratio of administrative and
% of change in
Administrative and general general expenses to reserves
administrative and
expenses
and pending life insurance
general expenses
claims
200320042003
2004
2005
2003
2004
2005
2004
2005
251,665 267,152 295,158
0.9%
0.8%
0.8%
6.2%
10.5%
40,164 55,129 45,926
0.9%
1.1%
0.8%
37.3% -16.7%
291,829 322,281 341,084
0.9%
0.9%
0.8%
10.4%
5.8%
198,362 192,184 205,204
1.0%
0.9%
0.8%
-3.1%
6.8%
37,940 38,092 36,133
1.8%
1.7%
1.4%
0.4%
-5.1%
236,302 230,276 241,337
1.1%
1.0%
0.9%
-2.6%
4.8%
120,127 101,941 109,700
1.2%
0.9%
0.9%
-15.1%
7.6%
85,565 76,307 84,090
1.7%
1.3%
1.3%
-10.8% 10.2%
205,692 178,248 193,790
1.4%
1.1%
1.0%
-13.3%
8.7%
214,414 231,198 251,265
1.7%
1.7%
1.6%
7.8%
8.7%
123,220 120,836 135,535
1.5%
1.4%
1.3%
-1.9%
12.2%
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
The Phoenix
Hadar
Phoenix Group
Harel Group
Menorah
Hachsharat
23,785 21,292 24,582
1.9%
Hayishuv ILD
Ayalon
14,257 11,979 21,762
1.7%
Eliahu
22,258 22,475 27,283
2.9%
IDI
20,408 29,030 32,913
43.1%
AIG
9,981
11,130 12,286 207.7%
TOTAL
1,162,146 1,178,745 1,281,837 1.2%
1.6%
1.6%
-10.5%
15.5%
1.4%
2.5%
37.4%
299.7%
1.1%
2.3%
2.6%
27.6%
282.4%
1.1%
-16.0%
1.0%
42.2%
11.5%
1.4%
81.7%
21.4%
13.4%
10.4%
8.7%
23
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Annual Report 2005
The Capital Market, Insurance and Saving Division
Chart C-3
General and administrative expenses vs. reserves and pending life insurance
claims by company, in 2005
(in percent)
40%
35%
30%
25%
20%
15%
10%
5%
0%
Migdal
group
Clal .
group
Phoenix
group
Harel
Menorah
Market share - Reserves and pending claims
ILD
Eliahu
Ayalon
IDI
AIG
Market share - Expenses and commissions
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Another way of measuring the economies of scale in the life insurance sector is shown
in Chart C-3. This chart shows the companies’ market share in general and administrative
expenses versus their share in reserves and pending claims. Judging by this ratio it would
appear that the “Migdal Group” has the best ratio of all the insurance companies, with a
36% share of reserves and pending life insurance claims, vs. only 27% of total general and
administration expenses.
Life insurance programs
A life insurance program may or may not include a risk component, may be sold as an
insurance fund (managers’ insurance or insurance for the self-employed) that has certain
tax benefits, or as an individual program that is not an insurance fund and therefore, has
no tax benefits. The programs themselves differ with regard to management fees and other
conditions.
Below are the various types of insurance programs offered to insureds:
1. Individual programs (that are not approved as provident funds and therefore deposits
do not enjoy tax benefits), and programs for the self-employed (which are approved
24
Annual Report 2005
Life Insurance
as provident funds and provide depositors with tax benefits, subject to the Income Tax
Regulations);
2. Managers’ insurance programs through employers, for salaried workers (approved as
provident funds);
