Special Edition The Israeli Insurance, Pension & Finance Newspaper May 2023 Year XIII 4750-0793 ISSN EMBRACING INNOVATION Israel’s vibrant insurance market, coupled with its technological innovation, economic stability, and supportive regulatory environment, presents a compelling case for reinsurance companies
Welcome We wish all of the participants an enjoyable and successful conference
3 POLICY Special edition 2023 Contents The Importance of Reinsurers’ Active Participation in Israel’s Insurance Market >> Premium By Ori LaviPelleg, Chief Editor, Policy D&O and Cyber - Updates of Important Developments in Israel >> By Adv. Sigal Schlimoff, partner at Gross Orad Schlimoff & Co. law office and Lloyd’s representative in Israel, And Adv. Maya Salomon- partners at Gross Orad Schlimoff & Co. law office Lloyd’s Broker Guest Krieger, Specialising in the Israeli Market, Provides an Update on London’s Dynamic Appetite for Financial Lines Risks >> By Alon Miller, CEO, Guest Krieger 24 Cyber Insurance - Expectations, Reality, Future, and the Technological View >> By Kobi Bendelak, Insurtech Israel CEO 26 How to Gain Profitability? >> By Rachel Maoz, Corporate & Business Account Department Manager, non-life division, Migdal Insurance company 30 Exploring the Rise of AI in Insurance Underwriting - From Humans to Machines >> By Anton Soudah Client Manager, Uri Orland risk management consultants 32 How to Avoid Negative Surprises in the Upcoming Renewals Season >> By Anna Ziswiler, Market Head Switzerland and Mediterranean ,Swiss re 8 6 5 The Reinsurers’ Results in the Compulsory Motor Insurance and Liability Insurance have considerably improved But there was an Aggravation in the Comprehensive Motor Insurance >> Analysis of the General Insurances in the Financial Statements >> By Hagai Shapira 10 A Record Production in 2022 is accompanied by a Loss of NIS 569M >> Analysis of the General Insurances in the Financial Statements By Hagai Shapira 34 Insurance & Reinsurance – the Human Touch >> By Diana Berezin, Co-CEO, Aon Reinsurance Israel 38 In Mindset to Israeli Life (Insurance) >> By Giselle Paz, L&H Actuary, Aon Reinsurance Israel 16 The Libor Reform - End of Libor Interest as of 30th June 2023 >> By Peggy Sharon, Adv, Levitan, Sharon & Co. 18 On Insurance Contract Law and D&o Insurance >> By Uri Orland, Adv. 20 AI and automation-driven operations for auto insurance claims management - A Revolutionary Vision >> By Uri Maimon, CEO and founder of MRM and Auto3P 22 The Recovery of Ukraine: New Insurance and Reinsurance Risks and how they will Affect Israeli Carriers and Exporters >> By Ben Aram, Alexandra Rodina and Zvika Zelichov, Kennedys 28 Chief Editor: Ori Lavi-Pelleg • Translation: Ron Tenenbom • Graphic Design: Ofek studio Publisher: Arie Lavi, Economic Communication, Ltd. • Mail: news@polisa.news • Tel. 972-3-5407884 • P.O.B 23622, Tel Aviv 6123601
A PERFECT STORM Natural catastrophes and inflation Economic factors and inflation exacerbated the impact of natural catastrophes and amplified insurance losses in 2022. A better monitoring of granular exposure and claims data for secondary perils as well as appropriate observation periods are key to adjust models readily and take account of the rapidly changing risk landscape. Scan the QR code to discover more of the lessons learned from last year’s loss experience. Partnering for progress swissre.com
5 POLICY Special edition 2023 Israel’s insurance industry has experienced substantial growth and transformation in recent years, presenting a unique opportunity for reinsurers to actively participate in this dynamic market. With a robust economy, technological innovation, and a strong regulatory framework, Israel offers attractive prospects for reinsurers looking to expand their global footprint. In this article, we will explore the reasons why reinsurers should consider being actively involved in Israel’s insurance landscape. Economic Stability and Growth Potential. Israel boasts a stable and resilient economy, characterized by consistent GDP growth and low inflation rates. The country’s innovative ecosystem has propelled it to the forefront of technology and entrepreneurship, creating a fertile ground for Insurtech startups. As these companies emerge and flourish, reinsurers can play a vital role in supporting their growth and offering risk management solutions tailored to their unique needs. By actively engaging in Israel, reinsurers can tap into a thriving market with significant growth potential. Technological Advancements and Insurtech Innovation. Israel is widely recognized as a global leader in technological advancements, particularly in sectors such as cybersecurity, artificial intelligence, and data analytics. The insurance industry is no exception, with numerous Insurtech startups disrupting traditional models and introducing innovative solutions. Reinsurers can leverage their expertise and collaborate with these startups to develop cutting-edge risk assessment and underwriting tools, enhance operational efficiency, and create new revenue streams. By actively participating in Israel’s Insurtech ecosystem, reinsurers can foster innovation and drive positive change within the industry. Diversification of Risk Portfolio. Israel’s insurance market offers a unique set of risks, including natural catastrophes, cyber threats, and geopolitical uncertainties. By actively engaging in this market, reinsurers can broaden their risk pool and balance their portfolios, spreading risks across different regions and perils. This diversification strategy enhances overall stability and resilience, mitigating potential losses in the event of a localized catastrophe or economic downturn. Collaboration with Local Insurers and Government Support. Collaboration between reinsurers and local insurance companies is crucial for sharing expertise, enhancing underwriting capabilities, and expanding the range of insurance products available in the market. Israeli insurers can benefit from the global perspective, risk assessment tools, and financial strength of reinsurers. Furthermore, the Israeli government actively supports the development of the insurance industry and welcomes international partnerships. Reinsurers can take advantage of this supportive environment to establish strategic alliances, promote knowledge exchange, and foster long-term growth. Access to Talented Human Capital. Israel produces a highly skilled workforce, particularly in fields such as technology, data science, and actuarial science. Reinsurers can tap into this talent pool, recruiting top professionals who possess the necessary expertise to navigate complex