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Table of contents

1. Introduction ............................................................................................................. 42. Analysis of business results in the non-life insurance lines....................................... 7

A. Profitability ............................................................................................................... 7B. Concentration in the line .......................................................................................... 8C. Seasonality............................................................................................................... 11

3. The reform in the compulsory motor-vehicle insurance line ................................. 13A. General.................................................................................................................... 13B. Rates starting from April 2001 ................................................................................ 13C. Correct declarations given by insured ...................................................................... 14D. Claim report............................................................................................................ 15E. Database.................................................................................................................. 16F. Residual insurance................................................................................................... 16G. Avner....................................................................................................................... 17

4. Rates in property motor-vehicle insurance ............................................................. 18A. Cancellation of minimum premium ........................................................................ 18B. Review of the rate formulas ..................................................................................... 18

5. The terrorist attack of September 11th and its implications ................................... 216. Cancellation of venue stipulation in insurance contracts ....................................... 227. Health insurance .................................................................................................... 23

A. Introduction............................................................................................................ 23B. Business results in the sickness and hospitalization line............................................ 23C. Long-term care insurance ........................................................................................ 24

1) Background.......................................................................................................... 242) Guidance on long-term care insurance (individual) .............................................. 25

D. Health insurance for foreign workers ....................................................................... 26E. Proper disclosure in group health insurance............................................................. 28F. Prohibition of selling policies for supplementary medical covers to traffic

accident casualties.................................................................................................... 28

List of tables:Table D-1: Distribution of Non-Life Insurance Gross Premiums, by Lines,

in the years 1998-2001................................................................................ 6

List of figures:Figure D-1: Distribution of gross non-life insurance premiums by lines in 2001 ............ 5Figure D-2: Profitability of the Non-Life Insurance Line in the years 1996-2001........... 7Figure D-3: Profits in Non-Life Insurance by Main Lines in 1998-2001 ........................ 8

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Figure D-4: Distribution of Gross Premium by Companies in the Non-Life Insurance Lines in 2001 (excluding Avner and Karnit)................................................ 9

Figure D-5: Distribution of Gross Premium by Companies in the Motor-Vehicle Insurance Line in 2001 ............................................................................... 9

Figure D-6: Distribution of Gross Premium by Companies in the Homeowners Insurance Line in 2001 ............................................................................. 10

Figure D-7: Distribution of Gross Premium by Companies in the Property Loss Insurance Line in 2001 ............................................................................. 10

Figure D-8: Distribution of Insurance Premiums in the Main Lines, by Quarters in 2001 ..................................................................................................... 11

Figure D-9: Business Results in the Sickness and Hospitalization Line in 2000-2001... 23Figure D-10: Distribution of Gross Insurance Premiums by Companies in the Sickness

and Hospitalization Line in 2001.............................................................. 24

AppendicesAppendix A: Parameters used by the insurance companies to set the compulsory

motor-vehicle insurance premiums as of 31.12.01..................................... 31Appendix B: Companies that have not used the parameters for pricing a private car ...... 31

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1. Introduction

The Non-life insurance Department is responsible for setting the policy, regulation and current supervision on all the insurance lines, except for life insurance. The purpose of the department is to protect the interests of the insured and put an emphasis on creating a market with proper structure based on fair competition. The insurance lines include, among other things, property insurance, comprehensive and compulsory motor-vehicle insurance, liability insurances, financial insurances and health insurances. The health insurances include long-term care insurance, insurance for covering medical expenses, implants, individual accidents etc. During 2001 the Division dealt with the implementation of the first stage of reform in thecompulsory motor-vehicle insurance line. At the beginning of April the insurance rates were updated so as to reflect the insurance risk embodied in the various vehicles, and the standardrate of insurance that was in use for many years, was cancelled, by opening a range of ten percent above and below a benchmark rate. In this range, the insurance companies can set different insurance rates for different insured. Regarding property motor-vehicle insurances, the Insurance Commissioner has issued a circular guiding the insurance companies to cancel the minimum premium they have integrated in the standard rate and resubmit the rate formulas for approval. Toward the end of the year the influence of the events of September 11th was evident andconsequently the rates in insurance lines that cover catastrophes rose. Regarding health insurances, rules were set for extending the proper disclosure toward the insured at the time of joining the insurance and during the insurance period. Moreover, new insurance policies for foreign workers have been approved according to the instructions set in the Foreign Workers order that came into force on October 2001. This order instructs employers to insure the foreign workers employed by them at a minimum scope of cover, which is basically similar to the health basket given to Israeli citizens according to the National Health Insurance law. In addition, during this year the Insurance Commissioner published a draft of instructions for the insurance companies regarding the long-term care insurance in individual policies in order to assure a fair long-term cover and maintain the stability of the insurance business.

The total of premiums1 in the non-life insurance lines in 2001 was about NIS 14.9 billion. This amount is an increase of about 8.7% (about NIS 1.2 billion) compared with the year 2000 where about NIS 13.7 billions were collected. This is an exceptional increase in the premiums (between 1988-2000 there was an average decline of about 0.3% a year in the collected premiums).

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Figure D-1: Distribution of gross non-life insurance premiums by lines in 2001

(Percent)

Source: annual report data of the insurance companies and processing of the Capital Market,

Insurance and Savings Division (Based on individual Companies reports (Solo)).

