The Bottom Line / Sometimes Insurance Sellers Can Be Right, Too, You Know

It is hard to admit, but sometimes the insurance companies are right. No, they aren't right when they sell overpriced insurance products to unwitting clients, or let loose agents whose job it is to convince people that life insurance is better than a pension fund (it is not).

No, they are not right in their twisted consumer awareness, which leads them to reject claims even when they have no reason whatsoever to suspect fraud. The insurance companies are not right about a lot of things, and in general, amply warrant their reputation of being one of the most anti-consumer groups in Israel.

But sometimes they're right. For instance, they are right when they accuse the Finance Ministry of forcing unfair competition on them with its "mobility" reform.

The "mobility" reform means that all those who save money in pension funds, life insurance plans or provident funds can move their money from one sector to another without limitation. It is one of the most important consumer revolutions in Israel's financial history. Consumers locked into expensive, poorly performing life insurance plans will be able to move their savings to much cheaper pension funds.

In practice, most life insurance customers aren't likely to move all those tens of billions into pension funds.

What they are likely to do is threaten the insurance companies that they might move the money. That would be enough to force the insurers to dramatically improve the terms they offer clients.

And that is, of course, what a consumer revolution is all about: Captive clients of the insurance companies will be able to negotiate terms with the insurers, to take advantage of nascent competition in the sector to lower prices that the insurers charge them.

So far, the situation of pension savers is dandy; but the situation of the insurance companies is a lot less so. The insurance companies can be expected to throw their elephant-weight lobby at the Knesset to try to change the treasury's decree, but given the tremendous advantages to consumers in the "mobility" reform, and the terrible image that the insurance companies have regarding consumer affairs, they probably won't be able to block the reform.

Except for one point, which even the treasury admits is a knotty one: It's the insurance companies' claim of imbalance in the benefits that the state pays to customers of pension funds, compared with customers of life insurance plans.

In short, the insurance companies are being sent out to the battlefield armed with pea shooters against the superior marketing weapons of the pension funds.

In two areas, the state discriminates against life insurance savers, compared with pension fund savers. The more meaningful area is that the state is guaranteeing part of the returns that pension funds provide. Some 30 percent of the pension funds' investments are guaranteed by the state, and a high level of return at that.

The state issues pension funds with designated bonds that bear assured returns, thus relieving the pension funds of the risks of the capital market. This feature essentially protects 30 percent of their investments. That assurance alone is believed to give pension fund savers a 20 percent advantage compared with the amount that savers can build up in insurance programs.

The insurance companies scream about this discrimination against their clients, mainly when it comes to their need to fight off the wiles of the pension funds trying to attract these same clients. The Finance Ministry hears the wails, and admits (a) the insurance companies have a point and (b) these designated bonds are not a good thing, because they warp the financial market: 30 percent of the pension fund monies go straight into the treasury, bypassing the capital market entirely.

What does that mean? Mainly, that one of the main perks granted to the pension funds - the designated bonds - is about to be rethought.

Even if no change is made now, at the end of the day, some way must be found to end the bias. It's a pretty safe bet that the solution will be to terminate the designated bonds, and what that means is worse terms in the pension funds.