risk landscapes and drive innovation. By establishing a presence in Israel, reinsurers can nurture local talent, provide job opportunities, and contribute to the growth of the local insurance ecosystem. Israel’s vibrant insurance market, coupled with its technological innovation, economic stability, and supportive regulatory environment, presents a compelling case for reinsurers to be actively involved. By embracing the opportunities offered by this dynamic market, reinsurers can diversify their risk portfolios, foster innovation, and collaborate with local insurers and Insurtech startups. Moreover, by leveraging Israel’s technological prowess and access to highly skilled human capital, reinsurers can strengthen their global presence and ensure long-term success. As the insurance landscape continues to evolve, being an active participant in Israel’s market positions reinsurers at the forefront of industry developments and sets the stage for mutual growth and prosperity. Premium The Importance of Reinsurers’ Active Participation in Israel’s Insurance Market By Ori Lavi-Pelleg, Chief Editor
6 POLICY Special edition 2023 D&O and Cyber insurers carefully follow legal developments in the relevant jurisdictions, in order to ascertain trends and accordingly the risks entailed in these dynamic classes of businesses which are materially influenced from the legal environment. There have been some recent material decisions and law amendments in Israel that are worth paying attention to. Cyber & Privacy one of the main risks emanating from a cyber incident is a data breach or data leakage which causes the release of sensitive or protected data of third parties who may file class actions claims against the company which was attacked. Such claims are covered in principle under cyber insurance and may result in payment of significant insurance benefits. In a recent court case in Israel, the District Court dismissed a class action against Facebook for cyber incident related data breach setting out some significant principles. The claim related to a security breach discovered by Facebook which reportedly had exposed the personal data of nearly 50 million users. A class action was filed in Israel against Facebook for damage of users as a result of the leakage of their personal data. The Judge dismissed the claim and emphasized that since cyber-attacks became such a common phenomenon, there are no systems which are fully protected against cyber-attacks. While Facebook must take reasonable action to trace attacks and contain them, it does not have a strict liability that no attacks or data breaches occur. It also cannot and should not anticipate every one of the endless possible attacks on its systems. It was further determined that Facebook did not make misrepresentations regarding the level of its security. Given there cannot be an anticipation that Facebook’s systems will be fully protected against attacks, the Judge rejected the allegation that Facebook was negligent, as it is unreasonable for users to expect that there will be no security breaches in its systems, and concluded that an absolutely breachfree security plan is simply impossible. Accordingly, the Judge determined that Facebook did not breach the Privacy Protection Law. This judgment, although is not a binding precednent, sets out a very important defence for companies that are targeted by cyber attacks, against third party claims for breach of the Privacy Protection Law, in cases where the comapany can prove that the level of its security was in line with exepted standards and when the attack was complex. Furthermore, any third party who sues such a company will have to overcome another barrier to prove that the data subjects sustained a real damage, and not a negligable damage. This is an important decision which acknowledges that cyber-attacks are inevitable, that there are no systems which are fully protected against attackers and thus that breach of privacy does not automatically lead to liability of the company whose systems were infiltrated. D&O Liability The court’s consideration when approving a settlement in a derivative claimAn important decision was handed down in January 2023 by the Court of Economic Affairs in Tel-Aviv, in the framework of approval of a settlement agreement of a derivative action. A minority shareholder of an Israeli Bank submitted a Motion to Certify a Derivative Action against the Bank’s D&Os, alleging that they are liable towards the Bank for losses exceeding NIS 1 billion, allegedly sustained by it as a result of the extension of credit to a tycoon. The D&O insurers and the Bank reached a relatively low settlement for a full and final release of the claim, and requested the court’s approval of the settlement, as required under the Law. Despite many objections to the settlements filed by various parties, the court approved the settlement and decided as follows: The Court is not required to fully analyze the chances and the risks of the Derivative Claim when approving a settlement, and it is sufficient that it gains the impression that the settlement took the relevant considerations into account and reflects a just and fair settlement for the benefit of the Bank. The Judge emphasized that under Israeli law, the D&Os enjoy the defence of the Business Judgment Rule. The burden of proof that this defence D&O and Cyber - Updates of Important Developments in Israel By Adv. Sigal Schlimoff, partner at Gross Orad Schlimoff & Co. law office and Lloyd’s representative in Israel And Adv. Maya Salomon - partners at Gross Orad Schlimoff & Co. law office Adv. Sigal Schlimoff Adv. Maya Salomon Continued on page 33
Intrested in the Israeli insurance market? For more information