According to table D-1, this increase is the result of an increase of about NIS 304 million in premiums in the business property loss and comprehensive line (about 27.4%), an increase of about NIS 299 million in the property motor-vehicle line (about 6.7%) and an increase of about NIS 185 million in the sickness and hospitalization line (about 18.2%).

property loss & homeowners9%

homeowners7%

compulsory motor-vehicle26%

property motor-vehicle31.8%

employer liability1.9%

other liability lines7%

Individual accidents1.4%

sickness & hospitalization8.1%

aircraft and marine vessels0.2%

cargo in transit0.7%

engineering insurance

2.1%

credit insurance

0.8%

other risks3.7%

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Table D-1:Distribution of Non-Life Insurance Gross Premiums, by Lines,

in the years 1998-2001(NIS thousands, December 31 2001 prices)

Insurance type 1998 1999 2000 2001

Change in premiums between

2000-2001

Rate of premium change in

2000-2001

Business property loss and comprehensive 1,231,438 1,115,887 1,108,390 1,412,107 303,717 27.4

Homeowners 985,275 967,226 1,006,453 1,044,091 37,637 3.7

Compulsory motor-vehicle 3,823,991 3,749,955 3,812,232 3,874,569 62,337 1.6

Property motor-vehicle 4,744,693 4,607,550 4,441,974 4,740,615 298,640 6.7

Employer liability 261,838 258,033 248,901 278,478 29,576 11.9

Other liability lines 854,667 909,745 906,671 1,040,472 133,801 14.8

Individual accidents 224,998 218,662 205,561 205,494 -67 0.0

Sickness and hospitalization 802,350 948,638 1,019,284 1,204,392 185,108 18.2

Aircraft and marine vessels 27,476 27,418 26,581 30,283 3,702 13.9

Cargo in transit 135,390 119,053 112,328 110,495 -1,833 -1.6

Engineering insurance 254,183 305,531 288,586 316,248 27,662 9.6

Credit insurance 99,734 106,249 69,840 119,508 49,668 71.1

Other risks 361,240 436,211 483,627 547,698 64,070 13.2

Businesses originating abroad 1,206 1,053 587 1,141 554 94.3

Total 13,808,478 13,771,210 13,731,015 14,925,589 1,194,574 8.7

Source: annual report data of the insurance companies and processing of the Capital Market,

Insurance and Savings Division (Based on individual Companies reports (Solo)).

Line profits(including Avner)

Avner profits

1,000

900

800

700

600

500

400

300

200

100

01996 1997 1998 1999 2000 2001

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2. Analysis of business results in the non-life insurance lines

A. ProfitabilityThe profit in all the non-life insurance lines aggregated in 2001 some NIS 812 millioncompared with NIS 430 million in 2000. This is an increase of about 89% in profitability.

As seen in figure D-2, the profitability in the non-life insurance lines is fluctuational.

Figure D-2: Profitability of the Non-Life Insurance Line in the years 1996-2001(NIS million)

Source: data from the annual reports of the insurance companies and processing of the Capital

Market, Insurance and Savings Division (Based on individual Companies reports (Solo)).

Figure D-31 shows a profit in the main insurance lines in 1998-2001. It is evident that thecompulsory motor-vehicle insurance line (including Avner) is the most profitable line in allthe reviewed years2. In addition, one can see the fluctuational nature that characterizes theproperty motor-vehicle insurance line (see detailing in the Commissioners report for 2000). In 2001 the profitability in these two lines was about 66% of the profitability in the non-lifeinsurance line (about 43% in 2000). The profitability in the homeowners line is relatively stable, and ranging between about NIS88 million and about NIS 103 million a year. In 2001 it was about 11% of the total profitin the line whereas the rate of premium in the homeowners line was about 7% of the total of premiums in the non-life insurance line.

1 The profit of the compulsory insurance line includes Avners profits as follows: in 1998 NIS 571 million, in 1999 NIS 408 million, in 2000 NIS 85 million and in 2001 NIS 157 million.

compulsorymotor-vehiclepropertymotor-vehiclehomeowners

sickness & hospitalization property lossother liabilities (employer and other)

1998 1999 2000 2001

800

700

600

500

400

300

200

100

0

(100)

(200)

(300)

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Figure D-3: Profits in Non-Life Insurance by Main Lines in 1998-2001(NIS million)


Market, Insurance and Savings Division (Based on individual Companies reports (Solo)).

B. Concentration in the line The insurance premiums collected by the Clal group (the group with the largest market share) in the non-life insurance lines in 2001 are about 2.5% of the total insurance premiums collected in the line. The part of the Clal group is about 1/3 of the total of insurance premiums collected in the property loss and homeowners lines (about 36.3% and 31.5% correspondingly) and about 1/4 of the total of insurance premiums collected in the property motor-vehicle insurance line (about 23.1%). According to the figures below, it appears that the four large insurance groups3 have aconsiderable market share in the property insurance lines. Their share in the property loss line is about 79.6%, their share in the homeowners line is about 72.6% and in the property motor-vehicle insurance line about 62.9%. The differences in concentration in the various insurance lines may indicate the degree of competition in the various lines.

2 Figures D-2 and D-3 include the profitability of the Avner Company. This company recognizes a profit after five years, unlike most of the insurance companies that recognize a profit after three years. If Avners reporting method in 2001 were like other companies, the profit would have increased in about NIS 900,000.