3. Group life insurance programs through employers, corporations and service providers.
Table C-11
Gross premiums by insurance type in 2003-2005 and rates of change
(in NIS thousands and percent)
Type of insurance 2003
2004
2005 Individual- Me’urav (legacy)
1,057,922 901,708 772,582
1,651,304 1,415,613 1,190,142
Individual - Adif (Yoter)
Individual - policies issued since Jan. 1, 2004
120,240 558,882
Employee - Me’urav (legacy)
536,768 494,023 458,863
Employee – Adif (Yoter)
7,074,918 7,070,813 6,731,529
Employee - policies issued since Jan. 1, 2004 26,377
460,449 1,364,576
642,287 713,860 794,770
Pure risk - individual insurance
886,090 876,406 869,289
Pure risk - group insurance
Subtotal
11,875,666 12,053,112 12,740,633
Work disability
1,178,310 1,220,892 1,227,837
518,814 655,784 873,971
Nursing care insurance
267,259 282,906 309,279
Severe illness insurance
265,365 286,524 259,737
Other (*)
TOTAL
14,105,414 14,499,218 15,411,457
% of
change in
2003-2004
-14.8%
-14.3%
-8.0%
-0.1%
1645.6%
11.1%
-1.1%
1.5%
3.6%
26.4%
5.9%
8.0%
2.8%
% of
change in
2004-2005
-14.3%
-15.9%
364.8%
-7.1%
-4.8%
196.4%
11.3%
-0.8%
5.7%
0.6%
33.3%
9.3%
-9.3%
6.3%
The total premiums for 2005 stood at approximately NIS 15.4 billion. Deducting disability
insurance, health insurance and nursing insurance, the premium came to NIS 12.7 billion.
The rate of change in the premiums between 2004 and 2005 was 5.7%. The data indicates a
continuation of the trend towards recovery in premiums for life insurance that had already
begun in 2004 (only 1.5%) following years of serious recession in 2002 (-6%) and 2003
(-3.2%). The rise in the volume of premiums collected in 2005 is explained, among other
things, by Israel’s emergence from economic recession.
25
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
(*) Other: Includes health insurance
Annual Report 2005
The Capital Market, Insurance and Saving Division
Chart C-4
Gross premiums by life insurance type in 2005
Nursing care.
6%
Severe illness.
2%
Work disability.
8%
Pure risk - group.
6%
Other (*).
2%
Individual
- Me'urav
(legacy).
8%
Individual - Adif
(Yoter) 8%
Individual
- policies issued
since 14% 04/1/
Employee
- Me'urav
(legacy) 3%
Pure risk - individual
5%
Employee - policies
issued since 104/1/
8%
Employee
- Adif (Yoter)
43%
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Chart C-4 indicates that the lion’s share of the premiums in 2005 is still being paid for Adif
(Yoter) manager’s insurance, with 43%, although this is lower than 2004 and 2003. In those
years the rate was 58% and 60.7%, respectively.
We can see a downward trend, and this is expected to accelerate in the future due to
redemption or surrender of these policies on the one hand, and the fact that they will no
longer be marketed, on the other hand.
Life insurance assets portfolio
Insurance companies invest the premiums they receive for life insurance programs in various
assets, as do pension funds and provident funds. The insurance companies have investment
funds that are characterized by the extent of the guaranteed return on the monies invested. For
example, monies in Fund Aleph (Fund Aleph was open to new insureds from 1962-1976), are
guaranteed a return of 4%-5% to the insureds, while in Fund Yud (Fund Yud is a participating
fund introduced in 1992 and does not invest in LI bonds), has no guaranteed return and the
monies are invested in the capital market and subject to investment regulations.
26
Annual Report 2005
Life Insurance
Chart C-5
Distribution of the assets portfolio in the life insurance sector between the
participating portfolio and the guaranteed return portfolio in 2001-2005
(in percent)
100%
80%
60%
40%
20%
0%
2001
2002
Participating portfolio
2003
2004
2005
Guaranteed return portfolio
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Chart C-5 indicates that the share of the participating portfolio out of the total assets in
life insurance continues to grow with time at the expense of the share of the guaranteed
return portfolio. This can be explained by the fact that guaranteed return policies investing
in LI bonds haven’t been marketed since 1992, and their replacement with participating life
insurance policies.