8 POLICY Special edition 2023 How to Avoid Negative Surprises in the Upcoming Renewals Season By Anna Ziswiler, Market Head Switzerland and Mediterranean, Swiss re In the aftermath of a tough 1/1 renewals season, what to expect in the upcoming January reinsurance renewals is the question we get asked the most these days. While I don’t have a crystal ball at hand to predict what kind of surprises nature will throw our way in 2023, I can give you a few pointers on what you should keep an eye on as the year unfolds to avoid negative surprises when the time comes. A new norm for average annual natural catastrophe losses Risks are becoming increasingly unpredictable. The lingering effects of a three-year-long pandemic, the growing impact of climate change in the frequency and magnitude of secondary perils, coupled with global political and economic instability were the ingredients for a dramatic “perfect storm” in 2022. Although hurricane activity was considered average in the North Atlantic, 2022 proved to be yet another costly year, with natural catastrophe global economic losses totaling a staggering bill of USD 275 billion. Of that, insurance covered USD 125 billion, the fourth-highest number of insured losses since 1970, well above the 5- and 10-year averages of USD 110 billion and USD 81 billion, respectively, and still leaving a USD 150 billion protection gap. But 2022 was not an outlier. For six years in a row now, we’ve seen aboveaverage losses. This, however, is not a surprise per se, as it re-affirms the 5-7% annual growth, net-of-inflation trend in catastrophe-related insured losses since the 1990s. This trend also shows that today, average annual industry losses from natural catastrophes of more than USD 100 billion are becoming the norm. A changing risk landscape Looking ahead, we anticipate this trend to persist. While climate change undoubtedly alters the risk landscape by intensifying weather hazards, several key factors significantly amplify these losses. Economic development, population growth and urbanization contribute to increased exposure of valuable assets in areas vulnerable to weather-related disasters and/or exposed to seismic activity. 2023 has already seen strong earthquakes hitting Southern Turkey and Syria in early February, killing more than 50,000 people and devastating the region’s infrastructure. In addition to the undeniable tragedy of lives lost in such disasters, reconstruction efforts, already hampered by scarcity of building materials, will have to factor in higher inflation cost, another more recent factor contributing to further increasing insured losses. As the value of buildings, cars and other assets rise with inflation, so do the repair costs, which drive higher claims costs resulting from natural catastrophes. The power of disciplined modeling and underwriting So, what is in store for us in 2024? Fortunately, we have witnessed a longoverdue shift in risk awareness. There is now more emphasis on disciplined modeling and underwriting of natural perils, leading to better alignment between exposure and anticipated losses. This marks a departure from the era of abundant capital driven by low interest rates, which resulted in a prolonged period of softer reinsurance market conditions. Israel: a sophisticated insurance market with fine-tuning opportunities While the scenario described above is global, it relates very closely to Israel. The highest natural disaster-related risk for Israel is earthquake exposure. We find a well-developed market as well as growing exposures and the need for re/insurance support. Israel generally boasts good insurance penetration, though there is always room for finetuning. Does homeowners’ property insurance provide adequate coverage in the event of a disaster? Does the indexation of insured property values accurately reflect current prices? Moreover, the Israeli market has addressed an important issue by offering land cover insurance to mitigate the mismatch between the reconstruction value and commercial value of properties. Despite its lowerthan-expected uptake, considering the real estate boom in Tel Aviv, this innovative add-on product showcases the insurance market’s capacity for innovation. It serves as a reminder to consider not only the uninsured but also the level of insurance coverage and potential gaps that may exist. Fostering the development of a longterm sustainable insurance market We know that ensuring sustainable Continued on page 33
10 POLICY Special edition 2023 The reinsurance became a key player in the production and results of the general insurances. It seems that we are in the midst of a period in which the reinsurers examine the outcomes of the recent years, while aiming to change the rules and policies as part of a strategic plan of improving their situation, mainly in the fields of activity that are unstable with respect to their profitability, including the comprehensive motor insurance and part of the liability insurances. The main reason why the domestic companies use reinsurers is to protect their equity and obtain a defense while cooperating with reinsurers in the risk and premium. The defense that the companies obtain allows them: a) to increase their business in excess of the scope their equity allows them to; b) to receive a defense against a catastrophic damage -meaning an extremely large event in its scope (like a fire, earthquake, nature disaster and etc.) or against a complex of damages in a certain field that can endanger the company’s capital; c) to spread the risk while deciding on a maximum sum of damage for a single coverage in order to stabilize the underwriting system (and the profitability). In addition, in certain cases the reinsurer allows a domestic insurer to learn about a certain risk the company is inexperienced with or doesn’t have the knowledge as to how to set its price or treat the claims in such matter, and therefore they are helped by the knowledge of a reinsurer. About 34.6% of the production in the general insurances transferred in 2022 to the reinsurers (9.205 billion NIS out of 26.637 billion NIS-34.6%) and an equivalent percentage out of this transferred production was with respect to pending claims (6.36 billion NIS out of 19.1 billion NIS - 33.3%). The reinsurers and domestic insurers have a contractual relationship for sharing in the premium and risk (and in the payment of the claims). The two main contracts in such a relationship are: A proportional insurance – in such a case the reinsurer proportionally participates in the premium and claims- this is a full partnership in all the (big and small) damages (according to the participation percentages). In cases in which the underwriting is problematic/ the claim ratio is bad (as was described in the recent years in a few fields of activity), the reinsurer absorbs the payment of the commission to the domestic insurers in addition to his share in the claims. An unproportional insurance- this insurance deals with an excess of loss in which the reinsurer is responsible for a damage that is usually extremely large, which remains after the insurer’s deductible was used. In this kind of contract, it is uncustomary to pay a certain commission to the reinsurer. Since most of the small and mediumsized damages fall on the domestic insurer, the profit or loss of the reinsurer are measured in the number of large damages that exceeded the participation of the domestic insurer, and hence, in the case of a bad underwriting the domestic insurer will be the first one to suffer the