3 List of insurance groups: The Phoenix group: Phoenix, Hadar Harel group: Shiloach, Sahar-Zion, Dikla Clal group: Clal, Aryeh, Ilit Migdal group: Migdal, Hamagen

Clal24.4%

Migdal11.1%

Phoenix15.1%

Harel (Sahar-Zion)18.4%

Menorah6.7%

Direct Insurance3.3%

Ayalon6.4%

Eliahu5.3%

Other9.4%

Clal23.1%

Migdal8.3%

Phoenix15.9%Harel (Sahar-Zion) 15.6%

Menorah6.9%


Ayalon8%

Eliahu7.8%

ILD3.4%

Other5.4%

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Figure D-4:Distribution of Gross Premium by Companies in the Non-Life Insurance Lines

in 2001 (excluding Avner and Karnit)


Market, Insurance and Savings Division.

Figure D-5: Distribution of Gross Premium by Companies in the Motor-Vehicle

Insurance Line in 2001



Detailing of the insurance groups in the group 'Other' in figure D-5:AIG 2.4%, Agricultural insurance 1.5%, Shomera 0.3% and Shirbit 1.2%.

Clal31.5%

Migdal13.8%

Phoenix14.7%

Harel (Sahar-Zion) 12.6%

Menorah9.6%

Ayalon5.4%


Eliahu3.1%

Other6.1%

Clal36.3%

Migdal12.8%

Agriculture Insurance6.5%


Menorah 2.5%

Phoenix6.1%

Ayalon6.5%

Eliahu4% ILD 0.9%

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Figure D-6: Distribution of Gross Premium by Companies in the Homeowners Insurance Line

in 2001



Detailing of the insurance groups in the group 'Other' in figure D-6:AIG 1.9%, Hachsharat Hayeshuv (ILD) 2.4%, Shomera 0.7% and Shirbit 1.1%.

Figure D-7:Distribution of Gross Premium by Companies in the Property Loss Insurance Line

in 2001



compulsorymotor-vehicle

propertymotor-vehicle

homeowners sickness & hospitalization

property loss

liabilities(employer and other)

quarter 1

quarter 2

quarter 3

quarter 4

45

40

35

30

25

20

15

10

5

0

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In order to examine the concentration in the various lines in 2001, we use the following indices:

1. The Herfindahl-Hirschman Index (HHI) calculated by the sum of squares of theinsurance companys market share out of the total of premiums collected in that line.

2. The CR3 index that sums up the market share of the 3 large insurance groups out of the total of premiums collected in that line.

The results of the concentration indices are specified below:

Indices/Lines

Compulsory motor-vehicle

(excluding Avner and

Karnit)

Property mo-tor-vehicle

HomeownersSickness & hospitaliza-

tionProperty loss

Employer liability

Herfindahl Hir-schman Index

0.13 0.13 0.17 0.29 0.22 0.18

CR3 (In percentage) 52 55 60 78 73 68

As the indices grow bigger, the concentration in the line also increases.

C. Seasonality

Figure D-8:Distribution of Insurance Premiums in the Main Lines, by Quarters in 2001

(Percent)



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Figure D-8 shows the distribution of insurance premiums over the quarters in the non-life insurance lines for 2001. The figure shows that in the motor vehicle lines the main part ofinsurance premium payments was done in the 1st quarter of the year compared with the other quarters where the distribution is similar (the reason for this is probably the fact that collectives, that are an important factor in the property motor-vehicle insurance market, tend to arrange motor-vehicle insurances for their workers at the beginning of the year). In the property loss line and in the liability (employers and other) lines, the trend is similar. On the other hand, in the homeowners line and sickness and hospitalization lines the distribution of insurance premiums is similar among all quarters.

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3. The reform in the compulsory motor-vehicle insurance line

A. General In July 1997, the Motor Vehicle Insurance Law (insurance under Conditions of Managed Competition and Transitional Arrangements and Directives regarding Avner) 1997 (hereinafter: "Managed Competition Law)" opened the compulsory motor-vehicle insurance industry to competition. The main goals of the reform were as follows:

1. To arrange a competitive structure for the line in order to financially streamline it andreduce the price of all insurance premiums in the line.

2. To encourage careful driving by using parameters that reflect the insurance risk for thepurpose of setting the insurance premium, and preventing the subsidization so that each insured will pay his risk premium.

As one can recall4, in consequence of signing the memorandum of understanding between the Insurance Commissioner and the insurance companies and the legislation that followed, the reform implementation is carried out in two main stages. The first, starting from 1.4.2001until 31.12.2002, the validity of Erlichs letter expired, and the insurance companies are the ones setting the insurance rate in the range of 10% above and below a benchmark rate with no compensation mechanism on past losses. At the same time, the rate of liability of insurance companies in coinsurance was raised to 70% in 2001 and to 80% in 2002 and Avners share declined correspondingly. At the second stage, starting from 1.1.2003, Avner will not deal, in a direct or indirect manner, with any business not related to the settlement of claims5.

B. Rates starting from April 2001 Starting from April 2001, with the implementation of the first stage of the reform in thecompulsory motor-vehicle insurance line, the standard rate that was common in the compulsory motor-vehicle insurance line was cancelled and the insurance companies were allowed to set by themselves the insurance rates in a range of 10% above and below a benchmark rate set by the Minister of Finance, based on the recommendations of the database operator. The regulations6 stipulate that within this range, the insurance companies can set the insurance rates and use at their discretion seven risk parameters, set by the Insurance Commissioner according to the recommendations of the database operator and with the Insurance

4 For further details on the reform and memorandum of understating, see chapter D for the annual report of the Capital Market, Insurance and Savings Commissioner for 2000.

