A Revolution in Insurance Consumerism

Treasury to allow the transfer from life-insurance policies to pension funds.

The supervisor of insurance is about to publish the regulations for transferring funds from provident funds and life-insurance policies to pension funds. These regulations will allow any insured person to transfer funds from a life-insurance policy, but will not restrict such transfers only to newly insured person (i.e., those benefiting from policies purchased from today onward).

This is a truly dramatic change in the world of insurance and is expected to send shock waves through the industry because of the opportunities now available to policy holders. The accumulated funds in life-insurance policies in Israel currently amount to some NIS 70 billion and if some of these assets are transferred to pension funds, the insurance companies will suffer a decline in their profits. The regulations put almost no restrictions on the transfers and are designed to make them smooth and easy - while maintaining the continuation of the policy holders' rights during the transfer. The pension insurance industry will now be a fully competitive industry, in which all existing and future policy holders will be able to choose their pension savings plan at any time, and transfer funds from one pension savings instrument to another. At present, whole life-insurance policy holders are captives of the insurance companies as they have no option of switching to another company and taking their policy savings with them; the insured persons can only freeze premium payments at one company and open a pension savings plan at another.

The new regulations therefore create a revolution in insurance consumerism. Industry sources assume that the full transfer option will result in stiff competition over management fees and will force insurance companies to lower the high fees on existing policies. From the insurance companies' perspective, the implication of the regulations is that their inventory of life-insurance policies that has accumulated since 1991 will be at risk of being transferred to the pension funds. The bulk of this NIS 70 billion is from Adif policies that were sold between 1991 and 2001, and which today constitute the main inventory from which the insurance companies earn their profits.

Until now the companies believed that this inventory was safe, both because there were no regulations allowing the transfer of the accumulated funds, and because these policies were considered very worthwhile, due to their attractive advance payouts. Now it turns out that the pension funds are attacking that feature as well, and claim that their advance payouts are better, making it worthwhile for Adif policy holders to transfer to a pension fund. Quite a few insurance consultants support this claim, and it is reasonable to assume that the financial advisers at the banks will support it, too.

An en masse transfer of Adif policy holders to pension funds is a real threat to the insurance companies. The latter currently own the pension funds, and thus these funds will remain under their management. Still, the companies could suffer significant damage, since the management fees charged by the pension funds are about 25 percent of those charged by Adif policies. In order to facilitate the transfer, the supervisor of Capital Markets, Insurance and Savings Department at the Finance Ministry is drafting regulations for continuity in the transfer of policy holders. These regulations will only cover the transfer of capital investments (the one-time withdrawal of a pension at retirement - as is the common practice with whole life insurance policies) to a pension savings plan (the pension will be received as a monthly allowance throughout a person's life). No reverse transfers will be allowed (from a monthly pension to a capital investment).

Policy holders in the capital tracks of provident funds or life insurance will be able to transfer their accumulated savings to a pension fund in a one-off transfer that will entitle them to monthly pension rights. The continuity of a policy holder's rights will be maintained after the transfer: The pension fund will deal with the new fund holder as if he had begun depositing on the same date as he began saving via his life-insurance policy. This continuity, however, depends on a situation of no increases in life-insurance coverage, in order to prevent people who are ill from exploiting the transfer option to increase their life coverage.