blow. Most of our report in the matter of the reinsurers’ production and outcomes is related to the aforesaid contractual relationship. However, there are also facultative insurances for a specific risk or a number of specific risks, which are usually very big. In such cases most of the coverage at the reinsurers and Israeli insurer mainly deal with the service and brokerage. Sometimes an extremely large damage distorts the general outcome that is related to contractual agreements (as it happened in 2021 to Clal in the matter of the liability insurance). The Results of 2022 In 2022 9.2 billion NIS out of 26.6 billion NIS, which constitutes 34.6% of the gross production was transferred to the reinsurers (in 2021 the outcome • 35% of the production in the general insurances transferred in 2022 to the reinsurers, which is a modest reduction of less than 2% in the participation rate but a nominal increase of 633 million NIS in the production that was transferred • As a result, the reinsurers went from a loss to a profit of 1.1 billion NIS • the considerable increase in the reinsurers’ production in the fields of property and other insurances brought a significant increase in the profit, because 70% of it was transferred to the reinsurers • a summary of the reinsurances in 2022 2022 Elementary Sector Result Analysis The Reinsurers’ Results in the Compulsory Motor Insurance and Liability Insurance have considerably improved in 2022 compared to 2021 and at the same time there was an Aggravation in the Comprehensive Motor Insurance By Hagai Shapira
11 POLICY Special edition 2023 was 8.57 billion NIS out of 23.57 billion NIS - which constitutes 36.4%). This indicates a certain reduction in the participation rates (1.8%) despite the nominal increase of 633 million NIS in the production that was transferred to the reinsurers. There are two main reasons that explain this contrast: A significant increase in the companies’ production in all fields, mainly in property and other insurances, that about 70% of its production was transferred to the reinsurers (the increase is from 3.87 billion NIS to 4.40 billion NIS – an increase of 530 million NIS in the secondary production), and in the field of liability insurances - there was an increase of 44.7% from 1.82 billion NIS to 2.02 billion NIS, meaning an increase of 202 million NIS in the secondary production. On the other hand, there was an offset that derives from a reduction in the secondary production of the compulsory motor insurances (297 million NIS), which derives from a strategic decision of the reinsurers to reduce their participation and because of their desire to change the contractual terms with the Israeli insurers following large losses in the recent years. An increase in the production of the (relatively) new companies that have many reinsurances (also in the field of the compulsory motor insurance), such as weSure and Libra, where the reinsurance constitutes a significant part of the insurance (above 65% of the gross insurance), as part of the policy (and need) of expansion while protecting the equity (we are dealing in 2022 with an increase of about 100 million NIS from 161 million NIS to 261 million NIS that its main effect was in the increase in comprehensive motor insurance). As for the profitability of the reinsurers: 2022 generated for the reinsurers a profit of 1,131.8 million NIS compared to a loss of 723.7 million NIS in 2021- an improvement of 1,855.6 million NIS and an (alleged) transfer to a profit. However, when you neutralize the influence of the property and other insurance, the change is even more dramatic: and in this case we transfer from a loss of 1.982 billion NIS to a profit of 54.9 million NIS, an improvement of 2.036 billion NIS, but we are closer to a balance (than to a profit). In principle, the profit that is recorded in the property and other insurances is distorted because of the large effect of the earthquake premium that is mainly a profit, since there was no earthquake (and let’s hope there won’t be one). Therefore, let’s refer to this field separately. Another distortion that exists in the liability insurances and in the property and other insurances derives from facultative insurances of special risks, which may present large losses or profits that aren’t within the regular contracts, and this can distort the results. Therefore, the results of the reinsurers in the fields of the compulsory motor insurance and comprehensive motor insurance better reflect the true situation, which we must learn to analyze. Compulsory Motor Insurance In 2022 the field of compulsory motor insurance, that its secondary production amounted to 1.788 billion NIS (30.1% of the gross premium) and it endured a minimal loss of 46.9 million NIS, performed in comparison to 2021 (when the production was 2.085 billion NIS, which was 38.9% of the gross premium) a significant positive change with respect to the reinsurers. The field recorded in 2021 a loss of 1.019 billion NIS compared to the loss of 46.9 million NIS in 2022, which is an improvement of 972 million NIS, but still a loss, while the secondary production decreased by 297 million NIS (8.8% - which reflects a The Production and Profitability of Reinsurers in 2021 and 2022 (in Millions of NIS) Compulsory Motor Insurance Comprehensive Motor Insurance Liability Insurance 2022 2021 2022 2021 2022 2021 Production 5,943 5,365 9,899 8,472 5,943 5,365 Reinsurance 1,788 2,086 988 791 1,788 2,086 30% 39% 10% 9% 30% 39% Change -297 -9% 197 1% -297 -9% The Insurance Companies’ Profit -199 134 -1,545 -23 -199 134 The Reinsurers’ Profit -47 -1,019 -459 -168 -47 -1,019 Total of Motor Insurance and Liability Insurance Property and Other Insurance Total 2022 2021 2022 2021 2022 2021 Production 20,375 17,997 6,263 5,578 26,637 23,575 Reinsurance 4,801 4,700 4,405 3,873 9,206 8,573 24% 26% 70% 69% 35% 36% Change 101 -3% 531 1% 633 -2% The Insurance Companies’ Profit -1,083 593 514 716 -569 1,308 The Reinsurers’ Profit 57 -1,982 1,077 1,258 1,134 -723 Continued on the next page
