Israelis are living longer and as a result insurance stocks plunged yesterday, wiping out NIS 850 million of their value.
The two seemingly disconnected developments came together yesterday after the Finance Ministry administered a shock to the insurance industry by making changes in pensions for all Israelis who invested in whole life (as distinct from term ) insurance policies for their retirement (known in Israel as bituah menahalim, or executive insurance policies ).
Investors in insurance stocks panicked and shares plunged, wiping out NIS 850 million in value.
Oded Sarig, the commissioner of capital markets, insurance and savings in the Finance Ministry, informed insurance companies yesterday the treasury would require them to make huge accounting provisions for certain existing whole life insurance policies, and ban their sale as of the beginning of next year - because Israelis are living longer.
Sarig called a meeting in his office in Tel Aviv with senior executives of all the major insurance companies. He informed insurance company executives of the urgent meeting at the ministry's Tel Aviv offices only on Tuesday - in a surprise move.
The upheaval in the insurance industry is the result of Israelis living much longer. The treasury expects life expectancy to rise by another year or two, both for men and women, when new statistics are released. The life expectancy tables the insurance companies now use were last updated in 2008. This will require insurance companies to increase their reserves for future payouts enormously, and cut their profits by an estimated NIS 700 million to NIS 800 million this year - and the Finance Ministry is worried about the stability of the entire industry.
Insurance company CEOs told Sarig yesterday they were disappointed and upset with how he chose to inform them of the changes, and only after first conducting a press briefing on the matter the previous day. Sarig apologized, saying he did not intend the story to leak out to the press first. The CEOs were also upset that the meeting was not held in secrecy, with the treasury leaking the location of the meeting to the press, resulting in the CEOs being greeted by a large media presence when they arrived at the Finance Ministry offices.
The CEOs said they left the meeting without understanding exactly what would change and how much damage the changes would cause the companies. But they did not disagree that the whole life policies guaranteeing a high monthly payment were an extremely problematic product. In fact, one CEO thought Sarig should ban the sale of such policies immediately and that there was no reason to wait another six months.
No more guaranteed monthly payments
The problem is that insurance companies sell some whole life insurance policies which includes a monthly pension component, and if life expectancy increases the companies will have to pay significantly more on these policies.
In 2008, the commissioner made changes in pension savings plans and required the payment of such policies as monthly retirement benefits and not in one big lump sum on retirement. These monthly payments are based on the amount the retiree has accumulated in his or her whole life insurance policy, calculated for the expected lifespan remaining. The two main numbers involved are the total amount of retirement savings accumulated, and the life expectancy.
The problem is that Israeli insurance companies are the only ones in the world that provide a guarantee that the life expectancy used at the time the saver signs up for the policy will stay in force for their entire life - even if the statistics change. For example, the insurance company commits themselves to someone who takes out such a policy at age 25, and may have to face payments based on promises made 70 years earlier. Israeli pension funds make no such promises, and international reinsurers are unwilling to back these policies as such commitments are unheard of and impossible to account for.
Migdal was the hardest hit insurance stock yesterday, plunging 10.3% on four-and-a-half times its normal turnover. Migdal's market cap is now 30% below the value when Shlomo Eliahu agreed to buy it four months ago - and worth 30% less. Harel fell 5.5%, Clal Insurance dropped 4.6% and Phoenix lost 6.5%. Menora-Mivtachim lost only 1.3%.
Even though these whole life policies have a guarantee based on present life expectancies, Israeli pension funds are still considered to have an advantage. The pension funds charge much lower management fees and are able to invest part of their funds in special government bonds guaranteeing high long-term interest rates. All this, plus cheaper insurance offered by the funds, leaves retirement savers with 20% to 40% more in their pension fund accounts than if they had bought whole life insurance policies for retirement, and as a result most pension advisers recommend pension funds and not insurance policies.
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