Taking Stock / Screwed Before and After

"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 us, the insurance companies, and you the agents too."

Three months have passed since Yair Hamburger, chairman of Harel Insurance and the outgoing chairman of the Association of Life Insurance Companies, made that astonishing admission.

He spoke on the eve of the treasury's life insurance reform, which set caps on the commissions agents could receive, and forced the insurers - for the first time in Israeli history - to disclose the true price of life insurance coverage.

The treasury's reform set a giant cat among the insurance pigeons. Hundreds of insurance agents were caught totally unprepared for the new era. In the first quarter of 2004, policy sales plunged, and the insurers, the agents, the consultants and the customers are still seeking a new equilibrium.

What led Hamburger to say what he said? One could think of several things linked to the battle between the insurers and the agents. But the more time passes since the reform began, the more the feeling grows that unlike the agents, the insurance companies are remarkably unmoved by the reform. They seem quite confident that they can continue screwing their customers after all.

To recap, until the reform, the insurers and agents marketed life insurance policies in which the premium was divided into three parts: savings, "expensive risk," and policy. The booby-trap lay in the "expensive risk" factor, which is where the companies and agents made their money.

Until 2001, that expensive "expensive risk" component was divided into 20 percent risk, and 80 percent commissions for the companies and their agents. From 2001, the cost dropped, but still 50 percent of the amount was real cost and the rest hidden fees.

During the industry's heyday, agents urged buyers to allocate 28 percent of the monthly premium to "expensive risk." For each shekel in premium, 28 agorot went to that risk, but of that, 22 agorot went to the companies and agents. That is beyond the commission for the policy itself, an annual fee of 0.6 percent of the accrued savings, plus 15 percent of real profit.

All these commissions made life insurance policies the worst savings vehicle around. The companies may have called it managerial insurance, but really it was insurance for suckers, who were insuring mainly the lifestyles of the insurers and agents.

In the 1990s, under pressure from some of their more savvy customers, the agents began to gradually reduce the "expensive risk" component from 28 percent of the premium to 10-15 percent. That still left plenty for the agents and companies, and assured that managerial insurance remained a particularly unrewarding savings vehicle.

And then came Eyal Ben Chelouche's reform. There is no more such animal as "expensive risk." Now the premium was divided into three parts: savings, "cheaper risk," and costs. Now each customer knows exactly what the policy costs and there are no tremendous outlays hidden in that "expensive risk" factor.

But woe! There is a booby-trap - Ben Chelouche let the insurance firms charge up to 13 percent of the regular premium. That is insanely high, equivalent to "expensive risk" of 26 percent.

Even if customers manage to negotiate the rate down to 7 percent or 8 percent, it remains extraordinarily high, lifting management fees to 2.5 percent of the policy, three times what a mutual fund charges.

The only difference before the reform and after is that now, most of the commission goes to the insurers, not to the agents.

No wonder that shares of insurance companies were unaffected by the great reform. No wonder that the market values of the five biggest insurers has long passed that of Bank Hapoalim, and is approaching that of Hapoalim and Discount Bank together.

The banks have been taking fire from all directions for their high fees, but meanwhile, the insurance companies are merrily continuing to charge astronomical sums, devoid of any economic logic, and with the backing of the Finance Ministry yet.

Ben Chelouche did only half the job, and he should now complete the work and slam a cap on costs. Otherwise, a few years down the line, another Hamburger is going to flip and tell us that he and his buddies have been screwing us all along.