Insurers’ Bonanza: One-seventh of Israeli Household Spending Goes to Premiums

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An elderly woman with her caregiver, 2011.
An elderly woman with her caregiver, 2011.Credit: Alon Ron

In recent years, Israeli insurance companies have been transformed into a financial empire, and their influence is expected to grow even further thanks to the government.

A legal provision requiring that Israelis have a pension has meant that the rate at which money is flowing into pension funds is exceeding economic growth. Insurance companies will continue to take in huge sums that will accumulate in pension savings accounts.

The companies currently manage about 1.1 trillion shekels ($279 billion) in pension savings, a figure that by 2020 is expected to double. That mountain of cash is expected to provide hefty management fees to insurance firms for many years to come.

In fact, it’s hard to find other industries where the base assets are projected to double in just five years. Still, the insurance companies are not making do with management fees.

Using their clients’ assets, the companies have been buying real estate designed to generate returns to account holders. This includes assisted-living housing projects whose residents pay monthly fees to the insurance firms.

In turn, the companies provide credit to a major slice of the country’s business with these revenues and other assets. And the insurance firms also decide who gets paid benefits on health and property insurance and other special insurance.

Meanwhile, insurance premiums have become a major expense item for the average Israeli household. The consumer organization Public Trust (Emun Hatzibur in Hebrew) reports that the average family headed by two nonsmokers in their 40s with two children under 18 spends between 1,800 and 2,400 shekels a month on insurance. That’s 12% to 16% of average household income, which the Central Bureau of Statistics put at about 14,500 shekels a month in 2013.

In analyzing the extent to which the insurance industry has become part of our lives, TheMarker has broken down the details on which insurance is available in the market. It ranges from private medical coverage to mortgage insurance to car insurance and “extra” coverage such as insurance for catastrophic illness and personal accident coverage. The analysis is based on data from the companies themselves and the Central Bureau of Statistics.

As policyholders age, premiums generally go even higher, and smokers always pay more for private health coverage. Preexisting conditions also increase premium costs, while a single accident will hike liability insurance costs. A previous theft claim will also usually increase insurance on the contents of one’s home.

In the past, the insurance industry was more reactive. Consumers would simply buy household coverage of various kinds and submit claims when unforeseen losses occurred; for example, damage to a car. Similarly, life insurance provided coverage in case of death. Consumers viewed the insurance sector as a necessary evil — something to encounter only when something bad happened.

That has changed in recent years as a result of a calculated move by the insurance companies. The firms are now marketed as much more important to people’s lives — not only as coverers of policyholders when they suffer a loss, but as companies that help their clients live carefree lives.

Tailor-made products

This changing image has begun filtering through the industry all over the world, and although the sector’s image is now more positive, premiums have not gone down. On the contrary.

The new image lets companies offer a wide range of insurance, suited to the needs of each customer’s lifestyle. So, for example, extreme-sports aficionados can buy insurance tailored to them, purportedly so they can take their risks without concern.

In recent years, insurance has assumed a greater role in the lives of us all. Private insurance companies use various means to convince us to pay for that perfect policy, covering our homes, cars, health and lives.

Germany-based Juergen Weiss of the global Gartner consulting firm explains the change in image from being providers of a simple product to more complex, personalized services. He notes the French firm Axa, for example.

Axa began selling a package of five kinds of coverage that included car, home and liability insurance, boosting revenues from customers who enjoyed lower premiums than if they bought each policy separately. And companies instituted loyalty programs whose members also reaped savings, Weiss says.

The companies also learned from companies in the cellphone industry, which analyze their revenue streams based on average revenue per user. This metric reflects the importance the companies attach to customers — not only existing ones, but potential new ones. It is reflected in non-uniform pricing structures, as companies try to increase spending by individual customers. But the task is still ongoing.

Twice a year the Israeli insurance industry holds a conference in the resort city of Eilat, and at nearly every gathering a major firm’s chief executive takes the stage to tell agents that Israelis can be sold more coverage. Israelis are required by law to buy various kinds of coverage including car insurance and pension insurance, not to mention mortgage and structural coverage, without which Israelis would not get mortgages.

But beyond such policies, there is discretionary coverage that most Israelis choose to buy, including expanded medical coverage through the country’s health maintenance organizations. Three-quarters of Israelis opt for this, so it’s almost an additional health tax.

Dubious duplication

But spending on medical coverage doesn’t stop with what the HMOs have to offer. Forty percent of Israelis also have medical insurance through insurance companies, in many cases duplicating insurance for virtually the same services. The beneficiaries are the insurers, of course, not the consumers.

A panel headed by then-Health Minister Yael German set out to deal with the issue, but its recommendations were never implemented after the coalition government broke up late last year and new elections were called. The current fate of the recommendations is not clear.

Beyond such relatively basic insurance, there is a whole set of coverage that is supposed to help Israelis deal with the unexpected by restoring their situation to what it was before. In essence, such coverage is designed to protect against financial catastrophe.

People with vast wealth don’t need such insurance because they have the resources to deal with such occurrences. If a car owned by a moneyed couple is destroyed in an accident, for example, and they don’t have comprehensive insurance, they still have the cash to buy a new car without much of a fuss.

Of course for most people, the destruction of an uninsured car means a major financial loss. The owner may simply have to forget about having a car.

Another set of coverage, which despite its importance is not commonly bought, is home insurance. Home insurance covers the condition of the home, from damage to water leaks to coverage against earthquakes that could destroy an entire home and its contents.

Still, only about half of Israelis insure their homes. Needless to say, if the average person’s home is destroyed in an earthquake, he’ll be hard-pressed to replace it out of own funds.

There is also lots of inequality in private insurance offerings. Most comprehensive insurance plans, including coverage for catastrophic illness, are geared to the wealthy, who can pay the premiums. They're not geared to the poor, who don’t always get full coverage through the government health system.

In recent years, the government has steered clear of various types of insurance, first and foremost pension coverage. Meanwhile, various kinds of private coverage, including health and pension insurance, can be very expensive.

As life expectancies have increased, so has the burden on the state, so the government prefers to shift the problem to the private sector. This leaves the poor, who don’t have the means to buy the product, without a comparable alterative.

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