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InstitutionalBodies

Contents

1. Introduction 51

2. Structure of the Market 52

A. Activity Indices 53

B Concentrated Structures Indicators and Competition 55

C. Embedded Value 59

3. Activity Features 61 A. Combined Data 61

1) Earnings of the Institutional Bodies 61

2) Total amount of assets being managed by the Institutional Bodies 63

3) Operating expenses in the Institutional Bodies 64

4) Premiums, deposits and remuneration fees in the Institutional Bodies 65

B. Further data in relation to Insurance 67

1) Total amount of payments to Life Insurers 67

2) Total amount of claims paid and provision made for contingent claims 67

in General Insurance

3) Total balances of the Insurance Companies 67

4) ncome from Life Insurance business 68

5) Income from General Insurance business 69

6) Efficiency in the Life Insurance sector 71

7) Efficiency in the General Insurance sector 72

4. Risks and stability evaluation 73 A. General 73

B. Risks to which the Institutional Bodies are exposed 74

1) Insurance Risks 74

2) Credit Risks 74

3) Market Risks 75

(a) Interest Risk 75

(b) Share Prices Risk 75

(c) Currency Risk 75

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Ministry of Finance The Capital Market, Insurance & Saving Division | Institutional Bodies

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(d) Reinvestment Risk 76

(e) Asset/Liability Mismatch Risk 76

4) Operational risks 76

(a) Embezzlement and fraud 76

(b) Failures in information technology systems 76

(c) Shortcomings in preparedness for crises, catastrophes and 76

emergency situations

C. Risk distribution according to types of institutional bodies. 77

1) Provident Funds 77

2) Pension Funds 77

3) Insurance Companies 77

(a) Life Branches 77

(b) General Insurance Branches (Property, Liabilities, Health and Finance 78

D. Developmental Changes in Exposure during 2007 79

1. Insurance risks 79

(a) Reserves/claims ratio 79

(b) Claims ratio (amount of damage - Loss Ratio) 81

(c) Insurance Premiums Development 83

(d) Reinsurance 84

E. Credit Risks 88

F. Market Risks 92

1) Management of the geographical exposure to risk 92

2) Division of the Investment Assets of Institutional Bodies 93

3) Division of assets in the investment portfolio of Institutional Bodies 96

according to their marketability

4) Capital 97

1. Introduction

The Capital Market, Insurance and Savings Department, is the body that supervises the Institutional Bodies who manage the financial savings of the Public in Israel.1 These bodies include the Provident Funds, the Pension Funds and the Insurance Companies, that are, inter alia, engaged in the management of other risks.

The Capital Market, Insurance and Savings Department works to preserve stability in the capital market in Israel, by working for the improvement and development of competition within it. This is by improving the earnings of the insured members, protection of their rights and increasing their awareness of the various products and of the importance of savings in financial terms. The Department also works for growth in the sources of creditin the national economy and for the prevention of conflicts of interest in the insurance and the financial savingsmarket, its activity having expanded significantly as a result of the Bachar reform plan. In order to achieve theseaims, the Department governs the range of activity of the Institutional Bodies, and initiates changes in the institutional structure of the capital market.

The financial savings section has adopted three main reforms in the present decade: In 2003 the reform of thepension funds, in 2004 the reform of the life insurance market and in 2005, the reform in the capital market (the Bachar legislation). These reforms brought about a real change in the financial savings system and werethe leading element involved in the principal processes of change in the capital market. As part of the reforms the Provident Funds and the Trustee Investment Funds of the banks were sold to the Insurance Companies and to other private institutions, and corporation-related funds were transferred for management by management companies. The Insurance Companies were to become financial bodies offering the diverse range of financialsavings products: life insurance, pension funds and provident funds. Accordingly, the Insurance Companies are currently managing a substantial part of the public’s financial savings.

On December 31, 2007, the Institutional Bodies in Israel were managing assets amounting in value to NIS 718 Billion2 , of which NIS 649 Billion is financial savings. Transactions in the capital market in the first half of 2007generated very high investment income for the Institutional Bodies. These were reduced as a result of the negative trend and fluctuations in the capital market in Israel and worldwide in the second half of the year.Therefore, despite the earnings of the Institutional Bodies having been relatively higher in 2007, it was lower than the earnings achieved in the previous four years.

In this Chapter, actual transactions of the Institutional Bodies in the sectors of activity in 2007 will be set out in detail, and there will be a review of the stability indicators of the companies and an evaluation of the principal risks that the Institutional Bodies have faced.

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1 Including, study funds and compensation funds. 2 Inclusive of general insurance funds and shareholders equity capital of the Insurance Companies, old established pension funds and old pension

funds that are included in the arrangement.

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2. Structure of the Market

In Israel there are 24 active Insurance Companies (including Avner and Karnit). Three of them are Government Companies: Kennet, the insurer of Nature Damage in Agriculture, Inbal, the insurer of government-related activity and Ashra - the Israeli Company for Export Insurance, which deals in long term (more than one year) overseas trade risks. Apart from these, there are 101 active provident fund controlling corporate bodies, 13 management companies of new pension funds and 18 management companies of old pension funds.

Table B-1The Number of Bodies Active in the Market Classified

According to Sectors (2000-2007)

2000 2001 2002 2003 2004 2005 2006 2007

Total No. of Insurance Companies

32 28 27 25 25 25 24 24

Including: Companies active in the Life Insurance Sector

16 14 14 13 13 14 13 13

Total No. of corporate bodies controlling provident funds

102 101 101 105 105 104 108 101

Total No. of Management Companies of New Pension Funds

16 16 16 16 17 18 13 13

Total No. of old established pension funds

18 18 18 10 10 10 10 10

Total No. of old established pension funds included in the arrangement

- - - 8 8 8 8 8

Source: data of the Supervisory and Licensing systems of the Capital Market, Insurance and Savings department.

