Insurance industry facing major change
Regulations will free consumers to switch at any point from life insurance policies into pension funds
The insurance industry in Israel is apparently on the cusp of major upheaval. In the next few weeks, the Capital Markets, Insurance and Savings division of the Ministry of Finance is expected to publicize its policies regarding transferring funds from provident funds and life insurance policies to pension funds.
The regulations will allow for the free movement of funds for any policyholder ? including existing policies. Apparently the Inspector of Insurance will place almost no restrictions on transactions, instead ensuring smooth transfers. As a result, the pension industry is poised to open up into a fully competitive sector.
Insured individuals will be able, at any point, to choose their own pension fund and switch as well between available options.
Currently, life insurance policyholders are captives to their insurance firms ? their insurance cannot be switched. They can "freeze" the policy, and open a new one elsewhere, with all the burdensome paperwork and record keeping that is entailed. As such, the proposed new regulations are revolutionary, and very much in consumers' favor. It is assumed that this ability to move at whim will result in strong competition for funds, and will lower the high management fees that insurers currently charge.
For the insurers themselves, this means that their life insurance funds under management - for policies since 1991 - are at risk. These reserves approach NIS 70 billion. Adif insurance policies sold since then are a major source of income for the insurance firms, and the firms believed that they would continue to manage these funds.
But pension funds managers are now claiming that even holders of Adif policies would be better off with them. Apparently many insurance advisors agree, as will bank based financial advisors. A mass exodus out of the Adif funds - and into pension funds ? is a real threat to insurers.
Of course, over the past year many insurance firms bought pension fund managers ? mostly from banks who had to sell those subsidiaries. So the insurers will continue to manage the funds. However, management fees for pension managers are only about a quarter of Adif policies.
The regulations are expected to allow for a transfer from capital savings ? which pay a lump sum ? to annuity savings, which pay a monthly allocation for the remainder of a retiree's life. A transfer in reverse ? into capital savings accounts ? will not be allowed.
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