27
Annual Report 2005
Between 2001-2005 the participating portfolio and the guaranteed return portfolio (hereinafter,
“the assets portfolio”) both grew from a level of NIS 70 billion at the end of 2001 to NIS
118 billion at the end of 2005. This represents a real increase of 68.2%. Between 2004-2005
the real assets portfolio grew by NIS 14.8 billion (an increase of 14.3%). In contrast with
this, from 2003-2004 the real assets portfolio grew by NIS 8.3 billion (8.8% increase). The
growth in the value of the assets portfolio seen in 2005 derives mainly from the increase in
returns posted in 2005 compared with the returns achieved in 2004.
Annual Report 2005
The Capital Market, Insurance and Saving Division
Table C-12
Distribution of the life insurance assets portfolio in 2003-2005
(in percent)
Type of asset
Distribution of total life insurance
assets portfolio
% change
2003
2004
2005
2004-2005
3.0
3.2
2.6
-0.5
20.9
21.4
15.9
-5.5
31.4
28.4
25.4
-3.0
10.3
12.3
18.0
5.6
11.3
12.5
17.7
5.2
4.3
5.0
5.3
0.4
Cash and cash equivalent
Other government bonds
Life indexed (LI) bonds
Corporate bonds
Stocks
Loans
Deposits in banks and
13.5
financial institutions
Investments in subsidiary
0.0
companies
Rental property rights
1.5
Fixed assets
0.2
Receivables from reinsurers 0.8
Premiums due and agent
0.6
balances
Receivables and debit
0.1
balances
Deferred acquisition costs
2.0
and other assets
Total income and debit
100.0
balances
Distribution of assets in
participating portfolio only
% change
2003
2004
2005
2004-2005
3.7
3.8
2.6
-1.3
36.4
35.1
24.3
-10.8
1.3
1.2
1.1
-0.1
15.6
17.8
25.0
7.2
20.5
20.9
28.1
7.2
2.5
3.3
4.2
0.8
11.8
10.4
-1.4
13.3
11.3
9.7
-1.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.6
0.2
1.6
1.6
0.2
1.6
0.1
0.0
0.0
1.8
0.0
0.6
1.9
0.0
1.9
1.9
0.0
1.8
-0.1
0.0
-0.1
0.6
0.5
-0.1
1.0
0.8
0.6
-0.2
0.2
0.2
0.0
0.1
0.2
0.2
0.0
1.2
0.6
-0.6
3.2
1.8
0.7
-1.0
100.0
100.0
100.0
100.0
100.0
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Since guaranteed return programs are no longer being sold, the downward trend continues
in the share of the LI bond component out of the total life insurance assets portfolio, and
between 2004-2005 there was a drop of 3% in the share of LI bonds from the total assets
portfolio. Guaranteed return LI bonds have been replaced in the assets portfolio primarily with
corporate bonds and stock investments. In contrast with this, the share of the participating
programs portfolio assets through solid government bonds has decreased.
28
Annual Report 2005
Life Insurance
Insurance company returns
Since 1992 life insurance policy monies allocated for the savings component are invested in
the capital market and are affected by the asset portfolio composition and their returns (Fund
“Yud” and other investment channels). It is important to distinguish between gross returns,
which are influenced among other things by the investment policy and its performance during
the relevant time period; and net returns, which are credited to the policyholder according to
his policy terms after deducting management fees.
The returns depicted in this part of the report are based on reported returns, and not necessarily
on actual returns credited to each policyholder. These actual policyholder returns are affected
by other indices, such as timing and size of the deposits.
Table C-13
Participating portfolio – gross weighted return, net weighted return and
management fees in 2000-2005
(in percent)
Year
Gross weighted return
Net weighted return
Management fees
(fixed + variable)
2000
2001
2002
2003
2004
2004
4.4
6.7
-6.6
21.0
8.6
14.9
3.2
5.2
-7.2
18.2
6.8
12.5
1.2
1.5
0.6
2.8
1.9
2.4
Returns for the participating portfolio in 2005 were relatively higher than they were over
the past five years (except for 2003), and despite the decline seen in 2004 compared with
2003 the data reflect the continued the positive trend begun in 2003. The increased returns
in the participating portfolio may be linked to rises in the stock market and the shekel bonds
indices. In 2005 the TA25 index rose by 33.4% and the TA100 index rose by 29.5%. This
year stocks constituted 17.6% of the participating portfolio and among other things, this
contributed to the gross return (14.92%) seen for the participating portfolio. This is reflected
29
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Note: The weighted return is calculated by multiplying the returns of all companies by the relative weight of the assets of
all companies.
in Table C-13. The positive trend that had begun last year continued on the bond market as
well, although the price increases were more moderate compared with 2003 and 2004.
