The Bottom Line / Looking out for Number 1
There is little trust between insurance companies and the insured, and it creates a dynamic of fraud, from both sides.
Many years ago I received a tempting offer. A pension fund manager offered me to join his fund and promised me excellent terms based on a government subsidy. The man knew his business of course, and that is why he chose to offer me the deal.
This was just a short time after the reforms that cut back on the government benefits for pensions took effect, and he basically offered me the old terms.
When I asked him how he could sign me up for the pension fund with conditions that no longer exist, he confidently told me that it was okay since only a month had passed since the changes, and he could present my request to join the fund as if I had made it a month earlier.
I turned down his tempting offer for whatever reason, but I learned an important lesson about how money is managed in Israel. A lesson on the flexibility in managing money: the deals, tricks and looking out for your friends - and yourself. This is a lesson that is being paid for by all those who are not blessed with connections to the managers of Israel's financial industry.
The exposure in TheMarker last Thursday of the backdating affair at Menora-Mivtachim surprised quite a few people, but those in the know about the Israeli financial industry have seen quite a lot of dirty tricks over the past two decades at the expense of investors.
In the case of Menora-Mivtachim, it turns out that employees of the insurance and pension giant enjoyed a special service not available to the general public. They invested their own money in accounts at the firm and simply moved them back and forth between various investment tracks - after the fact. When they discovered their own personal investments had lost money, they simply asked to retroactively transfer their funds to an investment track with higher returns.
This of course is illegal, and Menora's internal auditor who exposed the case brought it to the attention of management, the board of directors and the Finance Ministry's Commissioner of Capital Markets, Insurance, and Savings. At the end of the internal examination a few employees were fired, and employee investment accounts were transferred to the management of an external agency to prevent a reoccurrence.
The CEO of Menora-Mivtachim, Ari Kalman, told us that customers were not harmed as a result of the affair, and the damage, which he said totaled less than NIS 1 million, was only to the company's own accounts.
Where was the insurance commish?
Menora-Mivtachim's handling of the affair might have eased our minds, except for the fact that it never attracted the appropriate attention from the insurance commissioner. Such an affair exposes serious problems in the management of the public's money. It teaches us that there are gaping holes in how our money is managed, which allow the employees of the insurance companies and investment houses to easily make changes in portfolios, to transfer losses from one group of investors to another, to make retroactive moves, and to take care of certain customers and screw others. In short, they can do whatever they want with our money - without us knowing what is happening.
After all, investors do not enjoy anything near transparency in how their money is managed. They only receive an account statement in the mail once every few months, and even that is usually not very easy to understand. The report basically includes the bottom line: how much money do you have, how much did you make - or lose - this year. But there is not even a hint of all that happened to your money during the reporting period. And we are talking about thousands, or even tens of thousands, of transactions per portfolio every quarter. No less, the ability of investment managers, or even just plain employees, to control, manipulate, divide, classify or just correct their numbers backward and forward is enormous.
Of course the companies' management will claim afterward that it is just one or two bad apples, a small breach that has been closed, and after all no one was hurt. But it is hard for us to really believe it. A hole invites the thief, as the proverb says. And a thief comes when he is invited.
Until the commissioner of insurance blocks up these breaches, investors cannot sleep soundly at night. There is a whole basket of tricks that allow rolling over losses from one favored investor to another less important one, and such acts are too easy and too enticing.
Little trust on either side
Over the years, savings plans and insurance policies from the insurance companies have caused quite a lot of damage and losses to the insured at each and every stage: at the sale of the policy, when agents pushed expensive and inappropriate policies on investors, ones that were better suited to the agent's own profits; upon early withdrawal, when heavy fines were charged; during the entire lifetime of the policy, when the companies charged excessive fees; and even at the stage of actually paying off the policy, when the companies frequently turned around and refused to pay.
There is little trust between the insurance companies and the insured, and it creates a dynamic of fraud and cheating, from both sides.
The backdating affair at Menora-Mivtachim adds another unknown to the equations: Does the return we get from our insurance company and policy also reflect losses they have piled onto our accounts to benefit others? This is a serious blow to our faith in the insurers, in a sector that did not enjoy too much trust in the first place.
In order for savers and the insured to feel safe, the insurance commissioner must conduct a full and thorough investigation of all the legal aspects of the affair. But more important, he needs to investigate the technical aspects of how the employees and managers got away with such manipulations to the public's savings.