12 POLICY Special edition 2023 decrease of 22.6% in the participation of the reinsurers). The decrease derivers from the reinsurers’ desire to improve positions and reduce activity in the proportional reinsurances following large losses in the previous years (starting form 2016 the losses amounted to more than 2.5 billion NIS). Most of the decrease was in the Phoenix (from 41.4% to 19.2%), Ayalon (from 70.7% to 45.8%), Shlomo (from 61.4% to 33.3%), Hachshara (from 70.6% to 58.4%) and Bituach Yashir (from 50.1% to 35.8%). In the companies Bituach Haklai and Harel there was an insignificant growth, which contrasted with the general trend (with respect to Harel you need to add Shirbit’s production, which may have an influence). The field of the compulsory motor insurance underwent in 2022 a positive balance change regarding the reinsurers mainly because of the dramatic change in the curve of the risk-free interest that reduced the insurance liabilities and brought an increase in their profitability. Since the reinsurers don’t enjoy the investment profits/losses -they didn’t enjoy in 2021 the exceptional investment profits that managed to generate a (minimal) profit, and therefore they were not harmed (from a balance aspect) in 2022 when the capital market wasn’t in its best. However, they incurred in 2021 the burden of the underwriting problem and rates that don’t match the risk in addition to the increase in the liabilities, which derived from a decrease in the interest curve, and their losses amounted then to more than 1 billion NIS. In 2022 the crisis in the profits of the capital market didn’t affect the (balance) profitability, and the rise in the interest curve caused a change in the trend and transfer to profitability, but it still seems that from their point of view the rates aren’t compatible with the risk. Moreover, it seems that in 2022 the companies reduced their participation rate (mainly in the proportional contract), and the reduction in the secondary production was done despite the increase in the companies’ production and a larger decrease in the rate of the commission for the Israeli insurers (a decrease of 21.4% in the commission compared to an increase of 10.8% in the companies’ production). There is no doubt that this derives from the reinsurers’ desire to reduce the activity in the proportional contract. In addition, it seems that the commission they paid the Israeli reinsurers decreased from 326 million NIS to 256 million NIS, which explains the improvement in the reinsurers’ positions compared to the Israeli reinsurers. The trend for the upcoming years will be- a reduction in the reinsurers’ participation in the proportional insurances and a gradual transfer to unproportional insurances. There is a claim that part of the Israeli companies (mainly the small and medium-sized companies, but not only them), which have many reinsurances, have reduced rates (and created a competition). This claim is since most of the risk was transferred to the reinsurers. There is no doubt that the recent change in the rates (which requires the regulators’ approval) was approved, inter alia, because of the reinsurers pressure to change the rate. Despite the positive change in most companies, it seems that in 2022 the results of the reinsurers at Shlomo (a loss of 189 million NIS), Hachshara (a loss of 160.8 million NIS) and weSure (a loss of 50.7 million NIS) were extremely large. There were (relatively small) losses at Libra (16.5 million NIS), Migdal (14.6 million NIS - that a main part of it is unproportional) and Haklai (about 1.4 million NIS in 2022 and 1 million NIS in 2021). The Phoenix, Clal, Menorah, Bituach Yashir, Ayalon and AIG transferred from a loss to a profit (for the reinsurers). Until 2016 most of the reinsurers’ production was in excess losses, and it seems that we are gradually returning to the same situation. Comprehensive Motor Insurance The field of the comprehensive motor insurance is a statistical field with millions of exposure units, and therefore the use of a (proportional) reinsurance seems odd unless it is in exceptional cases such as heavy vehicles, luxury vehicles or special vehicles in which the company doesn’t have information about the underwriting conduct. The use of unproportional contracts is clearer when it comes to the protection in events like a parking lot collapse or nature disaster that can simultaneously cause damages to many cars. The Israeli companies transfer only 10% of their production (987.8 million NIS in 2022 compared to 791 million NIS in 2021- an increase of 25% compared to last year), but it seems that the young companies that transfer 57%, influence the rate of transferring production to the reinsurers because of the significant increase in their production. In 2022 the companies Shlomo and Hachshara still had a relatively large participation of the reinsurers in the production: at Shlomo it was 32.2% and at Hachshara it was 24.8%, while part of this participation at Hachshara pertains to fronting polcies for heavy vehicles and that distorts the big picture. As for the results: this field caused in 2022 a loss of 459.3 million NIS compared to a loss of 167.9 million NIS in 2021. The companies with many reinsurances- Shlomo (a loss of 246.8 million NIS), weSure (a loss of 50.3 million NIS) and Libra (a loss of 90 million NIS)- amount to 85% of the loss (387 million NIS). The Clal Company, which transferred in 2022 about 12% of its production to reinsurers, showed in its balance a loss of 46.4 million NIS. Amongst the other companies, the outcome of the reinsurers at Ayalon (a profit of 7.2 million NIS in 2022 The Reinsurers’ Results in the Compulsory Motor Insurance and Liability Insurance have considerably improved in 2022 compared to 2021 and at the same time there was an Aggravation in the Comprehensive Motor Insurance Continued from previous page 2022 Elementary Sector Result Analysis
13 POLICY Special edition 2023 compared to a loss of 26.4 million NIS in 2021) was notable compared to other companies, and it seems that a considerable part of this achievement is related to the change, which includes a reduction in the production and commission. It seems that in the near future most of the contracts will be unproportional and they will answer only large damages. If we connect the reinsurers’ losses with the companies’ losses, we will see that the comprehensive motor insurance lost in 2022 about 2 billion NIS. Liability Insurances The field of the liability insurances transferred in 2022 about 44.7% of its production to reinsurers (2.025 billion NIS out of 4.543 billion NIS), which was similar to 2021 (1.823 billion NIS out of 4.159 billion NIS). However, following the increase in the liability insurances’ production (9% - from 4.159 billion NIS to 4.532 billion NIS), there is an increase also in the production that is transferred to the reinsurers (202 million NIS - about 11.1%). The liability insurances were an industry that historically dealt with excess losses, and a small part of it with proportional insurances. In the recent years there is a change that derives from the increase of product liability, and mainly professional liability, where the coverages are relatively