5 Managed Competition Law, section 10B (B).

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Commissioners approval. An insurance company is obligated to use all the parameters approved to it by the commissioner. The purpose of these parameters is to evaluate the insureds quality of driving in order to adjust the insurance premium to the insured risk. In addition, the insurance companies are entitled to give discounts on the permissible loadings allowed to them up to 14.23% of the insurance premium (the loadings are designated to finance theoperational expenses of the companies, including profit and agents commissions).

The parameters allowed for use in compulsory insurance

Parameter Trend

Engine volume The rate decreases as the cc increases

Driver gender Lower rate for women drivers

Driver age The rate decreases as the age increases

Driver experience (years licensed) The rate decreases as the experience increases

History of road accidents The rate increases with the number of car accidents

Deprivation of drivers license The rate increases with the number of license deprivations

As of 31.12.01, a major part of the companies used a differential rate. Appendix A specifies theinsurance companies and the various parameters they used as of this day. Half of the companies that deal with compulsory insurance have used parameters to set the premium: six companies used the drivers age parameter, four used the drivers experience parameter and one company used six parameters. Eight companies used no parameter for pricing the insurance premium.

The usage the insurance companies do with various parameters results in a situation where insured have different rates in different companies. Selecting an insurance policy is influencedby three central elements: the insurance cover given in the policy, the identity of the insurance company and the amount of premium. In a compulsory insurance the insurance cover is dictated by virtue of the law therefore the insured must consider mainly the identity of the insurance company, the experience he has with it and the cost of insurance. The practical meaning for the public of insured is that when buying compulsory insurance for a car one should consider, among other things, the insurance premium charged by the insurance company. Since starting from April 2001 this premium is not uniform among all the companies, it is recommended for insured to compare between the various companies and rates.

C. Correct declarations given by insured According to the law, compulsory insurance is made for the car rather than for a specificdriver. As long as the insurance premiums were set based on the car characteristics only

6 Regulations of supervision on insurance businesses (the insurance premiums an insurer is entitled to charge from insured in motor vehicle insurance), temporary provision 2001.

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(engine type and size), it was easier for the insurance companies to check the reliability of data given by the insured on the car. With the reform implementation, more emphasis will be put on the drivers characteristics, which are the main factors that influence the insurancerisk, therefore the insurance companies will have to check various characteristics of the drivers using the car, like the age of potential drivers, their history of accidents, the purposes of using the car and the like.

An insurance company can ask the insured questions related to parameters that influence theinsurance risk, yet it is possible that the insurance company could not condition the insurance cover on the correctness of the obtained declarations (for example, the driver age). This situation may result in a state where certain insured will have an incentive to give incorrect declarations in order to pay a reduced premium, knowing that an incorrect declaration will not influence the payment of insurance compensations. This situation may result in thefollowing consequences: A. Rates that do not reflect their insurance risk will be given to insured who give faulty

data, therefore the insurance company will not collect sufficient premiums.B. The cost of risk will be rolled over to other insured due to faulty data given by insured.C. Faulty information will be entered to the database so that the reliability of the databases

products will be damaged.

During 2001 a report of a professional committee appointed by the Insurance Commissioner for examining alternatives for coping with incorrect declarations of insured was published. According to one of the alternative offered by the committee, a limited fine will be laid oninsured who gave incorrect declarations due to which they received a reduced premium in their compulsory motor-vehicle insurance policy.

According to the above alternative, an insured who gives incorrect details when buying the policy like the age of driver who will drive the car, his experience in driving, the number of license deprivations etc. will be fined. The fine will be limited and will be collected by selfparticipation when the insurance case happens only from the compensation component for the pain and suffering caused to the traffic casualty7, yet not from the payment for medicalexpenses or for the work disability. The amount of fine will be set, among other things,according to the influence of the incorrect details on the premium paid by the insured, likethe mechanism set in section 7 to the Insurance Contract law. Setting the fines requires, ofcourse, a legislative change.

D. Claim report During 2001 a circular concerning Claim Report in compulsory motor-vehicle insurance was published, stipulating the obligation to report in writing in a uniform format on compulsory insurance claims for policies that end starting from 1.4.02. For policies that end starting from

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1.10.02, the reporting will be extended and will also include a specification of variables thatinfluence the insurance premiums according to the definitions of the database operator, evenif the insurer has not used them when calculating the insurance premiums. Moreover, the report will include the details of the driver involved in each accident.

The purpose of circular is to facilitate the underwriting process in compulsory insurance, like in property motor-vehicle insurance, by the delivery of a claim report for each insured, a report that specifies the claims for bodily injury for each policy. The specification of thedrivers details and the variables by which the policy was issued will enable the insurance company to better evaluate the risk of each insured and to allow fair and correct pricing of the insurance policy.

E. Database As stated, the basis for correct fair competition and pricing of the insurance rates is statistical information. One of the most important components in the reform in compulsory motor-vehicle insurance is the database, which goal is to recommend to the Insurance Commissioner and the insurance companies on risk rates. Based on deliberations with the insurance companies, a statistical plan was published in July that defines the way of collecting data andreporting on them to the database. At the request of the insurance companies, the beginning of data collection was delayed until 1.10.01. From this date on, information will be collected according to the statistical plan from each insured.

