Taking Stock / Consider Yourself Screwed

"For years we screwed the individual insurance customer. We sold him mixed life insurance policies with negative yields, without his knowledge. The ones to blame for that are we, the insurance companies, and you the agents too." (Yair Hamburger, chairman of Harel Insurance Investments and departing chairman of the Association of Life Insurance Companies, speaking at a conference of insurance agents on Thursday.)

Yes, ladies and gentlemen, that is a direct quote from the man himself, nor has he withdrawn his words to date. We screwed our customers, baldly states the most powerful figure in Israel's insurance industry, the man who headed the association of life insurance companies for years, a man lionized for the extraordinary financial results of the company he leads.

The insurance agents at the conference didn't need Hamburger to tell them they'd been screwing their clients. Even babes in arms know that the agents have been screwing clients for decades, selling them expensive policies and charging insanely high commissions, gouging billions from their customers over the years without the buyers being any the wiser.

You shouldn't be surprised, either, faithful reader. Over the last five years we've devoted maybe 30 columns to the systematic robbery of Israeli life insurance buyers, discussing how agents sold inferior, expensive policies without the customer understanding a thing about what he was buying.

"Screwing the customers", to paraphrase Hamburger, is the main reason Israel's five biggest insurance companies are also some of the biggest creators of value for shareholders over the last decade.

The way the insurers reamed their customers is reminiscent of another royal screwing, by the insurers' big brothers, the banks. The banks also profit from the ignorance of the little man, who is a prolific font of commissions.

The difference between banking and insurance is that the banks' monopolistic power is greater, where households are concerned. But the banks do suffer one disadvantage compared with the insurance companies. Every few years, the banks routinely lose tens of billions of shekels on bad loans, mainly to business. Insurance companies undertake no such risks; all they have to do is fleece households through commissions.

End of an era

What is the difference between banking and insurance, in a sentence? This is it: The banks give money to customers in exchange for paper, while the insurers take money from customers and give paper.

But why did Hamburger elect to publicly admit to screwing the customers? Is he pioneering a new spiritual trend among the wealthy? Is he studying kabbala? Or cleansing through breast-beating?

No, no, this is Hamburger, after all, a razor-sharp businessman who carefully considers each deal, each investment, each word.

The man behind Hamburger's remarkable admission is Eyal Ben-Chelouche, the capital markets commissioner and supervisor of insurance for the Finance Ministry. The reform he's imposing from January 2004 will put an end to the party at the insurance companies, and Hamburger knows it.

Ben-Chelouche's reform caps the commissions insurers may collect from customers. Mainly, it forces the companies and agents to provide full and accurate disclosure of the costs of policies. To borrow a wail from Migdal Insurance chairman Izzy Cohen, issued six months ago, "Disclosing commissions will destroy the sector."

Agents know quite well what faces them. From 2004, it will be far harder to screw the customers. They haven't given up, though, and are urging the insurance companies to petition the High Court to block the treasury's reform.

Their hopes may persist, but Hamburger knows the game is over, that the High Court bid will fail, that the entire public debate about insurance policies will simply expose the industry's ugly face and the true nature of its business over the years.

Hamburger figures the agents' bid to torpedo the reform is doomed, and that it's time to stop screwing the customers and turn a new leaf. All he was trying to do was explain to the agents that it's over, finita la commedia, show's over, let it go, sometimes you can't fool all the people all of the time.

One can understand why the agents are hysterical. Most agencies' business model was based on customer ignorance, enriching the agents while the customers went broke.

The insurance companies are in a far better position, though. Their veteran insurance portfolios are still churning out tremendous profits. And the pension reform could help them continue growing when the recession ends. Stocks and bonds shot up this year, thanks to the U.S. loan guarantees and Nasdaq, assuring them of handsome capital gains. They feel ready to cope with the changes.

The agents struggling against the reforms and proper disclosure have finally answered the oldest question in the industry, we feel. Exactly who do they represent? The customers, or the insurance companies?

Now we know. It turns out they don't represent either one. They represent only themselves.