Untimely death of an insurance plan
Managers policies dealt fatal blow by growing life expectancies. Now what?
Why did the Finance Ministry's insurance commissioner intervene in the market for managers insurance?
Well, there were five tough years of deliberations after the commissioner found that among the world's insurance companies, only Israeli firms assume the risk of guaranteeing the life-expectancy component of pension payments for people just beginning to save.
This week ended in a decision to ban selling such policies. From now on, the life-expectancy factor will be fixed starting only from age 55. Of course, it's easier to project life expectancy for older people, with the risk to insurance companies much lower.
The meaning: Until now, a 30-year-old could expect the payout on a policy to remain intact even if he or she lived longer than the insurance company had predicted when the policy was taken out.
Why did the penny drop now?
Last year's actuarial estimates found life expectancy rising much faster than indicated by the previous estimate in 2008. There's a two-year gap between the projections - a huge difference when it comes to liabilities.
The discovery showed that even the best experts can't adequately predict life expectancies. If they missed the mark by so wide a margin inside three years, how can they provide an accurate estimate for 70 years down the line? The commissioner decided that the uncertainty and risk could threaten the companies' stability.
Will the public lose out?
Yes. The decision narrows the range of retirement schemes available. There will no longer be an option of choosing between pension plans with or without a guaranteed life-expectancy factor. The first option - buying into a whole life policy at any age - won't exist any longer. And by definition, limiting the choices available to policyholders worsens their position.
But even today most people saving for retirement don't enjoy guaranteed life expectancy; the vast majority save through pension funds, not through managers insurance, so most people won't be affected.
Will the change sting the insurance companies?
If guaranteed whole life insurance is so risky that it isn't offered by any insurance company elsewhere, why would Israeli companies voluntarily insist on selling the product? The reason is its enormous market appeal.
Legions of insurance agents persuaded clients to choose managers insurance over pension funds because of its guaranteed life-expectancy component. Other than that, pension funds are safer and cheaper. The companies will shed the huge risk involved in insuring life expectancy but will also lose their chief marketing tool.
The biggest victims are Migdal, which has 36% of the market NIS 150 billion industry, followed by Clal (23%) and Harel (13%).
Does this spell the end for managers insurance?
Beyond doubt, managers insurance has been dealt a fatal blow. Its main added value over the much cheaper pension funds has been the insured life expectancy, which is now gone. Some observers think managers insurance is now a thing of the past, leaving retirement insurers with just one product: the pension fund. It is certainly inconceivable that management fees on managers insurance - 4% on money deposited and 1.05% on the cumulative balance - will be higher than those for pension funds..
Is it a good idea to buy managers insurance now, before it's too late?
The insurance commissioner allowed insurance companies to continue selling managers insurance in its current form until the end of 2012. A mad rush to buy the product is expected before time runs out, so he also restricted the amount that can be sold until then.
The limiting of supply and higher demand should make the price of insurance jump, as well as the updated life-expectancy forecast, which in any case would boost the tab. So is it still worthwhile to hurry and acquire managers insurance before time runs out?
Opinions vary, but even before the announcement and the expected price hike, many pension experts claimed that guaranteed life-expectancy insurance wasn't worthwhile. Since the insurance companies knew they were dealing with highly risky coverage, they would have escalated its price over the years.