Remarks: The Provident Funds - as per controlling corporations: Pension Funds - as per Management Companies of the New Funds only.

A merger and acquisition trend has characterized the insurance sector in recent years. Over the years the sector has been reduced from 32 active companies in 2000 to 24 active companies in 2006. Along with the mergers and acquisitions, in 2007, New Koppel Insurance Co. Ltd was established, which holds a license to operate in the general insurance sector, without the number of the companies having changed at the end of the year. In the Provident Funds branch the position was different, and after years in which there was a trend towardsexpansion in the number of corporations controlling the Provident Funds, a moderate fall was anticipated in

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2007, and their number amounted to 101 at the end of that year. The main fall stemmed from the cessation of the Banks’ activity in this sector after implementation of the Bachar reform and sale of the Provident Funds that they controlled, to other bodies. As opposed to what occurred in these two sectors, in the Pension Funds sector no change has occurred in the last year, and the number of managing companies remained at 13. However, from the beginning of 2008, a number of Institutional Bodies are in the process of obtaining approval for the establishment of a Pension Fund Management Company, and the expectation is that this number will increase as a result of the recent legislative changes.

The following are the Groups to which the Institutional Bodies belong.3

Clal Group including Clal Insurance, Clal Health4, Clal Credit, Meitavit Reserves and Clal Provident. Migdal Group including Migdal Insurance Company5, The New Makefet, Meitavit Reserves and Clal

Provident. Phoenix Group including the Phoenix Insurance Co., the Phoenix Pension Funds Management, and the

Phoenix Provident. Harel Group including the Harel Insurance Co., the Dikla Insurance Co., Harel Pension and Harel

Provident. Menorah Group including the Menorah Mivtachim Insurance Co., Shomera Insurance Co6., Menorah

Mivtachim Pension and Menorah Mivtachim Provident Ayalon Group including Ayalon Insurance Co., Spring Pension Fund Management (Pisgah) and Ayalon

Provident Funds Management AIG Group including the AIG Insurance Companies and Ezer (EMI). The Government Group of Insurance Companies including KNT (Nature Damage Fund), Inbal and Ashra. Additional Insurance Companies - Israel Land Development, Eliahu, Shirbit, Direct Insurance (I.D.I Direct),

Agricultural Insurance - Cooperative Society, B.S.S.H, Avner Corporation and Keren Karnit The Holding Groups both of Provident Funds and of Pension Funds - Excellence Nessuah, Yuvalim, Gilead,

Helman Aldoubi, Magen Zahav and Meitav. Approximately ninety additional companies that only manage Provident Funds.

A. Activity Indicators

The General Insurance branch is one of the principal branches in the national economy. The scope of its activity in the ratio to the local embedded products grew, in the period between 2001 to 2003, but since 2004 a falling trend was recorded in the extent of its activity. The amount of its assets dropped by 0.1% of a point on average per year, and in 2007 it amounted to 2.8% of the GDP. The source of this fall is, inter alia, the rate of annual growth in General Insurance premiums, which in recent years has been lower than the rate of annual growth in terms of the GDP.

3 The data does not include acquisitions not yet closed as at December 31, 2007, and old pension funds. 4 Formerly, Arieh Insurance Co. Ltd.5 In June 2007, Hamagen Insurance was merged with Migdal Insurance Company. 6 In August 2007 the Shomera Insurance Co. was acquired by Menorah Mivtachim Insurance Company.

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At the same time, the savings and pension related assets have suffered an aggregate fall of 0.9% betweenthe years 2001 to 2007, and currently stands at 7.5% of GDP. The Provident Funds branch, which constitutes 43% of the savings and pension related assets, has been characterized by considerable fluctuations over theperiod in relation to GDP. In 2006-2007 the amount of activity in this branch was relatively stable and the total of assets in it amounts to 3.1% of GDP. Stability in relation to GDP has also been recorded in the life insurance branch, and in the period 2003-2007 the amount of its activity stood at 2.6% of GDP. As opposed to these, in the new and the old established pension funds sector, the trend is clear: From 2001 an upwards trend was recorded in the scope of activity of the new pension funds, which is expressed in an annual increase of 0.1 of a percentage point per annum, up to 1.1% of GDP in 2007. In an exactly reverse ratio, and as is concomitant from the circumstances, the amount of activity of the old established pension funds has continually reduced in the years, and in 2007 it amounted to 0.7% of GDP.

The extent of the activity of the Institutional bodies is shown in Table B-2, which summarizes the developments and the trends in the various branches.