Table C-14
Net / gross returns, and the average return for 2000-2005 by insurance company
2001
2002
2003
2004
2005
Migdal
Hamagen
Clal
Arieh
Phoenix
Hadar
Shiloah
Sahar-Zion
Menorah
Ayalon
Eliahu
ILD
3.8
3.8
2.5
2.4
2.7
3.3
2.8
3.3
3.2
3.0
2.3
4.2
5.5
5.5
5.2
5.2
4.1
5.6
5.5
5.5
6.5
5.1
5.1
5.5
-7.7
-7.8
-7.6
-7.5
-5.9
-8.0
-7.4
-7.2
-6.1
-5.9
-1.4
-2.2
17.9
17.7
19.1
19.2
17.4
17.7
6.4
6.8
6.3
6.4
7.1
6.7
12.4
13.0
12.5
12.3
12.5
11.8
5.1
5.1
3.5
3.4
3.8
4.4
3.9
4.5
4.4
4.2
3.4
5.6
7.1
7.1
6.7
6.7
5.4
7.3
7.1
7.1
8.2
6.7
6.7
7.1
-7.2
-7.2
-7.0
-7.0
-5.3
-7.4
-6.8
-6.6
-5.5
-5.3
-0.8
-1.6
20.5
20.3
21.9
22.1
20.5
20.4
8.2
8.7
8.0
8.2
9.0
8.6
14.9
15.6
14.9
14.7
15.0
14.1
19.7 7.6 12.5
19.5
13.9
8.1
9.8
8.1
6.4
5.2
5.5
12.8
13.0
10.6
11.1
22.8 9.7 14.9
22.8 10.2 15.2
16.0 7.7 15.3
10.0 6.8 12.6
11.7 7.0 13.0
Average net
return in the
past five years
2000
Other
2005
Harel
2004
Phoenix
2003
Clal
2002
Migdal
Company
name
2001
Group
name
Net return
Ave rage gross
return in the
past five years
(in percent)
Gross return
2000
Annual Report 2005
The Capital Market, Insurance and Saving Division
7.7
7.9
7.6
7.6
7.7
7.6
1.2
1.5
8.8
7.2
6.3
7.0
6.1
6.2
6.0
6.0
6.0
5.9
0.1
0.4
7.0
5.7
4.9
5.5
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Table C–15
Highest and lowest gross returns in 2000-2005
(in percent)
Year
Lowest gross return
Highest gross return
2000
2001
2002
2003
2004
2005
3.4
5.4
-7.4
10.0
6.8
12.6
5.6
8.2
-0.8
22.8
10.2
15.6
Adjusted standard
deviation
0.2
0.1
0.4
0.2
0.2
0.1
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
30
Annual Report 2005
Life Insurance
The adjusted standard deviation is an index that measures the gaps in returns posted by the
insurance companies. The higher the standard deviation, the more significant the difference
between the returns the insurance companies achieve. Table C-15 shows there is no real
difference in the adjusted standard deviation in 2005 compared with the previous two years.
The reason for the relatively low standard deviation is apparently related to rate increases in
the stock market seen in recent years.
Participating insurance programs are credit or debit policyholders for investment profits or
losses, after deducting management fees. Investment in assets is subject to the provisions of
the Supervision of Insurance Transactions Law (Investing the Insurer’s Capital and Funds and
Managing its Liabilities) – 5761-2001, and the regulations the Commissioner of Insurance
issues from time to time.