large. In addition, most of the facultative insurances transfer considerable sums to the reinsurers, and in cases of large claims a certain Company Production and Reinsurance The Reinsurance Profits in Fields of Activity Year Production Reinsurance Comprehensive Motor Insurance Compulsory Motor Insurance Liability Insurance Property and Other Insurance Total Harel 2022 4,405 1,616 37% -17 -1 115 295 392 2021 3,693 1,331 36% -4 - -151 305 150 Clal Insurance 2022 3,143 1,431 46% -46 63 192 193 402 2021 2,819 1,327 47% -16 -219 -537 293 -479 Menorah 2022 3,712 1,250 34% -10 67 166 8 231 2021 3,391 1,075 32% 20 -52 39 90 97 The Phoenix 2022 3,717 1,062 29% - 24 1 222 247 2021 3,155 1,048 33% - -122 66 201 145 Ayalon 2022 2,225 836 38% 7 106 188 165 466 2021 2,046 857 42% -26 -128 -95 108 -141 Shlomo 2022 1,760 628 36% -247 -189 - -16 -451 2021 1,666 897 54% -81 -150 - 2 -229 Hachshara 2022 1,240 529 43% -5 -161 -63 -41 -271 2021 1,177 395 34% -7 -80 -43 24 -106 Migdal 2022 2,071 479 23% 2 -15 -58 106 35 2021 1,872 462 25% 2 -5 -27 128 98 weSure 2022 475 327 69% -50 -51 - 0.2 -101 2021 310 221 71% -11 -27 - 0.2 -38 Bituach Yashir 2022 1,876 314 17% 4 111 3 62 180 2021 1,711 361 21% 5 -148 -1 53 -91 Libra 2022 438 290 66% -90 -17 - 2 -104 2021 304 202 66% -48 -33 - 1 -80 Bituach Haklai 2022 527 259 49% -6 -1 20 -14 -1 2021 496 225 45% -0.3 -20 -47 26 -42 AIG 2022 1,050 185 18% - 16 - 94 110 2021 935 173 19% - -35 - 27 -8 Total 2022 26,637 9,206 35% -459 -47 563 1,077 1,134 2021 23,575 8,574 36% -168 -1,019 -794 1,258 -723 The Reinsurance Results in 2022 compared to 2021 (in Millions of NIS) Continued on the next page
14 POLICY Special edition 2023 distortion in the comprehension of the outcomes is created. When it comes to the outcome in the balance, the reinsurers also don’t enjoy (or suffer like in 2022) the condition in the capital market, and therefore, in the current year they enjoyed the changes in the interest curve, which reduced the insurance liabilities, and they transferred from a loss of 794.4 million NIS in 2021 to a profit of 561.1 million NIS in 2022- an improvement of 1.3 billion NIS. The results of 2021 and 2022 were respectively (negatively and positively) affected by the changes in the interest curve, but it seems that in 2022 there was also an underwriting profit in the sub-field of professional liability, which is undergoing a rise both in the premiums and in the underwriting profitability. Since the 6 large companies constitute most of this field, it seems that except for Migdal (a loss of 58.1 million NIS) the rest of the large companies presented a profit and considerable improvement compared to 2021 (in the Phoenix the reinsurers have a profit but it is less than that of 2021). In the companies Clal (that moved from a loss of 537.3 million NIS in 2021 that mainly derives from a facultative insurance to a profit of 191.7 million NIS in 2022), Ayalon (that moved from a loss of 94.5 million NIS in 2021 to a profit of 188.2 million NIS in 2022) and Harel (that moved from a loss of 151 million NIS in 2021 to a profit of 115 million NIS), the positive change was significant. The result of the reinsurers in Menorah (a profit of 166 million NIS) is notable since it is an exception that the reinsurers presented a (balance) profit two years in a row, while improving their condition (63.4 million NIS). We can notice in the other (small and medium-sized) companies the loss of Hachahara’s reinsurers. Property and Other Insurances The field of property and other insurances is the largest field in the reinsurances, and about 70% of its production transfers to it. Therefore, the effect of the reinsurers on the retention production and on the results is the most significant. In 2022 4.404 billion NIS out of the 6.262 billion NIS were transferred to the reinsurers -70.3% (while in 2021 3.873 billion NIS were transferred out of 5.577 billion NIS- 69.4%)/ In principle, the results of the reinsurers don’t reflect a true picture, mainly because of the premium that is related to the earthquake, which considerably contributes to the distortion of the outcomes (a premium without any claims), and therefore you need to examine the field when you neutralize these premiums. This field has many reinsurances and all the large companies, which constitute about 80% of the production in this field, showed in 2022 (and also in 2021) a nice profit of more than 1 billion NIS. In 2022 three companies, which aren’t amongst the large companies, unusually reported that the reinsurers in the field of property and other insurances had a loss (Bituach Haklai - 13.5 million NIS, Shlomo- 15.5 million NIS, Hachshara- 41.3 million NIS). Summary The reinsurers’ results in the different fields of activity divide between proportional contracts, unproportional contracts and facultative insurances. Therefore, the reinsurers’ profit or loss that is recorded in the companies’ balances may be different between the different types of contract and different companies also because of a difference in the terms and commissions. As a result, the reinsurers’ outcome that is written in the companies’ balances is mainly an indication about the complex and you cannot deduce from the balance the results of a specific reinsurer in a specific field or sub-field. However, you can connect the companies’ retention results with results of the reinsurers in order to understand the conduct of a specific field. For example: if the companies presented a retention loss of 1.5 billion NIS in the comprehensive motor insurance field and a loss of about half a billion NIS was presented in the companies’ outcomes in the balance, then you can understand that the motor insurance field presented in 2022 a loss of about 2 billion NIS and the reinsurers only reduced the loss rate for the Israeli insurers. In the fields of liability insurances and property and other insurances there are many distortions in the results, which derive from facultative insurances (lability insurances and property and other insurances) and from the manner the earthquake profits (property and other insurances) are recorded. Therefore, the results in the fields of compulsory and comprehensive motor insurances can provide over time an indication about the reinsurers’ satisfaction. Since the large changes in the compulsory motor insurance started in 2016 following the entrance of the best practice, we noticed a rising rate of the entrance of reinsurers into proportional insurances in considerable participation percentages. Starting from 2016 the portion of the reinsurers’ losses in the compulsory motor insurances reached more than 2.5 billion NIS (including an increase of 1 billion NIS in 2021), and it seems that starting from 2022 there is a change of approach, which includes an improvement of positions in the participation rate, in the rate of the commissions and in other terms while transferring to unproportional insurances. We are expected to see similar trends also in the field of the comprehensive motor insurance (where 10% of its production is transferred to reinsurers) because despite the good years the Israeli insurers had (between 2017 and 2020) the reinsurers aggravatedly had losses in those years, which intensified in 2021 and even more in 2022. Continued from previous page The Reinsurers’ Results in the Compulsory Motor Insurance and Liability Insurance have considerably improved in 2022 compared to 2021 and at the same time there was an Aggravation in the Comprehensive Motor Insurance 2022 Elementary Sector Result Analysis