Table B-2GDP, Life and General Insurance Premiums7 and the total amount of deposits in

Provident and Pensions in the period 2001-2007 (in NIS billions; amount in percentages)

2001 2002 2003 2004 2005 2006 2007

Gross domestic product 499 518 524 549 589 633 665

Total of General Insurance Premiums 15.6 17.2 17.5 17.6 17.7 18.3 18.7

Total of Life Insurance Premiums 14.9 14.0 13.9 14.3 15.5 16.9 17.4

Total of Provident Funds Deposits 19.1 18.7 18.1 19.1 22.5 19.5 20.8

Total of Deposits in New Pension Funds 3.1 3.7 4.1 4.4 5.2 6.2 7.5

Total of deposits in Old Pension Funds 4.9 4.8 4.5 4.5 4.5 4.6 4.8

GDP rate of the activities of the Institutional Bodies

GDP rate of General Insurance 3.1% 3.3% 3.3% 3.2% 3.0% 2.9% 2.8%

GDP rate of Life Insurance 3.0% 2.7% 2.7% 2.6% 2.6% 2.6% 2.6%

GDP rate of deposits in the Provident Funds 3.8% 3.6% 3.5% 3.4% 3.8% 3.1% 3.1%

GDP rate of deposits in the Pension Funds 0.6% 0.7% 0.8% 0.8% 0.9% 1.0% 1.1%

Total amount of deposits in the Old Pension Funds

1.0% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7%

GDP rate of the total amount of Pension-Related Savings

8.4% 8.0% 7.7% 7.6% 8.1% 7.4% 7.5%

Source: Publications of the Central Bureau of Statistics, data in the Annual Financial Statements of the Insurance Companies, the Provident and Pension Funds and data processing of the Capital Market, Insurance and Savings Department.

7 In this Chapter, the data for the years up to 2003 (inclusive) are adjusted to the index for December 2003. Data of 2004 and onwards are encompassed in current prices

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B. Concentrations and Competition Indices

The concentrations in the General Insurance and Pension Savings branches are analyzed according to two indices:

Harpindel - Hirschman Index (HHI) - the amount of quarters of the portions receivable upon division of the assets (or the insurance liabilities) of each body, of the total of the assets (or the insurance liabilities) in the branch as a whole.

CR3 Index - the ratio that the assets or insurance liabilities of the three major bodies, bears to the total of the assets or insurance liabilities in the branch, in that order.

The results of these indices are shown in Table B-3, which measures the concentrations in the various branches.

Table B-3Indices of Concentrations and Competition on an Annual Basis8

Concentrations and Competition Index - CR3

2004 2005 2006 2007

General Insurance 0.47 0.46 0.46 0.46

Life Insurance 0.75 0.74 0.74 0.74Total of the Provident Funds

0.49 0.47 0.37 0.32

Total of the New Pension Funds 0.74 0.71 0.84 0.83

Concentrations and Competition Index - HHI

2004 2005 2006 2007

General Insurance 0.11 0.10 0.10 0.11

Life Insurance 0.23 0.23 0.23 0.23Total of the Provident Funds

0.10 0.09 0.07 0.06

Total of the New Pension Funds

0.29 0.26 0.29 0.28

Source: Data of the Annual Financial Statements of the Insurance Companies, the Provident Funds and the Pension Funds and data processing of the Capital Market, Insurance and Savings Department

General Insurance:

8 The Provident Funds - according to the assets of the controlling corporations; the Pension Funds - according to the assets of the Management Companies of the New Pension Funds only. The indices are in reference to concentrations in Life Insurance and in General Insurance the calculation made is according to the insurance-related reserves.

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The concentrations index in the General Insurance branch is relatively low. The three major Insurance Groups in this branch hold 46% of the total of the insurance liabilities.9 This rate has been maintained over the last three years, following several years that were characterized by a fall in the concentrations. The low concentrations stem from the increasing entry of small companies into many spheres of activity in this branch, a fact which increases the competition in it. A sub-branch that it represents is compulsory vehicle insurance, in which the premiums are 22% of the premiums in General Insurance. Over the period of 2003-2007 no change occurred in concentrations in the compulsory vehicle branch, the HHI index remained at 0.09. This low amount of concentration has been affected inter alia, by the reform that was made in the branch.

Financial Savings:

The Life Insurance branch is characterized by high concentrations. 74% of the total of the insurance liabilities in the Life Insurance branch lie with the three major Insurance Groups in this branch.10 A slight fall has occurred in recent years in the HHI concentrations index in the Life Insurance branch from 0.234 in 2004 to 0.230 in 2007.

In examining the reasons for the differences in concentrations between the two insurance branches (Life asopposed to General) it is important to bear in mind that there are 24 companies active in the General Insurance branch as opposed to 13 companies in Life Insurance. Furthermore, Life Insurance includes a savings component and a risk component at varying rates, and constitutes a long term contract, which includes lock-ups which make the transfer of insured parties difficult as well as the entry of additional competitors into the branch.As opposed to this, General Insurance encompasses a risk element only, and the contracts in this branch are generally short term contracts, and therefore the mobility of the insured parties in General Insurance is higher than that in Life Insurance.

The Pensions sector in Israel is also characterized by high concentrations, and the highest in actual fact of the savings and pensions products according the two indices that have been studied. 83% of the total assets in the New Pension Funds are in the hands of the three major Management Companies.11 In 2007 the HHI concentrations index stood at 0.277, a detail that is evidence of a fall as opposed to 2006, when it stood at 0.291.

The two concentrations indices in the Pensions branch have been characterized by fluctuations over the lastfour years, which stems inter alia, from the contrasting effects of structural changes in the branch. On theone hand, changes have been taken place in the control structure in the New Pension Funds market, and in the context thereof Pension Funds have merged following the consolidation of management companies in the same controlling group. On the other hand, the market segment of Pension Funds has grown in recent years at the expense of the largest of the pension funds, the New Mivtachim. These changes have given rise alternatively to a growth or fall in the concentrations.

9 Clal Group, Harel and the Phoenix.10 The Migdal, Clal and Phoenix Groups11 Menorah Mavtichim, Makefet and Meitavit Reserves.