F. Residual insurance During 2001, Motor Vehicle Insurance regulations were set (a residual insurance arrangement and a mechanism for setting rates), 2001 (hereinafter: "the regulations"). The regulations were designated, among other things, to streamline and improve the residual insurance array by establishing an arrangement administration, which is a corporation, and by arranging a mechanism for setting rates. In August 2001, the insurance companies established the Managing Corporation of the Compulsory Motor Vehicle Insurance Pool (the pool) Ltd according to the regulations. Moreover a CEO and board of directors were appointed to the company, workers were recruited and an information system was established. The residual insurance is basically in loss. The financing of its losses is imposed on all insuredin compulsory insurance. A private car and motorcycles under private ownership that are insured by residual insurance pay an addition of 25% whereas any other vehicle pays an addition of 35% to the market rates as set in the regulations. In order to finance the losses

7 The payment for pain and suffering is set in the regulations of compensations to traffic accident casualties (the calculation of compensation for damage other than in property) 1976 and may reach up to NIS 133,000 per casualty, depending on the degrees of disability set for him or the duration of hospitalization. At the absence of disability or hospitalization days, the maximum amount is up to 10% of the above amount.

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of the residual insurance, as expected due to the motorcycle insurance8, in a rate lower than their risk rates, 4.3% were added to the risk premium of all vehicles, meaning a total of NIS 116 million a year.

G. Avner The Motor Vehicle Insurance Law (insurance under conditions of managed competition, transitional arrangements and directives regarding Avner), 1997 stipulates that starting from 2003, Avner will no longer serve as a common insurer in the compulsory motor-vehicle insurance line. From now on Avner will only deal with matters related to the settlement of past claims of traffic accident casualties.According to the memorandum of understanding9, in December 2001 a new board of directors was appointed for Avner which role is, among other things, to assure correct and orderly transfer of Avner to management by a special manager in 2003.

8 The population insured in the pool other than motorcycles and that is not under a short-term insurance cover is very small.

9 For the memorandum of understating refer to Chapter D of the Commissioners report on the Capital Market, Insurance and Savings 2000.

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4. Rates in property motor-vehicle insurance

A. Cancellation of minimum premium According to the provisions of the law, an insurance company that is interested in introducing an insurance plan into the property motor-vehicle line (self and third party) must first obtainthe approval of the Insurance Commissioner. In order to obtain approval for the insurance premium, the insurance company is required to provide certain data to the Commissioner, like the full rate formula and a list of the parameters and their values.

Most of the insurance companies, in the framework of the rate formula, used to combine a parameter of Minimum Premium, which is the minimum amount an insurance company intends to charge from different insured as insurance premiums. Minimum premium means that although the risk data of a specific insured indicate that he should pay a certain amount,in fact he will be required to pay a higher amount. These are two examples for the minimum premiums used by the various insurance companies during 2000: Company A private car NIS 2,582 commercial car - NIS 3,095Company B private car NIS 2,016 commercial car NIS 2,419

After reviewing the matter of minimum premium and due to the desire to reduce cross subsidizations between different insured and establish actuary rates by which each insured pays according to his insurance risk, the Commissioner of Insurance published in August 2001 an insurance circular that instructs the insurance companies to submit for approval rate formulas that do not include minimum premiums. According to the circular instructions, the companies have submitted new rate formulas for the property motor-vehicle insurance line.

B. Review of the rate formulas The rate formula consists of a risk premium and loadings. The risk premium is in fact the expected cost incurred by the insurance company due to paying claims and settling claims: the payment due to the damage caused to the insured, including any expenses the insurance company may have incurred for settling the claim, like lawyers and investigators. The loadings include the expected cost due to the issue of policy, like marketing expenses and agents commission and the profit component.

Setting the risk premium is done while considering three main components:1. The cost of risk due to an accident that causes damage to the insureds car. 2. The cost of risk due to an accident that causes damage to the car of a third party10.

10 The payment of the insurance company for this component is usually limited by an upper limit.

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3. The cost of risk due to theft or an attempt to steal the insureds car.

In order to set a differential risk premium that considers the specific risk characteristics ofeach insured, the insurance company will set the cost of the various components indicated above. It should be noted that in the property motor-vehicle insurance line, the insurance companies use many diversified parameters for evaluating the risk.

The cost of risk due to an accident is directly related to the characteristics of the car drivers. Usually as the drivers age grows higher and as his experience increases, the cost of risk due to an accident decreases. Moreover, in certain ages the drivers gender and marital status are also influential (single or married). At certain ages the cost of risk due to an accident for womenis lower than for men, and the cost of risk of married people is lower than the cost of risk for singles. The reasons for this are diversified: it is possible that women are more careful thanmen, yet it is also possible that women drive less than men. This is also true for marital status. It is possible that married people drive more carefully yet there may be other reasons as well.

Additional characteristics of a driver that are relevant to the cost of risk due to an accident are as follows: 1. Number of drivers authorized to drive the car (as the number of authorized drivers

increases, the cost of risk also increases, because the car is used for longer periods of time or since certain drivers are more dangerous).

2. The insurance history of the driver. If an insured has not filed any property motor-vehicle claims against the insurance company in the last years, this may indicate of the drivers nature.

The cost of risk due to an accident is also influenced by the cars characteristics, like thecars manufacturer, its weight and whether this is a private or commercial car, is the car being used as the main car or as a secondary car etc.

It should be noted that to the matter of calculating the cost of risk due to damage to a third party, there is a substantial difference between the insurance companies regarding the way they calculate the cost of risk. Some of the companies use a differential rate according to the drivers characteristics, yet some insurance companies collect a fixed amount for a third partycover though these are different drivers.

The cost of risk due to a theft is very much influenced by the value of the car. As the value ofthe car increases, the consequences of theft lay higher cost on the insurance company. Another important component of the cost of risk is the probability of stealing various cars. There are different types of vehicles with a high probability of theft and there are other vehicles which probability of theft is lower. All the probabilities may change within a short time (for example

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a change in the thieves preferences). Therefore the insurance companies run a current follow up on the types of vehicles and the frequency in which they are stolen.