To Tel-Aviv Re 2023
16 POLICY Special edition 2023 In Mindset to Israeli Life (Insurance) By Giselle Paz, L&H Actuary, Aon Reinsurance Israel The Israeli Life insurance market is an expanding and evolving environment, facing a wide range of complex challenges – some of them of global nature, some unique to the local industry. NEW LIFE. Developing life business is a strategy of grow for general insurance companies. Clearly this diversification generates a new source of profit. It allows efficient risk management, which is translated into capital efficiency through diversification effects under Solvency II. Furthermore, innovative today available technologies became a huge advantage while competing with traditional insurers and heavy legacy, allowing reduced costs at each point of the chain: placing advanced underwriting tools give automated, improved, and faster sales; digital capabilities allow better marketing; data analytics provide a better understanding of trends and performances - as lapses, fraud-control and claim management. Non-life companies would be then able to offer up-sales providing the existing clients with a complementary value. The dynamics may well also push life insurers to invest in forward thinking tools and processes, upgrading the overall industry value. PRODUCT DESIGN. Our life and health market were traditionally known for its creativity and out of the box thinking. The motivation was diversifying sources of revenue by giving value to the insured, with different product designs fitting different publics and needs. With the goal of allowing anyone easily compare and understand policies, the regulator is leading uniform basic coverages, definitions, and structures. Competition on the service level is then brought to front. The standardization approach gives a clear mainstream line of solution, making it simpler also to reinsurers. Still, no one can determine for the consumer what he needs, and a further level might focus on tailor-made solutions to different pockets, preferences, and risk appetites. On this grounds, InsureTech startups are playing an influential role in the development of personalized products and preventive insurance. The comprehensive approach motivates customer loyalty and improves growth through cross-sale opportunities and effective cost management. New technologies developed by the Israeli Start-Up Nation are shaping the future of the global insurance industry and updating its relevancy. TOP HEALTH. Private medical insurance guarantees top quality and fast medical care as a financial protection to the entire family. It works as a third pillar, on top of a particularly strong primary national healthcare system, plus supplemental health services covered by the insurance of the health funds as a semi-private affordable plan. The overlap between the private and semiprivate layers results then in some double insurance. The government is leading a regulation to clarify the limits and funding sources, to avoid purchasing twice for the same good. As many others, I have consciously decided to pay for the overlapped components and secure access to different providers of the same service. At the end, it’s a matter of balancing between the customer value perception and the insurance risk pricing. GEOPOLITICS. Israeli mortality and life expectancy rates are impressive: 10th highest life expectancy in the world, based on OECD comparable data 2020. This ranking is even more remarkable, as Israel have seen many armed conflicts. We can relate this to being Israel one of the 10 most powerful, politically influential, and militarily strong countries in the world (according to a roundup for 2022 published by US News & World Report). Further to the qualitative factor on the overall mortality, we can quantify the active war risk exposure: only about 1.5% of the population are active reservists who serve more than twenty days every three years. Another interesting statistic is the gap in life expectancy with the highest and lowest education levels, as it can be seen as a proxy to the deviation for the insured population rates, while Israel performs better than the average OECD countries. From the reinsurance perspective, Israel offers true diversification across the global portfolio. REINSURANCE PANEL. High barriers have restricted entry of new life reinsurance players to Israel. Life reinsurance high concentration is a result of decades where only big players were able to invest trying to understand our sophisticated market – in terms of products, regulations, dynamics, language, and overall culture. Aon Reinsurance approach is performing as a local and professional bridge that allows reinsurers to explore our region in a wise, long term and gradual view. We are bringing new reinsurers to the market by providing the local knowhow, in a journey that allows to identify and evaluate the business opportunities that matches precise needs and strategy. Diversifying the reinsurance panel means better risk management, acquiring a defense against a possible future outcome that may change risk appetite. The market is ready, and it has begun to open its doors to new reinsurance capacity. “We cannot solve our problems with the same thinking we use when we created them” – said Albert Einstein. We should ask ourselves: are we facing the new challenges with the right mindset?
17 It's our second nature... Shlomo Insurance is part of the Shlomo Group, the biggest car group in Israel, and part of the world wide brand “Sixt”. Our vision is short and clear:“always yes”. To our agents, our clients and to our partners. As a service oriented company, we are doing our best to maintain our clients specific needs and create tailor made solutions.