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The Provident Funds sector is characterized by the lowest concentrations among the savings and pension products. The falling trend which started in 2004 has also continued in 2007 and 32% of the assets are in the hands of the three major controlling corporations, 12 as opposed as to 37% last year. In the last few years a significant fall has also occurred in the HHI concentrations index: from 0.10 in 2004 to 0.06 in 2007. One of theprincipal reasons for a fall in concentrations in the Provident Funds sector is implementation of the Bachar Reform and transfer of the Provident Funds from the Banks to the Insurance Companies and other private investment houses, by a limitation placed on the amount of financial assets that one Institutional Body canacquire.

The long term savings market shows an upward trend in the scope of alternative products that has occurred in the Bachar Reform, and has been strengthened as a result of Amendment 3 in respect of the Provident Funds. In view of this trend, if one were to examine the concentration indices in the general market according to the groups of Institutional Bodies, it would be apparent that this is lower by a considerable degree than the concentrations in each of the long term savings sectors. For example in Table B-4 , which shows the division of the pension-related saving assets as between the bodies, it can be seen that the three major companies are only managing 36.1% of the long term savings assets in the market as a whole, and that each one of them is managing less than 15% of the total assets.

Table B-4Division of the Pensions-Related Assets between the Bodies

(December 2007 in NIS Millions)

Group Total Assets Managed in NIS

Millions

% of Total Long Term Assets

in the Whole Market

Migdal 64,508 13.7%

Clal 65,300 13.8%

Harel 40,794 8.6%

Phoenix and Excellence 36,093 7.7%

Menorah Mivtachim 40,343 8.6%

Gadish Hapoalim 21,024 4.4%

Prizma Investment House 19,275 4.1%

Others 184,445 39.1%

One of the aims of Amendment 3 of the Control of Financial Services (Provident Funds) Law is the conversion of all the long term savings instruments into complete alternative instruments. Following the full implementation

12 Clal Insurance Company Ltd, Prizma Investment House Ltd and Bank Hapoalim Ltd.

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of this amendment, it will be more proper to examine the concentrations in the Pensions Savings Branch at a combined level and not on an individual level of each and every individual product.

Chart B-1 shows that the level of concentrations in each of the Pension Savings Products fell in 2007, in continuation of the falling trend in recent years in concentrations in the insurance and provident branches, and of the mixed trend in the Pensions branch. At the same time, the concentration indices of the banks have remained unchanged over the same number of years. The falling trend in the concentrations in the Pension and Savings branches is the fruit of a change in the Investment Regulations, Implementation of the Bachar Reform and additional measures taken by the Capital Market, Insurance and Savings Department for increasing transparency and improvement of the various products. All of these have contributed to an increase of competition in the whole of the pension-related savings market.

Source: Data in the Annual Financial Statements of the Insurance Companies, the Provident and Pension Funds, the Bank of Israel Internet Site and data processing of the Capital Market, Insurance and Savings Department

Pension Funds Life Insurance Banks General Insurance Provident Funds

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

Chart B-1: The Concentrations and Competition Index in the Banks, in the Pension related products and in General Insurance

2000 2001 2002 2003 2004 2005 2006 2007

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C. The Embedded Value

The embedded value expresses the value of the Life Insurance Portfolio of an Insurance Company, which embodies its future estimate within it, and it is determined in accordance with the revenues, expenditure, policy cancellations etc. This value applies to the existing portfolio based on the assumption that no new insured parties will be joining the insurance company. A separate detail is the embedded value in the new policies sold during the past year, and it expresses the value of the new business. From such detail information can be ascertained as to the changes that have occurred in the past year in the business turnover of the Company and one can obtain a certain indication with regard to the future.

When one considers the embedded value, account must be taken of the fact that the policies being calculated include policies in the health insurance sector (nursing care insurance).

In view of the instructions of the Director in this matter the Insurance Companies began publishing data as to the embedded value in 2007. Insurance Company can also elect to publish the embedded value of the Pension Fund that it is managing.

Charts B-2 and B-3 show data as to the embedded value of the Life Insurance portfolio and of the new businesses according to calculations of the Insurance Companies13.

13 The data produced by Harel Company include data of Dikla Insurance Company; the Clal Insurance Company data include the data of Clal Health Insurance Company.

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Source: Data in the Annual Financial Statements of the Insurance Companies and data processing of the Capital Market Insurance and Savings Department.

Source: Data in the Annual Financial Statements of the Insurance Companies and data processing of the Capital Market Insurance and Savings Department.

8000

7000

6000

5000

4000

3000

2000

1000

0

Chart B-2: Embedded value of the Life Insurance Portfolios in 2007 (In NIS Millions)

Israel LandDevelopment

294

InsuranceDirect354

AIG

392

Ayalon

475.3

Eliahu

1165

Menorah

2870

Phoenix

3692

Harel

3828

Clal

6159

Migdal

7606

Embedded Value

300

250

200

150

100

50

0

Chart B-3: Embedded Value of the New Businesses in 2007 (In NIS Millions)

Israel LandDevelopment

13

InsuranceDirect

26

AIG

51

Ayalon

14

Eliahu

19

Menorah

55

Phoenix

103

Harel

143

Clal

169

Migdal

248

Value of New Businesses

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3. ACTIVITY FEATURES

A. Combined Data

Table B-4Results of Activity of Institutional Bodies in 2007 (NIS Millions)

Pension ProvidenyLife

InsuranceGeneral Total

Pre-tax earnings 141 133 1,343 1,689 3,306

Total operating expenses and general management expenses

403 1,159 3,379 4,791 9,732

Total managed assets 47,26614 276,420 150,050 46,823 520,559

Source: Data in the Annual Financial Statements of the Insurance Companies, the Provident Funds and Pension Funds, and data processing of the Capital Market Insurance and Savings Department.