In summary, since the insurance companies differ both in the way they calculate the rate and in the parameters they consider in the formula, it is bound to have differences in the amount of premiums they charge from the same insured. In addition, it should be noted that if two companies use the same parameter, for example the drivers age, it is possible that in a certain company, X age groups will be defined and in another company Y age groups will be defined,with all that is implied. Due to these reasons it is important to carry out a market survey before buying insurance.

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5. The terrorist attack of September 11th and its implications

The terrorist attack on the World Trade Center in the USA on September 11th 2001 and the declaration of war of the American government on international terrorism that followed have influenced the international and the Israeli insurance market. The combination of thesecurity state in Israel and the high number of terrorist attacks have created a certain problem with the insurance availability and an appreciation of rates in part of the insurance lines.

Claims against reinsurers due to the attack have considerably decreased the free capital in the insurance market, and have lead to a decline in the risk capacity they are willing to receive. The decline in free capital in the reinsurance market (decline in supply) results in increased rates, especially in catastrophe insurance lines (for example earthquakes) and causes a problem of insurance availability for certain lines and insured.

For example, due to the appreciation of insurance rates because of war risks for cargos in watercrafts coming to the Israeli ports, it was feared that this will affect the import and export of cargos. In order not to interfere with the traffic of goods to and from the ports in Israel, itwas decided to adapt an arrangement by which the governmental insurance company Inbal Insurance Company Ltd (hereinafter: "Inbal") will sell policies for cargo insurance against war damages within the territorial waters of the state. As part of the arrangement it was established that the state, through Property Tax and Compensation Fund, would compensate Inbal in case of claims, so that Inbal will bear no risk on these policies. The policy was approved in November 2001 and may be extended up to a range of 30 nautical miles from the shoreline of the state of Israel.

In addition to the regulation of the marine cargo insurance, in the course of the year, the Division has reviewed the insurance availability for seam areas like the industrial areas in Atarot and Barkan that have suffered from difficulties in achieving insurance.

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6. Cancellation of venue stipulation in insurance contracts

Insurance companies used to include in many insurance policies a condition that determines in what venue will claims regarding the policy be clarified, usually in Tel Aviv. Such acondition limits the freedom of choice of the insured regarding the place of claim against the insurance company and also restricts their right to ask for transferring the discussion if an insured is sued by the insurance company.Therefore the Commissioner of Insurance has published a circular stipulating that insurance companies will not add into new insurance contracts sections that limit the insureds freedom of choice of a certain court. In addition, it was set that insurance companies will cancel, starting from 1.5.03, the sections that limit the venue to certain courts in existing insurance contracts. In insurance contracts where the insurance period is longer than a year, the insurance companies were required to notify the insured in writing of this matter. It should be noted that the circular instructions shall apply to insurance contracts in all insurance lines, including group insurance contracts, except for business insurance contracts (property, directors etc.) for which an insurance contract that is not a uniform contract was made.

premium expenses claims profits

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

2000

2001

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7. Health insurance

A. Introduction During 2001 rules were set for extending the proper disclosure given to an insured in health insurance policies when joining the insurance and within an annual report. Moreover, an offer for instructions for long-term care insurance policies (individual) was published, new insurance policies for foreign workers were approved, according to the instructions set in the Foreign Workers Law and an offer for the content of the actuarial memorandum that an insurance company has to submit, when applying for a health insurance policy approval or when changing an existing plan, was published.

B. Business results in the sickness and hospitalization line The scope of activity in the sickness and hospitalization line in 2001 shows a continued growth in the line over the last years. This increase is reflected by an increase of about 8% inthe amount of insurance premiums in relation to the insurance premiums in 2000. Loss ratio The loss ratio is the ratio of gross claims (paid claims and changes in pending claims) to total premiums. The data indicates a decline of about 6% in the Loss Ratio, from about 63% in 2000 to about 60% in 2001. This change may indicate a growth in profitability.It should be noted that the sickness and hospitalization line does not cover the entire activity in the field of health insurance, as part of it is reported under life insurance (like long-termcare insurance). Figure D-9 shows the main data of the financial results in the line.

Figure D-9:Business Results in the Sickness and Hospitalization Line in 2000-2001

(NIS thousand, December 2001 prices)



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Market data in the Sickness and Hospitalization line Figure D-10 shows the continued concentration of the line as presented in the Commissioners report of 2000, as half of the insurance premiums are in the Harel group (a decline of 1% in relation to 2000). The main changes compared with 2000 are in the insurance premiums held by the other three groups: an growth in the Clal group, a decline in the Phoenix group and growth in the Migdal group. The market share of the four large insurance groups is about 89% (like the data of 2000). It should be also mentioned that an insurance premium rate of 1.9% (it appears under another name in the figure) includes the Ayalon Company that holdsabout 1.76% and other companies that hold less than 0.1%.

