Gov't plans car compulsory car insurance cut

Car after accident Photo: Tamar Matsafi

A change in the formula for calculating compensation will lower insurance premiums and benefit the insurance companies.

The committee for examining the capitalization interest rate used in calculating compensation for injury in tort law yesterday published its report for public comment. The committee proposes changing the method for calculating compensation in tort law for injured parties covered by liability insurance, mainly compulsory auto insurance. The committee stipulated that the method of paying compensation to the Israel public should not be changed. The change will add many hundreds of millions of shekels to the insurance companies' profits, due to provisions made by the companies in recent years.

The change proposed by the committee cancels a change instituted by the National Insurance Institute (NII) that led to a 15% increase in compulsory auto insurance premiums, which cost the public NIS 700 million in payments for compulsory auto insurance in 2017, meaning that the committee's recommendations will also benefit the public. The recommendations are not final yet, but will probably improve the insurance companies' results and also benefit the general public. It is still unclear how much of the decrease in cost will be passed on to the public and how much will be kept by the insurance companies.

The committee's report proposes replacing compensation in monthly payments with compensation consisting of a single payment, which means, according to the committee, "that most of the compensation payments will continue to be paid in a capitalized (one-time, R.S.) amount." The committee also decided by (non-unanimous) majority vote, with the NII representative opposed) to adopt a uniform capitalization method "that preserves the way the players in the market currently treat the capitalization rate, thereby avoiding market shocks." The committee is chaired by Deputy Attorney General (Civil Law Department head) Erez Kaminitz.

The capitalization rate applying to compensation for injury will therefore be 3%, instead of 2%, as ordered by the NII at the recommendation of the Winograd Committee. This measure will have a concrete effect on the results of the insurance companies, which set aside almost NIS 1 billion for increasing their reserves, thereby reducing their profits. The current committee's recommendations are likely to release the reserves accumulated as a result of the changes made by NII, which will be reversed.

The insurance companies will therefore benefit from the release of reserves totaling hundreds of millions of shekels, which will definitely increase their profits, especially the large companies, such as Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), whose controlling shareholder and chairperson is Yair Hamburger; The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), managed by CEO Eyal Lapidot; and Menorah Mivtachim Holdings Ltd. (TASE: MORA), managed by CEO Ari Kalman.

The committee also discussed what should be done in cases in which the risk-free interest rate falls for an extended period. The committee decided that "in a dynamic interest rate environment, a revision mechanism should be established," but that this mechanism "should be inelastic," which should be accomplished through a "band" between 2% and 4%.

The news had no effect on the insurance companies' share prices, which were down slightly. Shachar Ron, chief actuary and CEO of Ron Actuarial Intelligence, which operates the statistical database for compulsory auto insurance in Israel, says, "If the capitalization interest rate goes back up to 3%, the risk rate for the entire insurance rate is likely to fall accordingly," but he qualified his statement by adding, "For the purpose of lowering the premium for compulsory auto insurance, the amount of the average claim, which has been rising consistently in recent years, should be taken into account."

The committee decided what should be done to encourage the establishment of funds that would facilitate joint investment of compensation money, and said it would "complete its recommendation in the matter after receiving proposals from the public." Other members of the committee included NII deputy director general of research and planning Prof. Daniel Gottlieb, National Economic Council head of research Dr. Shmuel Abramzon, senior deputy accountant general Gil Cohen, Ministry of Finance budget division deputy director Alon Messer, and Capital Markets, Insurance, and Savings Authority deputy commissioner Asaf Michaeli.

Published by Globes, Israel business news - en.globes.co.il - on January 14, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Car after accident Photo: Tamar Matsafi
Car after accident Photo: Tamar Matsafi
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