1) Earnings of the Institutional BodiesFor the combined pre-tax earnings of all the Institutional Bodies in the various activity sectors (hereinafter - the Total Combined Earnings) amounted, in 2007, to NIS 3.3 Billion, a steep fall of 22.4% as opposed to the total earnings recorded by the Institutional Bodies in 2007.

The earnings in the Life Insurance sector, which amounted to 40% of the total combined earnings, amounted in the year to NIS 1.34 Billion, a reduction of 28.2% as opposed to 2006. The earnings of the Insurance Companies in the Life Insurance sector, in 2007 were at the rate of 7.7% of the total amount of premiums that were collected, as opposed to a ratio of 11.5% in 2006.

The drop in profitability in the Life Insurance Sector stemmed in the main from the reduction of revenuesfrom management fees in the “with profits” policies as a result of the fall in yields, because the managementfees are receivable from the total aggregate. The fall in profitability also came about because of the increasingcompetition with the Pensions sector. This competition, on the one hand gave rise to an increase in the marketing expenses and the commissions payable to the agents, and on the other hand, to a reduction in the management fees from the premiums collected from the insured parties. A further factor in the falling in profitability wasthe substantial growth in expenditure on salaries and computerization as a result of an increasing demand for regulation that has occurred in recent years, principally in matters concerned with corporate administration.

14 Including general funds

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Furthermore, there has also been a growth in reserves to cover pensions in accordance with the Supervisor’s directives. Nevertheless, in the course of 2007, a growth occurred in sales of “with profits”Life Insurance Policiesand this to a small extent offset the fall in management fees collected as against these policies.

In 2007 an increase occurred in the financial margin15 and in the Life Insurance management fees, in comparison to 2006. The growth in management fees from the “with profits”policies stemmed both from an increase in thesize of the portfolio - which was compensated for slightly by the yield achieved in real terms in comparison to last year - and also from the increase in the financial margin, from the investments standing against the assuredyield policies.

As a result of the cancellation of the reserve for special risks, the income being produced from it was not included in 2007 in the insurance business report, as in the past, and was carried forward as part of revenues from investments as against capital.

As opposed to the life insurance branch, the earnings in the New Pension Funds branch grew during 2007 by 18.5% as opposed to 2006, and amounted to NIS 141 Million, constituting 0.3% of the total managed assets at the end of 2007, as opposed to 0.32% in 2006. The substantial rise in earnings of the Companies managing the New Pension Funds in the course of 2007 stems from the continued trend of the joining of new members, from the increase in deposits of the members (20% as opposed to 2006) and in the increase in the extent of accumulation of the assets (24% as opposed to 2006). New members joining the pension funds rose due to the low rate of management fees as opposed to the amount of management fees in respect of “with profits”policies, legislation that encourages pension-related saving and higher yields achieved by the pension funds as opposed to the “with profits” policies.

However, the growth in earnings of the new pension funds was affected by strong competition in the sector,and motivated the funds to give to a substantial amount of their members, substantial discounts and bonuses in relation to the management fees. At the same time, there was a rise in expenses associated with the increasing demands for regulation, - such as in matters relating to the management, audit and control and reporting - or arising from demands of the market; computer-related services and the provision of services to clients, including management of the diverse range of tracks that are offered in the rules and regulations. At all events,the increase in accumulation of assets and in the management fees that are derived from them will with time, enable the Funds to exploit their advantage of size and to reduce their expenditure -revenues ratio.

The earnings in the field of management of the Provident Funds and Study Funds grew in 2007 by a moderateof 5.5%, and amounted in all to NIS 133 Million16, being 0.4% of the total of the managed assets, as opposed to 0.5% in 2006.

15 The financial margin in Life Insurance is defined as the margin between the yield on the investment in Government Bonds (Designated Bonds) andthe assured yield for policyholders under assured yield policies

16 The income posted in the Provident Fund branch is not of the whole of the Provident branch, but is that of the management companies of the Provident Funds which does not include income of corporate Provident Funds

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During 2007 the trend continued of the movement of members and assets from the banking-related Provident Funds to the private Provident Funds and to the Provident Funds owned by the Insurance Companies, most of whom collect higher management fees. This trend stems in the main from the higher yields produced in these funds and from the wide ranging advertising of the private Provident Funds. Expansion of the channels of distribution for the marketing of Provident Funds continued the trend towards a significant rise in the amountof sales and in the amount of the assets being managed in Provident Funds, and as a corollary, in the amount of the management fees collected in respect of them. The rise in the extent of the sales compensated for the increasing amount of redemptions in 2007 as opposed to 2006. Likewise, expenses of the management companies rose by a more moderate rate than the rate of redemptions and this contributed to an improvement in the income of the companies managing the Provident Funds.

In an overall summing up of the situation, the earnings of the Pensions branch are much more than the Provident branch. Table B-4 shows that the income in the Provident branch is close to that in the Pensions branch (NIS 133 Million and NIS 141 Million respectively), but the total amount of the Provident Funds assets is 5.8 times the amount of the assets of the Pension Funds. The main difference for this profitability gap is thefact that the management fees collected in the Provident Branch is solely from accumulation whereas in the pension’s branch the management fees that are collected are both from accumulation and from the deposits.

