Viewpoint / Insurance firms await pensions jackpot
It's worth owning shares in an insurance company today. Even if you haven't had a chance, you should snap up shares in one of the insurance companies being traded on the stock exchange. All the indicators are that insurance companies are about to become the toast of the Israeli financial sector.
Actually, the indications are that it's all but inevitable, since the state has made every possible effort in the last year to bolster, better and improve the situation of insurance companies - even at the expense of their competitors.
The most blatant effort is in the field of pensions. Most estimates are that the state is letting insurance companies take over the pensions market with no effort on their own part. This is no small take-over, since pensions are meant to be the greatest competitive threat to insurers.
The state is now putting the new pension funds up for sale. The new funds are the future of the pension sector in Israel, and the state is selling them off after nationalizing them out from under the Histadrut in the guise of pension reform.
Officially, an open tender for anyone who wants to bid to buy a pension fund. In practice, the result of the tender to sell the new funds has been predetermined. Nearly all the buyers are expected to be insurance companies.
The reason is that only insurance companies stand to gain by buying the funds at the prices prevailing in the market today. Competition in the run up to the tender for the sale of pension funds has brought a sharp drop in management fees charged by funds.
Management fees total only 0.3-0.4 percent of the money in the funds, as opposed to double those fees at provident funds and quadruple at trust funds.
The pension sector estimate that those are management fees which do not permit a profit margin to the fund manager. In competitive terms, those are loss-leader prices. The parties to pay those prices are insurance companies, because they have added incentives which make buying the pension funds at a loss worthwhile.
One such incentive is the database of clients insured by the pension fund, which insurance companies are likely to make use of to sell those same clients the products they really make a profit on - life insurance.
A second, and most important advantage, is the removal of the chief competitor from the market. The pension is a competing product to life insurance in the annuity track - life insurance which is paid as an annuity until death. In fact, the pension is the preferred product for insurance companies in this track.
The pension is cheaper, if only because the management fees in it today are so marginal, and the pension enjoys a partial subsidy of its return by the state - 30 percent of pension fund assets are invested in non-negotiable government bonds, which promise high yields.
Even though a pension is preferable to life insurance, it's sold for much less. The awesome marketing machine of the insurance companies, as personified by their insurance agents, manages to sell its products much more effectively than the pensions.
If that is the state of play today, one can only guess what will happen when the insurance companies gain complete control over the pension funds. Under-marketing of the funds will become even more prevalent - with insurance products being sold to the insured instead of pension products - despite the latter being better for them. The advantage of controlling your main competitor makes the effort of buying the offered pension funds worthwhile to the insurance companies, even at high prices and even for negligible management fees. That's the reason they will almost certainly be the only winners in the tenders.
In the short term, the insurance company interest brought the pension sector to peak competitiveness. In the long term it is expected to bring the sector into atrophy. The first ones to suffer are likely to be the people saving for their pensions.