The first quarter of 2008 was bad news for those saving for their retirement with insurance policies. These whole life policies, known in Israel as "executive insurance policies" (Bituach Menahlim), showed an average negative return of 5.4% for the first three months of the year.
The five large insurance companies manage NIS 77 billion of such savings for the public, and their total value dropped NIS 4.5 billion in the quarter. The Phoenix showed the worst results of the five: -6.56%. The least bad results among the big 5 were posted by Harel Insurance, at "only" -4.76%. Harel manages about NIS 10 billion in participatory policies, where the company shares its profits (or losses) with policyholders.
The five big insurers - Phoenix, Clal, Migdal, Harel and Menorah-Mivtachim - charged their customers a total of NIS 1.1 billion in management fees for 2007. Most of the companies' revenues come from their management fees for these participatory policies. The fees are divided in two: a fixed fee of 0.6% of the total amount invested in the policy, and a variable fee of 15% of the profits returned by the invested funds. However, when the returns are negative, as in the first quarter of this year, the comapny does not charge this 15%. Of course, they also do not reimburse any part of these fees to customers when they lose money.
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Three smaller insurance companies - Eliyahu, Ayalon and ILDC - showed results that were not as poor as their larger competitors but still quite negative: losses of 4.07% on average for the quarter. The three companies combined manage NIS 2.5 billion in retirement savings. The figures refer to the main channel of life insurance policy savings, known as the Keren Yod funds. Other, much smaller investment channels showed slightly better, but still very negative results of -4.2% to -5.5%.
Customers suffered not only from the poor returns, but also from the high management fees. The numbers for 2007 show the large insurers charged customers from 1.6%, Harel, of total savings for the year, to 1.9%, Menorah and the Phoenix.
A big change for consumers came last month. Now the insurance companies must publish, on the treasury's Web site, details of their fees. Until now, we knew the companies charged a lot but now we can actually know just how expensive they really are. The companies charge the fixed fees, the variable fees and also take another large chunk out of the monthly premiums paid.
These life insurance policies are really packages made up of a number of components: retirement savings, pure risk life insurance covering death, and disability insurance. The total fees come out of the package, and each component has its own profitablility for the companies.
The hope for consumers is when the the new rules allowing the transfer of pension savings monies between various companies and retirement investment vehicles starts at the beginning of 2009, fees may go down. Next year the public will be allowed to freely switch among different types of retirement accounts: pension plans, provident funds and life insurance. Fees charged by the insurance companies are significantly higher than those of pension or provident funds.
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