The Banking Corporations in the year under revue, posted earnings amounting to NIS 9.2 Billion, a rise of 1.3% as opposed to 2006 in which the combined earnings amounted to NIS 9.08 Billion. The combined earnings of the banking system are 178% greater than that of the whole of the Institutional Bodies. Standing out in particular is the variation in earnings as between 2006 and 2007. Whereas in 2006 a sharp increase was recorded in the earnings of the banks, there was a moderate increase in 2007. This difference emanated in the main from theone-time growth in the capital gains in 2006 due to the sale of Trust Funds and Management Companies of Provident Funds, a sale which was rendered necessary by the conclusions of the “Bachar Committee”.

2) Total Amount of Assets under Management of the Institutional Bodies

The total amount of assets in all the branches managed by the Institutional bodies amounted, at the end of 2007, to NIS 519 Billion, a growth of 10% in compare to 2006.17

The total amount of assets managed by the Insurance Companies in the Life Insurance sector amounted to NIS 150 Billion, a growth of 10.9% as opposed to 2006. In contrast to this, in the General Insurance sector, in the reporting year there was a moderate growth of 3.6% in managed assets compared to 2006, and they amounted to NIS 46.8 Billion. The growth was achieved despite the fall in profitability in these sectors, and its main sourceis a continuing increase in new sales and in the development of new products and the yield on the managed assets.

17 Assets of the Old Pension Funds are not included in this amount.

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The total of the managed assets in the New Pension Funds at the end of 2007 amounted to NIS 47.3 Billion, a growth of 26% as compared to the previous year. The substantial growth in the total amount of managed assets was attributed to the yields achieved by the Funds and to a continuation of the trend of the large-scale joining of new members. Such participation was supported by encouragement of the allocation for pensions by the regulatory provisions and from the benefit of the media exposure enjoyed by the pensionfunds, which contributed to the public awareness of the low management fees as compared to life insurance policies. Furthermore, a continuation of the improvement of the state of the national economy which was involved in the growth in wages and salaries played its part in the increase in the total amount of managed assets.

The total of the managed assets in the Provident Funds amounted, at the end of 2007, to NIS 276.4 Billion, a rise of 8.1% as opposed to 2006. This rise was achieved despite the fact that there was an increase in the number of redemptions - because of the growth in new deposits and due to the yield that the Provident Funds achieved in respect of the managed assets during 2007. In addition, the publication of Amendment 3 by the Inspector created a renewed interest in savings by way of the Provident Funds.

The total amount of assets managed by the old established funds amounted at the end of 2007 to NIS 159.6 billion, a growth of 6.6% as opposed to 2006. This amount includes the total of assets being managed in the Balanced Funds, NIS 21.418 billion, and in the Funds under special management NIS 138.2 billion.

3) The Operating Expenses in Institutional BodiesThe total amount of operating expenses (including commissions) of the Institutional Bodies in the various activity sectors reached, in the course of 2007, approximately NIS 9.7 billion, a growth of approximately 6.9% as opposed to the amount of the operating expenses during 2006.

The total of commission fees and general and management expenses in the Life Insurance Sector amounted during 2007, to NIS 3.4 billion, a growth of 8.3% as opposed to the total amount of commissions and general and management expenses recorded during 2006. The increase in sales of Life Insurance Policies gave rise to an increase in the commissions paid to Agents amounting 4.3% as opposed to 2006.

In the field of General Insurance the commission fees and management and general expenses grew at a rate of3.7% to a total of NIS 4.8 billion. The General Insurance Sector is characterized by a high level of competition in a market that is not growing, and its profitability is being continuously eroded because of a fall in the tariffs inthe compulsory vehicle insurance branch and due to an increase in the amount of claims that have been paid. These features explain the increase in the amount of management and general expenses in this sector.

18 Including the Old Established Balanced Venture Pension Fund

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The total amount of operating expenses in the field of management of the new Pension Funds amountedduring 2007 to NIS 403 million, a growth of 19.2% as opposed to 2006. There was also a growth in operating expenses in the field of management of Provident Funds. In the course of 2007 these expenses amounted toNIS 1.16 billion, a growth of 12.6% as opposed to 2006.

The growth in the operating expenses of the Companies managing the Pension and Provident Funds stemmed from the growth in the various marketing expenses (expenses of advertising and commissions paid to marketers), from the growth in wage and salary expenses as a consequence of the absorption of new employees in the various sectors - consultants and marketers, customer service personnel etc. - and from a growth in expenses of computerization. The growth in wage and salary expenses and computerization stemmed inter alia from the increasing regulatory requirements, and including as regards the management and control and reports to the supervisory authorities and to the members of the Funds. An additional source of expenditure was the market demands for advanced computerized services and for services to clients, including technological management of the diverse range of tracks being offered in the rules and regulations.

4) Premiums, Deposits and Payments in the Institutional BodiesThe total of premiums, deposits and payments collected by the Institutional Bodies in the various activity sectors amounted, in 2007 to NIS 68.3 billion, an increase of 4.7% as compared to the amount in the course of 2006.

The amount of premiums collected in the Life Insurance Sector amounted in 2007 to NIS 17.4 billion, a growth of 7.5% as opposed to 2006. This growth stemmed in main from an increase in sales of new life insurance policies and from the continuing trend of a fall in the amount of policy cancellations. This growth is of a relatively moderate proportion as compared to the growth in the rate of collections in respect of competing products, for example, in the amount of payments collected by the new Pension Funds. These grew by 20.4% in the course of 2007.