Figure D-10:Distribution of Gross Insurance Premiums by Companies in the Sickness and

Hospitalization Line in 2001



Detailing of the insurance companies in the insurance groups: 1. Harel group Shiloach, Sahar Zion, Dikla 2. The Phoenix group The Phoenix, Hadar3. Migdal group Migdal, Hamagen4. Clal group Clal, Aryeh, Ilit5. Other Ayalon, AIG, Shomera, Shirbit, Direct Insurance

C. Long-term care insurance 1) Background Long-term care insurance is designated to provide financing support to a person who needssupervision or those who are incapable of doing daily activities, like eating, walking or getting dressed by themselves.Long-term care cases usually occur after the age of 75 hence the insurance cover must continue

Clal11.7%

Migdal12.8%

Phoenix17.4%


Menorah8.7%

Other 1.9%

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for an extended period so that the insurance period in the policy will be to the entire insureds life and the insurance company will not be allowed to terminate the insurance. Within the framework of the Health Insurance Law, National Security offers a basic level of monthly long-term care treatment for eligible insured men of 65 and up and women of 60 and up who live at home and need the help of another person for carrying out daily activities or who need supervision at home for their safety, according to tests and to the eligibility terms set by the law.According to the instructions of the National Health Insurance law, sick funds are not allowed to offer long-term care insurance plans. They were specifically excluded from thelaw due to the long-term implications of this insurance that requires risk management and long-term financial reserves. Therefore, insurance companies provide the long-term careinsurance. It should be noted that the increase in life expectancy and the aging of population, the increase in the standard of living, have raised the demand for buying a long-term care insurance policy. Most of the long-term care insurance offered by the insurance companies consists of group insurances that are sold mainly to sick funds members. It should be noted that more than 3 million people have long-term care insurance through the sick funds. Policies for long-term care insurance offer monthly payments at a fixed amount (severalthousands shekels) or indemnify for the recovery of expenses an insured may incur for getting long-term care services. The period of insurance compensation payment when an insured is in nursing care usually ranges between three years to life. The unique characteristics of long-term care insurance and selling it within the framework of a limited period group policy are problematic. In the contract entered with the policy holder (the group representative sick fund, employer etc.) the insurance period is set for a few years, usually with no assurance of continuity to the insured in case of terminating the agreement between the policyholder and the insurance company. This means that the insured may be left on the one hand with no insurance cover in case that the insurance policy is not renewed and on the other hand, with no option to buy another policy for long-term care insurance due to his health condition. In addition, group policies of long-term care insurance are characterized by premiums based on cross-age and gender subsidization. This may result in a dramatic increase in premiums for the subsidized insured. The Commissioner of Insurance is examining the required regulation for a group long-term care insurance.

2) Guidance on long-term care insurance (individual) During 2001, the Commissioner of Insurance has published guidance for insurance companies regarding long-term care insurance in individual policies. The guidance set rules to assure long-term appropriate cover, while maintaining the stability of the insurance business.These are the main instructions: 1. Long-term care insurance will be sold as long-term insurance that provides assurance

for the range of ages where the insured is particularly exposed to risk. Meaning an

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insurance company cannot terminate the insurance in a unilateral manner throughout the insureds life.

2. Due to the importance of this insurance it was established that buying the long-term care insurance will be done independently with no obligation to buy additional insurances.

3. The insurance company will not be entitled to raise the scale of premiums but only subject to obtaining an approval in advance from the Commissioner of Insurance and in any case not before the end of 5 years since the approval to operate the policy or since a prior approval for the raise. There is an option to change a premium in health insurances in general and in long-term care insurance in particular since these insurances are sold for extended periods , for the entire life of an insured (tens of years) and the insurance company has a difficulty in committing to an unchanging premium.This difficulty is derived, among other things, from the limited data available, changesin the cost of medical services, and uncertainty regarding future developments that may influence the level of risks in the field.

4. The insurance premium from the age of 65 and on will be level premium that does not change with the insureds age. This instruction was set since the function of the insurance risk from which the insurance premiums are derived increases sharply at the very old ages, a fact that makes it difficult for an insured to pay a suitable risk premiumin these ages.

5. For any payment at level premium by the insured, the insurance company accumulates a reserve for the insured. Level premium payment means that the insured pays an amount that is higher than his insurance risk, therefore a surplus is accrued in his favor. An insured who terminates the insurance will still have reduced cover according to the amount accumulated for him (paid-up values).

D. Health insurance for foreign workers Health insurance policies for foreign workers have been marketed by several insurance companies for some years now. Policies that were common until October 2001 provided cover for various medical expenses, during and not during hospitalization, and compensation for death and disability due to an accident (individual accident insurance). The provided covers were limited both in the type of covers and in the total amount of insurance for all covers in the policy, and no cover was provided for a physical condition that an insured may have had before the beginning of insurance. So that for example, these policies did not cover pregnancy, chronic sickness and AIDS.

Over the last years the number of foreign workers who stay in Israel has increased. With the increase in the number of foreign workers, the demand for social services for them and for their families, such as education, health and welfare services, has increased among that population. The phenomena of foreign workers, its scope and dimensions and social and

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financial implications has become a central issue on the public agenda.

On the background of the stated above, the Arrangement Law of 2000, in the amendment for the Foreign Workers Law (unlawful employment) - 1991, the rules for the terms of employment of foreign workers in Israel were updated in order to assure reasonable and fair working conditions for the foreign workers. This law stipulates, among other things, that it is obligatory for any employer to arrange health insurance for the foreign workers to their entire period of employment with that employer and that the insurance will provide a minimal cover as will set in an order of the Minister of Health.

Therefore the Minister of Health has published the Foreign Workers order (prohibition on unlawful employment and assurance of fair conditions) (medical cover for the worker) 2001, that came into force on October 2001. The purpose of order was to assure proper medical services for foreign workers and try to prevent exploitation of the medical infrastructure in Israel by medical immigration. This order stipulates that the scope of cover an employer must arrange for his worker will be basically similar to the national health basket given to Israeli citizens according to the National Health Insurance law.

