In January 2013, the Ministry of Finance will ban the sale of guaranteed life expectancy coefficients in life insurance policies, because they are liable to jeopardize the future stability of insurance companies. The ministry, however, will permit the sale of coefficients to policyholders over 55, but only as an addendum to the savings and not as part of it, as is the current practice.
Later, the Ministry of Finance intends to permit their sale only as a rider, and only after the risks are set out in reinsurance.
The decision is based on a long-term study by the Ministry of Finance, which found that the average life expectancy in Israel is rising more quickly than in the past. The ministry has therefore changed its position on life expectancy and is revising actuarial tables, which will worsen coefficients and savers' rights in their pension funds.
The Ministry of Finance estimates that rising life expectancy will cost the big insurance companies NIS 500 million to NIS 1 billion a year, beginning in 2012, due to payouts on old policies. A ministry official says that the planned measures will improve stability in the insurance market, which is very sensitive to fluctuations in life expectancy, and will also improve transparency for customers who do not know how to price current advance life expectancy payments in their policies.
Life expectancy coefficients in life insurance policies is a common practice in Israel, but rare in other countries. They allow insurance companies to sell managers insurance policies as separate policies from pension savings, and at a higher price. The life expectancy coefficient allows savers to receive from the date the policy is taken out (usually when they are in their 30s) an advance, which is based on their life expectancy, and which is used to calculate their old-age pension when they retire (currently 67 for men and 62 for women). The higher the advance, the smaller the old-age pension, and there has been a steady increase in these advance payments over the years.
The pension coefficient is a number which converts accumulated pension savings into the monthly pension for the remainder of a person's life. For example, a policy holder with NSI 1 million in pension savings and a pension coefficient of 200 will receive NIS 5,000 a month for the rest of his life, on the basis of the equation 1,000,000/200 = 5,000.
An examination by "Globes" found that Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) has the largest exposure to guaranteed life expectancy coefficients, with 46% of the insurance industry's total exposure. Migdal's exposure is NIS 64 billion, and 87% of its managers' insurance policies have guaranteed life expectancy coefficients, the highest proportion in the industry. "Globes" estimates its loss from the Ministry of Finance actuary table updates at NIS 230-455 million a year.
Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), controlled by Nochi Dankner, has the second largest exposure, with 70% of its reserves including guaranteed life expectancy coefficients, and 25% of the industry's total commitments. "Globes" estimates its loss at NIS 120-140 million a year from the update of the actuarial tables.
The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), controlled by Yitzhak Tshuva, is liable to lose NIS 70-140 million a year. Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) and Menorah Mivtachim Holdings Ltd. (TASE: MORA) are in better shape. Harel, controlled by the Hamburger family, currently has NIS 15 billion in guaranteed life expectancy coefficients, and is liable to los NIS 50-100 million. Menorah has the smallest exposure, and is liable to lose NIS 30-60 million a year.
The Ministry of Finance's updates to the actual tables and restrictions on guaranteed life expectancy coefficients sent insurance stocks tumbling today, costing the top five companies, all of which are on the Tel Aviv 100 Index, an aggregate market cap loss of NIS 785 million. By mid-afternoon, Migdal's share price was down 7.5% to NIS 4.23, Phoenix's share price was down 5.1% to NIS 7.10, Clal Insurance's share price was down 4.4% to NIS 35.76, Harel's share price was down 4.1% to NIS 110.50, and Menorah's share price was down 3.7% to NIS 23.01
Published by Globes [online], Israel business news - www.globes-online.com - on July 11, 2012
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