Chart C-6
Development of gross returns in the participating portfolio (Fund Yud) in 2005
(in percent)
6%
4%
Percent
2%
0%
-2%
-4%
-6%
-8%
Jan.
Feb.
Mar.
Apr.
Weighted gross return
May
June
July
Aug.
Sep.
Negotiable government bonds
Oct.
Nov.
Dec.
TA 100 index
31
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Annual Report 2005
The Capital Market, Insurance and Saving Division
Positive gross weighted returns characterized 2005. The high increases in returns on the
participating portfolio can be attributed to the high returns seen in the stock market during
those months. the TA100 index recorded positive returns throughout the year, and especially
in July and September. June was the only month in 2005 with a negative return, which can be
attributed to the negative return data on stock indices in general, and the TA100 in particular
(-6.1%).
If we examine the correlation between the return on the participating portfolio and the stock
indices in 2004 and 2005, we get a statistical correlation of 82%, while government bonds
correlate with the return on the participating portfolio by only 48%. The reason for this is
although stocks make up only about 15% of the participating portfolio, and stock component
is very dynamic. Thus we can conclude that just like with provident funds, the most relevant
index for explaining volatility regarding the participating portfolio is the stock index. All
together the TA100 index posted a cumulative increase of 18.9% and the general bonds
index remained stable at 1.7%, while the consumer price index maintained its low level and
closed at 1.2%.
32
Annual Report 2005
Life Insurance
3. Risk Management
In this section we will present several indices for examining stability and risk management
by the insurance companies with regard to life insurance. To date there is no international
standard with regard to reasonable levels of risk for the insurance company. Therefore, there
are international models that indicate the relevant variables for estimating the said level of
risk.
Reinsurance
Table C-16
Residual premium out of total life insurance premiums in 2000-2005
(in percent)
Residual premium out of total life insurance premiums
2000
93.5
2001
94.4
2002
94.3
2003
94.0
2004
94.7
2005
95.3
Non-life insurance is characterized by short policy terms and premium revenues (usually,
one year). By comparison, the life insurance product differs in the long-term commitment
of the insurance company: premiums are usually received over many years. Thus the total
life insurance premiums received in a given year does not necessary cover the insurance
company’s risk. This is especially true of new policyholders. Premiums received for their
insurance agreement do not cover the compensation they are entitled to receive upon the
occurrence of the insurance event. The conclusion is that an insurance company’s reserves
pending claims may provide a considerable anchor of stability. Insurance companies assume
different risks. Most reserves are determined by actuarial estimate.
Insurance companies distribute insurance risk via reinsurers. Several types of coverage are
33
Annual Report 2005
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
Annual Report 2005
The Capital Market, Insurance and Saving Division
commonly found in reinsurance:
1. Share quota reinsurance – covers a fixed amount of each claim
2. Excess of loss reinsurance – covers amounts exceeding a certain threshold per risk, claim
or event.
The remaining risk assumed by the insurance company is called the residual. Table C-16 presents the
residual premiums out of total life insurance premiums. This table shows that insurance companies’
residual increased by about 1% over the past years, and is similar to the levels prevalent in western
countries. It is possible that changes in certain risks (e.g., increased life expectancy and its influence
on pension-type policies, assessment of future claims, etc.) may impact the structural preparations
by insurance companies as far as actuarial estimates that take negative scenarios into account.