In consequence of the order publication in 2001, new insurance policies for foreign workers were approved. These are the main characteristics of these policies: As stated, the scope of insurance cover and its availability are basically similar to

the national health basket given to Israeli citizens according to the National Health Insurance law, including cover for medical services during pregnancy at the end of 9 months of work. In addition it stipulates cover for medical treatments in consequence of work accidents in the interim until the determination of the National Insurance Institution. In case that a specialist determines that a worker cannot work, an insurance cover will be provided until his medical condition stabilizes, so that the worker could return to his origin country.

In health insurance policies it is common to have a restriction by which the insurer may limit the insurance cover if the insurance case has resulted from a medical condition that the insured have had before joining the insurance. The regulation sets a certain cover in a case of pre-existing medical condition. After three years since the foreign worker has arrived to Israel (or from the day the order comes into force regarding a worker who was already in Israel at the time of setting the order), the insurance company would not be able to decline a claim by arguing that the medical treatment is for a pre-existing condition. In any case the insurance company is obligated to finance health treatmentsuntil the workers medical condition stabilizes.

In case of a dispute regarding the fitness for work or whether the medical treatment isrequired due to a pre-existing condition, a mechanism was set by which the worker is entitled to submit the opinion of a doctor on his behalf.

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In a large part of the policies there is cover for a death and disability insurance due to an accident. This cover is in addition to the covers bound by the order.

E. Proper disclosure in group health insurance In October 2001 proper disclosure for the insured was applied when joining health insurance policies (circular 2001/9). The rules of proper disclosure establish what are the main details of information to be given by insurance companies to the insured when buying a health insurance policy. The solidification of guidance was done due to the need toincrease the transparency and disclosure toward the insured, especially on the background of the complexity of health insurance policies (a detailing in this matter may be found in the divisions guidance for 1999).On the background of this circulars guidance for proper disclosure for individual insurances, the guidance was also extended to group insurances. It was established that starting from June 2002 an insurer will provide to any individual or a group of people insured in a group health insurance the insurance policy and a detailing of the information included in the circular with certain adjustments, like indication of the insurance duration and the term of agreement between the policy holder and the insurer and the insureds rights in case that the agreement expires or if he leaves the group.It should be emphasized that in group insurance, there is particular importance to the disclosure provided to an insured regarding the insurance conditions, since in this insurance, the insured does not sign the insurance agreement directly with the insurer therefore they are not aware of the details in the insurance plan.

F. Prohibition of selling policies for supplementary medical covers to traffic accident casualtiesIn recent years various insurance companies have been selling policies that offer medical covers for traffic casualties in addition to the covers provided in the motor-vehicle compulsoryinsurance. These policies offer, for example, compensation for a private operation, medical examinations or hospitalization due to a traffic accident. The cost of policies was betweenabout NIS 70 and NIS 200 a year. These policies have offered to provide insurance cover for traffic casualties in addition to theinsurance cover given to them according to the motor-vehicle compulsory insurance policy that provides insurance cover according to the Traffic Accident Compensation Law 1975.This law provides traffic casualties broad variety of rights which purpose is to reinstate theircondition to their condition prior to the accident. In order to achieve this purpose, the casualty gets insurance compensations under the motor-vehicle compulsory insurance due to several factors of damage: medical expenses, compensation for inability to earn a living and compensations for pain and suffering. The health insurance cover is very broad, even broader than the cover given according to the National Health Insurance law.

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During 2001, among other things, on the background of public complaints in the matter, the Commissioner of Insurance has reviewed the way of marketing and scope of use of policies by insured. It turned out that since January 1999 until the end of 2001 almost 100,000 policies of this type were sold, with the compulsory motor-vehicle insurance policy or with the motor-vehicle comprehensive insurance. These policies were sold in most cases through a joining form attached to the compulsory motor-vehicle insurance certificate, therefore itwas sometimes bought absentmindedly or thinking this is compulsory insurance rather than a voluntary cover that stands for itself. It was also found that insured have hardly made any use of the policies and only a few claims were filed (4 claims as of the end of 2001).

The review results show that due to the broad medical cover already provided under the compulsory motor-vehicle insurance and due to the method of marketing these policies and their way of management, the policies fail to provide a real insurance cover. Therefore the Commissioner of Insurance has decided to instruct the insurers to stop selling these policies as of 1.1.02.

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Appendices

Appendix A: parameters used by the insurance companies to set the compulsory motor-vehicle insurance premiums as of 31.12.01

Parameter

Company name

Cars engine volume

Drivers gender

Drivers age

Drivers experience

Previous claims

Number of license

deprivations

Is there an Air bag?

Personal Direct Alpina Direct Insurance Hadar Hamagen Phoenix Migdal SaharZion Shomera Shirbit

The insurance company is obligated to use all the parameters approved to it as specified in the table.

Subject to the approval of the Commissioner, a company may change the rate approved to it.

Appendix B: companies that have not used the parameters for pricing a private car

1. AIG2. Ayalon 3. Eliahu4. Aryeh5. Agriculture Insurance6. Hachsharat Hayeshuv (ILD) 7. Clal8. Menorah9. Ilit

The rate is standard for all private motor vehicles insured by the same insurance company, and may vary from company to company, pursuant to the approval of the Commissioner of Insurance.

ar01-02

Documents

insurance contracts

residual insurance

nonlife insurance lines

group health insurance

longterm care insurance

care insurance individual

hospitalization line

analysis of business