The amount of the premiums in General Insurance amounted in 2007 to NIS 18.7 billion. A relatively moderate growth was also recorded in this sector, of 2.2% as compared to 2006, which stemmed from the increase in the average tariff of the Policies that were sold. This growth is partially offset by the falls in tariffs as a resultof the increase in competition in this sector and the reduction by the Supervisor, of tariffs in the compulsoryvehicle sector.

As opposed to the amount of premiums in the Life Insurance Sector, the amount of payments collected in the Pension Funds amounted in 2007 to NIS 12.7 billion, a substantial growth of 20% as opposed to the amount thereof recorded in 2006. This growth can be attributed to an increase in new insured persons joining the new Pension Funds as a result of the effect of the legislation, which makes it obligatory to deposit an initial layer ofsavings in a pension - related track in order to obtain income tax credits, and due to the low management fees as opposed to “with profits” policies.

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The amount of the deposits in the Provident Funds and in the Study Funds reached NIS 20.7 billion in 2007, a growth of 6.3% as compared to the amount thereof in 2006. This growth stems both from the aggressive advertising and marketing of the Institutional Bodies who are managing the pension - related assets, and from the increasing awareness of the Public of the management of financial assets and of the maintenance andimportance of long term saving.

Table B-5Principal Data in the Insurance Sectors in 2005-2007 (in NIS Millions)

The Rate of Change

2005 2006 2007 2006 2007

Earnings

Net earnings (after tax) 2,727 2,393 3,451 -12.2% 44.2%19

Pre-tax earnings from life Insurance business

2,087 1,867 1,343 -10.5% -28.0%

Pre-tax earnings from general Insurance business

2,078 1,927 1,689 7.2% -12.4%

Premiums and Claims

Premiums in Life Insurance20 15,343 16,185 17,433 5.5% 7.6%

General Insurance premiums 17,613 18,280 18,685 3.8% 2.2%

Payments for insured parties in Life Insurance

7,474 8,067 8,498 7.9% 5.3%

Payments made and provisions allocated for claims in General Insurance

13,212 11,469 13,070 -13.2% 14.0%

Operating Expenses

Commissions, general and management expenses in Life Insurance

2,968 3,121 3,379 5.2% 8.3%

Commissions, general and management expenses in General Insurance

4,496 4,620 4,791 2.8% 3.7%

Balance Sheet Data

Balance sheet total - the Insurance Companies

181,149 195,679 215,782 8.0% 10.3%

Total Assets - Life Insurance 121,359 134,116 150,050 10.5% 11.9%

Total Assets - General Insurance 44,597 45,172 46,823 1.3% 3.7%

Shareholders equity + liabilities 15,193 16,391 18,938 7.9% 15.5%

Source: Data of the Annual Report of the Insurance Companies, the Provident and Pension Funds and data processing of the Capital Market, Insurance and Savings Department.

19 ש“ח 1,370 2007עמד על בשנת מיוחדים העתודה לסיכונים סכום לסיכונים מיוחדים. בגין ביטול העתודה ברווחים החד-פעמיים הינו מס הנקי לאחר ברווח הגידול מקור20 Includes premiums for nursing care insurance policies

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B. Additional Insurance Related Data

1) The Total Amount of Payments to Insured Persons in Life InsuranceThe total amount of payments to insured persons in respect of Life Insurance amounted in 2007 to NIS 8.5 billion, a growth of 5.3% as opposed to the amount of such payments in 2006. Despite a continuing trend of a reduction in the rate of policy cancellations, the growth in the total payments made to insured persons stems from the change in the method of revaluation of the non-marketable assets and from the yield that the Companies achieved in 2007, which contributed to the growth in the total of the policy assets that were redeemed during the year.

2) The Total of Claims Paid and Allocation made for Pending Claims in General InsuranceThe total payments to insured persons in general insurance amounted in 2007, to NIS 13 billion, a growth of 14% as opposed to the payments made in 2006. It is quite possible that the growth in payments to the insured persons stems from a fall in the quality of the underwriting of the Insurance Companies, from a change for the worse of one or more of the actuarial assumptions that constitute a basis for the estimation of reserves, or from the increasing competition in the sector, which expressed itself in terms of less strict claims management. This growth was also influenced by a reduction in 2006 in the evaluation of the claims that relate to the oldestablished underwriting years. A further factor is the increase in the rate of inflation in 2007 as compared to2006, which is expressed in accounting terms both in an increase in the amount of claims paid and in an increase in the investment earnings. This is in comparison to the fall in the rate of inflation in 2006, which would haveinvolved a reduction in payments of claims and in a reduction of the investment earnings. Therefore, when making a comparison between the two years, 2006 and 2007, one must take into account that the 2006 results were influenced by the addition of one-time factors.

3) The Total of the Balance Sheets of the Insurance CompaniesThe total balance sheets of the Insurance Companies amounted in 2007 to approximately NIS 216 billion, a growth of 10.3% as opposed to the total balance sheets in 2006. The total balance sheets of the Insurance Companies grew both in the Life Insurance Sector (approximately NIS 150 billion - a growth of 11.9% as opposed to 2006) and also in the General Insurance Sector (approximately NIS 46.9 billion - a growth of 3.7% as opposed to 2007) despite the fall in the earnings of the Insurance Companies in these sectors. The growth in the total balance sheets of the Insurance Companies is explained in the main by the growth in new deposits and in the yields achieved by the Companies in the capital market in 2007.