18 POLICY Special edition 2023 The LIBOR Reform - End of LIBOR Interest as of 30th June 2023 By Peggy Sharon, Adv. Levitan, Sharon & Co. The award of interest by the Court on a monetary obligation is not a punishment tool but rather a compensation for the loss of the ability to use the money. How will this award be calculated in insurance claims? The payment of insurance benefits in Insurance claims in Israel bears interest from the lapse of 30 days from the date of submitting the claim to the Insurer.1 The interest rate for policies which are denominated ILS is in the rate set according to the Law of Adjudication of Interest and Index Differentials,1961. However, insurance benefits under policies denominated in foreign currencies bear another kind of interest. During the years, the interest which governed the payment of dollar policies has been the LIBOR (London Inter-Bank Offered Rate) which has been set by a panel of 11-16 World Banks for loans on which financial entities and other bodies have relied upon as a rate which reflects the reality and the genuine assessment of banks concerning the interest rate in which they can borrow money from other banks. The Israeli Courts have awarded LIBOR interest on foreign currenciy policies, according to new regulations (from 2003) of the Law of Adjudication of Interest and Index Differentials,1961 which provided its application explicitly see e.g., C.A.78/04 Hamagen Insurance Company v. Shalom Gershon Hauliers (para. 74) – LIBOR + 1% on insurance benefits; C.C. 270/00 (Haifa Distr. Ct.) Discout Leasing Ltd and Sky Club Ltd v. Peltours Insurance agencies, Aryeh Insurance Co and Others (2006) -LIBOR+1% on insurance claim; C.A. 6388/98 Deniztas Nakliyat Ve Ticaret A.S. v. Credit Lyonnais S.A. and Others (2.7.2003) (Contractual Breach Claim). In June 2012, a scandal shook the financial markets, when it was revealed that various banks were involved in price co-ordinations and manipulations on the LIBOR interest by reporting high or low interest rates thus making false representations which enabled market traders to gain enormous profits. This led to criminal indictments, payment of fines of billions of Dollars to the authorities in Europe, USA and UK and resulted in transferring the control over the LIBOR to the ICE Benchmark Administration and to taking steps in order to abolish this interest rate from being an anchor basis. The reform will be completed at the end of June 2023, when the LIBOR will be totally abandoned concerning the US Dollar, after its cancellation as regards other currencies already in 2021. What will be the interest applicable to policies in foreign currencies after the LIBOR era? SOFR (Secured Overnight Financing Rate) is the US replacement rate published by the Federal Reserve Bank of New York instead of the LIBOR and many experts consider it as a more accurate and more secure pricing benchmark. It can be seen as the average interest rate for secured loans issued in American Dollars (USD) with a maturity of 1 day (overnight). The Bank of Israel in its review of the Israeli bank system in 2021, related to the global reform which abandoned the use of the LIBOR interest. A team of the Bank analyzed the matter and set the principles for the alternative interest in co-ordination with the Global Regulators abroad. The Bank emphasized that the leading governments and the international entities should ascertain that the transition from the LIBOR to the new alternative interest, will be carried out without causing shock to the financial markets. Experts think that the new rate which is defined as a “risk free rate”, will bring a change in the amounts as compared to the past, in view of the required adjustments to the element of credit risks. We will follow the new regulations which will be published regarding the alternative rates and the alternative international committees/platforms which will publish the rates relevant to each of the various currencies. 1) In addition to index differentials from the date of the Insured Event (Article 28 of the Insurance Contract Law 1981)
Welcome We wish all of the participants an enjoyable and successful conference
20 POLICY Special edition 2023 On Insurance Contract Law and D&o Insurance By Uri Orland, Adv. Israel was among the first countries to adopt a consumer insurance law, the Insurance Contract Law-5741 1981 which has been in effect since 1982. But this law was not drafted by insurance experts, and it has lacunas in it. Over the years, several amendments were made - but its main weakness, the gap between the legal side and the insurance practice - has not yet been resolved. The difficulty may intensify when we deal with insurances that are international, and which cannot be subjected to a local system of laws. The drafters of the law, who were aware of this, excluded from its scope Marine and Aviation insurance, except when ‘there was no choice’ - like in the case of the right of subrogation. The D&O liability insurance is in a ‘gray area’ between Israeli and international insurances, but the provisions of the local insurance law apply to it in full. The policy wording is based on international wording and does not fully comply with the provisions of Israeli law. I will examine a several matters in which Israeli law and D&O Liability Insurance are not in sync. Here, the legal system gives specific answers to the problems brought before it, answers that sometimes puzzle those who trust legal practice. The basic difficulty is regarding the basis of the policy for the D&O Insurance. These policies are drawn up in Israel on ‘Claims Made’ basis, which is not recognized by the Insurance Contract Law. The law recognizes liability insurance on an ‘Occurrence’ basis. The legal system solved the problem by stating that the parties to the insurance contract are allowed to stipulate the basis of the insurance, therefore the ‘Claims Made’ basis is valid. However, the court decision is not enough, and the legal basis must be completed in the law, such as regarding what constitutes a notice of a claim. The Israeli insurance contract law recognizes ‘Insured’ and ‘Insurer’ but does not recognize ‘Policy Owner’ (‘Policy Holder’) who is not an insured party. ‘Policy Owner’ exists in Israeli law in the regulations established for group personal insurances (life, health, and personal accidents) but not for liability. However, Directors & Officers liability insurance is a group insurance where the ‘Policy Owner’ stands between the insurer and the insured, without this being regulated by law. Failure to regulate may have negative results for insurers, such as an insured’s claim that he was not provided with a policy, and therefore the exclusions do not apply to his claim. Here the jurisprudence in Israel, known for its ‘creativity’, found a solution according to which ‘insured’ is in the status of ‘beneficiary’, but this is a forced solution. The ‘elephant in the room’ in the insurance laws in Israel, when we deal with D&O Insurance policies, is the issue of an ‘innocent insured’. Here, the underwriting is not personal. an insured may discover in the event of a claim that he is covered under to the policy, but this is invalid due to the act or omission of others. When the policy is valid, and the difficulty concerns a specific claim, Israeli jurisprudence found a reasonable solution according to which if he was not involved, his rights according to the policy will not be reduced or denied. But what is the status of an insured when it turns out that the policy was purchased while misleading the insurer, without having a part in it? Common sense tells us that in this case the insurance is not valid, which is also true for the ‘innocent insured’. There is still no decision by court, but the general direction is the future recognition of the right of an ‘innocent insured’ under the D&O policy to insurance benefits. In Israeli law, the claim limitations period is usually seven years. In insurance claims, this period was shortened to three years. In liability insurance, the claims limitation period of three years was not changed, but the law stipulates that if the claim against the insured is not timebarred, so is the insured’s claims against his insurers. This solution in the law is relevant but does not solve the difficulty from which date the shortened limitation period is calculated. In the absence of an explicit legal provision, it is ruled that the shortened limitation period begins at the time a lawsuit is filed against the insured. But, as mentioned, the insurance contract law does not deal with the question of what is ‘filing a claim’ against the Insurer under a ‘Claims Made’ policy. Adv. Uri Orland’s book ‘Liability Insurance of Directors and officers in Israel’ was recently published in Hebrew by Polisa
polisa.newsRkJQdWJsaXNoZXIy MjgzNzA=