Policy redemption
Table C-17
Life insurance redemptions and ratio of policies redeemed to average reserve
in 2003-2005
(in NIS thousands and in percent)
Company
Migdal
Hamagen
Migdal Group
Clal
Arieh
Clal Group
Phoenix
Hadar
Phoenix Group
Harel
Menorah
Hachsharat Hayishuv ILD
Eliahu
Ayalon
IDI
AIG
TOTAL
Life insurance redemption values
2003
1,381,582
221,497
1,603,079
1,010,085
113,158
1,123,243
446,124
295,403
741,527
713,104
520,858
93,456
64,956
46,501
2,753
0
4,909,477
2004
2005
1,172,971 1,058,124
184,382 181,061
1,357,353 1,239,185
957,530 875,001
110,798 103,322
1,068,328 978,323
400,639 365,206
264,784 282,512
665,423 647,718
601,783 519,746
511,598 441,995
76,531
72,937
53,917
44,621
41,882
50,724
3,306
7,140
0
0
4,380,121 4,002,389
% of policies redeemed out of
average reserves
2003
2004
2005
5.1%
3.9%
3.1%
5.5%
4.0%
3.4%
5.2%
3.9%
3.1%
5.6%
4.7%
3.8%
5.9%
5.1%
4.2%
5.7%
4.8%
3.9%
4.7%
3.9%
3.2%
6.4%
5.0%
4.6%
5.3%
4.2%
3.7%
7.0%
4.7%
3.6%
6.8%
6.0%
4.7%
7.9%
5.9%
5.0%
8.0%
6.5%
4.9%
6.6%
5.1%
5.2%
8.1%
5.8%
7.5%
0.0%
0.0%
0.0%
5.7%
4.5%
3.6%
Source: Annual reports by the insurance companies based on solo statements, processed by the Capital Market, Insurance
and Savings Division
34
Annual Report 2005
Life Insurance
Redeeming life insurance prior to term has two implications, each of which has an opposite
effect on profits: On the one hand, funds are redeemed at redemption values that include a
“penalty” on the policyholder and a profit to the company. On the other hand, the company
must write off the deferred acquisition costs recorded for the policy and immediately
recognize the expense on its income statement, since no future revenues are due for these
policies. Many policies on the market are priced based on their being valid for several years,
since in the first few years the company “loses money” on the policy, and sees a profit only
later on when management fees from assets increase (due to portfolio appreciation) and
agent expenses decrease.
Table C-17 above presents the volume of life insurance policy redemptions in 2003-2005.
Looking at the entire sector, the ratio of redemptions to life insurance reserve, which stood at
4.5% in 2004, dropped in 2005 to a rate of 3.6% of the average life insurance reserves at the
end of 2005. This general trend is repeated with every insurance company, except for “IDI”
and “Ayalon.” In these companies not only did the rate of redemptions increase between 2004
and 2005, they were also the leading companies with regard to volume of redemptions of
life insurance policies. The list of companies with the highest policy surrender rates includes
“IDI,” “Ayalon,” “Hachsharat Hayishuv ILD,” “Eliahu” and “Menorah.” However, several
other insurance companies, such as “Migdal” and “The Phoenix” consistently declined to
below 4%. This data reflects the insurance companies’ ability to better preserve a portfolio
and get better insurance agents to do their marketing for them. Moreover, the total redemption
value for all companies in 2005 is much lower than in the previous year, totaling NIS 4
billion.
Canceling and clearing insurance policies
Table C-18 presents the rate of policies issued in 2000-2005 that were cancelled or cleared
until the end of 2005. The data depicted in the table shows the following:
1. Only about 34% of the policies issued in 2000 by all insurance companies are still valid.
“Hachsharat Hayishuv ILD” posted the highest rate of policy cancellations and clearings
this year.
35
Annual Report 2005
A cleared policy – is one for which premium payments have stopped but the funds haven’t
been redeemed, therefore the company continues to invest the savings, to accrue returns and
charge management fees.
A cancelled policy – is one that was redeemed before the term of the policy.
2. Based on the numerical data we may conclude that generally speaking, there is
not relationship between the company’s market share and the rate of redemptions
(cancellations) and clearings.
Table C-18
Rate of cancelled and surrendered policies out of total policies
issued in 2000-2005
(in accrued percent)
Surrendered
2005
Cancelled
Surrendered
2004
Cancelled
Surrendered
2003
Cancelled
Surrendered
2002
Cancelled
Surrendered
2001
Cancelled
Surrendered
2000
Cancelled
Annual Report 2005
The Capital Market, Insurance and Saving Division
Average for
insurance 45.60% 20.70% 35.70% 23.57% 27.60% 21.50% 21.50% 17.60% 10.60% 12.90% 4.60% 4.00%
companies
36
Annual Report 2005