Taking Stock / The Lesser Evil

"The banks are retraining clerks to be insurance agents but they'll never hold a candle to the agents and replace them in the market. The banks just want to get every commission they possibly can, and close another deal in order to justify their surplus manpower." (Shlomo Eliahu, owner of Eliahu Insurance, which controls Union Bank (Bank Igud), owns 10 percent of Bank Leumi and 38 percent of The Israel Phoenix Assurance Company, expostulating at a conference of insurance agents in Eilat on October 19, 2004.)

If there's a man in Israel who knows insurance and banking inside out, it's Shlomo Eliahu. If there's a man in Israel with interests in both pies, it's him. Eliahu is a self-made man who built up one of Israel's biggest fortunes by investments in insurance companies, and in recent years he's put hundreds of millions of dollars into bank shares too. When he talks, he bears hearing out.

l "The banks just want to get every commission they possibly can ... to justify their surplus manpower" - This from the man who controls Union Bank and owns 10 percent of Bank Leumi.

Or to put it another way, if the Bachar team that's about to begin the true battle over reforming the banks wants an expert opinion about the banks' business model, Shlomo Eliahu is giving it to them.

The banks want every commission they can get and their staffing is bloated. What about providing unbiased advice? That doesn't seem to be in the business plan as Eliahu sees it.

l The bankers "will never hold a candle to the [insurance] agents" - True, bank clerks are unlikely to manage to do to customers what insurance agents have managed to do in the last couple of decades.

Bank clerks stuffed units in top-priced mutual funds with pitiful yields down customers' throats. They shoved low interest savings accounts at them. They sold them deposits providing lower yields than short-term Bank of Israel certificates. They did every transaction they possibly could to increase fees.

But however fee-hungry they may be, they will probably never cause the kind of financial wreckage that one clever insurance agent can do to his client with one single life insurance policy.

l Here is a short story. When the Bachar team began its deliberations over banking and capital market reform, we met with one of the panel members. We asked what they meant to do about the problems in the insurance industry.

Huh? said the member. We mean the way they gouge money from customers over life insurance policies, we explained.

Gouge? I have a managerial insurance (bituach minhalim) policy, he said. Maybe you can explain to me where this gouging is. Gladly, we said. Show us the policy.

The distinguished member of the distinguished committee whipped out his policy. A glance showed that 23 percent was risk, 77 percent savings.

Put another way: the agent sold him a policy in which 23 percent of the premium he was paying was "expensive risk"; he could have bought the same cover separately for 80 percent less. Ergo, 18 percent of his monthly premium was pure waste. Gone, lost money.

Gone to him but not to all - the insurance agent got it.

And this was a member of the Bachar team, a serious economist and businessman with tremendous financial know-how, yet an insurance agent pulled the wool over his eyes and sold him one of the worst investments possible.

l The Bachar team had to name the insurance companies as a possible alternative venue to manage investment funds, instead of the banks. It had no choice. There is no assurance that major foreign investment companies will buy out the banks' provident and mutual funds.

Make no mistake. There is a big difference between the banks and the insurance companies. At the banks, most of their customers are captive and their conflicts of interest are all the more egregious. Yet much remains to be cleaned up in the insurance industry.

As soon as it obtains approval to proceed with the Bachar reform, the Finance Ministry must tackle the problem in the insurance sector, where the corporate culture is no better than at the banks.