War, at Your Expense

Behind the scenes, it's war. It's a war where the main players are the insurance companies and the insurance agencies, but make no mistake. The one financing the fight, and bearing its results, is you.

It is a war over the proposals starting to take shape over at the Finance Ministry's department that supervises the insurance sector. Unifying the ceiling of management fees at 2% of accrued assets means that 2% of the money accrued in your pension fund or insurance policy or whatever would go straight to the fund manager, or to the insurance company.

That is how provident funds calculate their management fees at present. The Finance Ministry is considering imposing the formula on life insurance policies at the insurance companies, and on pension funds too (which the insurance companies presently own).

The idea of creating a blanket fee policy arose at the treasury after success regarding management fees at provident funds. In other words, fierce competition among provident funds resulted in fees of 1% or less, half the permissible ceiling.

The competition was a function of simplicity. The formula for calculating management fees at provident funds was simple, making it easier for depositors to demand a better deal.

But the formula for calculating management fees for insurance policies is horribly complicated. It combines a bite of accrued assets and of the regularly paid premium. The upshot is zero competition over management fees that the insurance companies charge from individuals.

The Finance Ministry set out to solve the problem. It thought it could do that, by setting management fees for life insurance policies and pension funds at the same 2% of the accrual.

It factored in the present combination, of 1% of the accrual and 13% of the monthly premium, which works out to about 2.3% of the accrual. The insurance companies were set to lose 0.3% of their average management fees, but as compensation, the treasury was willing to mull raising the management fees for pension funds from a ceiling of 1.1% to 2%. Since the insurance companies own the pension funds, and since the low fees on their management engendered competition over other fees, one might have thought that adequate compensation.

No. The insurance companies and agents are howling in outrage. Why? Maybe because of the way insurance companies pay agents for each policy they sell. Insurance sources say the agenta get a fixed 9% bite of the monthly premium for each such policy, throughout the policy's lifetime.

So? The rule is that management fees derived from the accrual is greater than from premiums. Take the example of somebody depositing NIS 10,000 a year, who has accrued NIS 300 in savings. A 13% bite of his premium is NIS 1,300 a year but 2% of the accrual is NIS 6,000 a year. It works in the companies' favor - as long as the accrual is positive.

Ah. There lies the rub. Over the policy's lifetime, management fees from accrual are worth more but that is not true in the short run.

In the first year of the policy's lifetime,13% of the premium is NIS 1,300. But 2% of the accrual is NIS 200. After several years the equation gets better for the companies, but the companies and their agents don't want to wait.

Why? Maybe because they don't actually plan for the long run. Maybe because the insurance sector was so busy shifting people from one policy to another, generally based on the benefit of the agent and not the customer, and therefore only a tiny percent of policies actually accrues anything after decades.

Maybe because the insurance companies are not looking out for their customers, so the customer doesn't really feel he owes a debt of loyalty to the insurance company or its agent. The short run rules, for all.