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Table B - 6Principal Data in the Life Insurance Sector

According to Insurance Companies (in NIS Millions)

Earnings from Life Insurance Business

Change from Previous Year

Percentage share of Market

Company 2005 2006 2007 2006 2007 2005 2006 2007

Clal Group 382 305 214 -20.20% 29.8%- 18.30% 16.30% 16.00%

Harel Group 358 330 196 -7.80% -40.60% 17.20% 17.70% 14.60%

Migdal Group

648 636 584 -1.90% -8.20% 31.00% 34.10% 43.50%

Phoenix Group

405 374 193 -7.70% -48.40% 19.40% 20.00% 14.40%

Menorah 222 156 102 -29.70% -34.60% 10.60% 8.40% 7.60%

Ayalon 20 19 27 -5.00% -42.10% 1.00% 1.00% 2.00%

Eliahu 39 17 12 -56.40% -29.40% 1.90% 0.90% 0.90%Israel Land Dev.

-1 9 3 1000.00% -66.70% -0.10% 0.50% 0.20%

Insurance Direct

10 20 14 100.00% -30.00% 0.50% 1.00% 1.00%

Shirbit - - -1 - - - - -0.10%

A.I.G 4 1 -1 -75.00% -200.00% 0.20% 0.10% -0.10%

Total 2,087 1,867 1,343 -10.50% -28.00% 100.00% 100.00% 100.00%

Source: Data of the Annual Financial Statements of the Insurance Companies, the Provident and Pension Funds and Data Processing of the Capital Market, Insurance and Savings Department.

4) Earnings from Life Insurance BusinessFrom the data shown in the tables above it can be ascertained that in the Life Insurance Sector all the Companies are showing a significant fall in earnings, except for Ayalon, the extent of whose activity in thesector is marginal. What stands out in their results are the bad results of the major companies such as the Phoenix, Harel and Menorah, except for Migdal, which despite the fact that it held the largest share of the market in the Life Insurance Sector, the amount of reduction in its earnings was the lowest in the market. The fall in earnings among the Companies spanning the Life Insurance Sector stemmed from the increasing competition with the Pensions Sector, which was reflected in a fall in the average amount of management fees. The increase of expenditure bit into earnings. In this item the expenses of computerization and wages grew, and time was spent in matters related to internal audit as a result of the requirements of reporting and proper transparency.

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Table B-7Principal Date in the General Insurance Sector According to Insurance Companies

(In NIS Thousandsand in Percentages)

Earnings from General Insurance Business

Change from Previous Year

Percentage Share of the Market

Company 2005 2006 2007 2006 2007 2005 2006 2007

Clal Group 291,551 307,459 248,752 5.5% -19.1% 14.0% 16.0% 14.7%

Harel Group 360,662 366,372 290,682 1.6% -20.7% 17.4% 19.0% 17.2%

Migdal Group 170,261 214,829 149,404 26.2% -30.5% 8.2% 11.1% 8.8%

Phoenix Group 52,981 190,142 218,826 258.9% 15.1% 2.6% 9.9% 13.0%

Menorah 212,459 208,569 208,965 -1.8% 0.2% 10.2% 10.8% 12.4%

Ayalon 109,421 101,321 94,253 -7.4% -7.0% 5.3% 5.3% 5.6%

Eliahu 222,379 199,392 207,587 -10.3% 4.1% 10.7% 10.3% 12.3%

Israel land dev 16,608 29,004 39,198 74.6% 35.1% 0.8% 1.5% 2.3%

A.I.G 34,815 46,301 72,419 33.0% 56.4% 1.7% 2.4% 4.3%

I.D.I. Insurance 106,865 133,145 58,618 24.6% -56.0% 5.1% 6.9% 3.5%

Shomera 3,063 9,885 18,044 222.7% 82.5% 0.1% 0.5% 1.1%

Agricultural Insurance

12,130 6,325 26,250 -47.9% 315.0% 0.6% 0.3% 1.6%

Shirbit 26,369 33,737 37,516 27.9% 11.2% 1.3% 1.8% 2.2%

New B.S.S.H. 14,588 20,021 28,448 37.2% 42.1% 0.7% 1.0% 1.6%

EMI (Ezer) -14,323 3,364 -12,607 -123.5% -474.8% -0.7% 0.2% -0.7%

Avner 455,833 25,412 3,086 -94.4% -112.1% 21.9% 1.3% -0.2%

Governmental (Ashra + Inbal) 1,930 32,154 5,481 1566.0% -83.0% 0.1% 1.7% 0.3%

Total 2,077,592 1,927,432 1,688,750 -7.2% -12.4% 100.0% 100.0% 100.0%

5) Earnings from General Insurance BusinessThe leading Companies in the segment of the market in the General Insurance Sector are Harel and Clal - 17.2%

and 14.7% respectively. In the sector as a whole, earnings fell at a rate of 12.4% as opposed to 2006. The fall stems

from the increasing competition in the sector and from the fall in tariffs, including the reduction of tariffs by the

Supervisor in the compulsory insurance sector. Furthermore, the revenues in real terms from investments have

fallen, the amount of claims being paid has grown, and there has been a degree of a fall in underwriting earnings.

Among the major companies, what stands out are the poor results of Migdal, Clal and Harel, which show a reduction

in earnings amounting to 30.5%, 19.1% and 20.7% in that order.

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TableB-8General and Management Expenses and Commission Fees in the

Life Insurance Sector (in NIS Thousands)

2007

CompanyCommission Fees

PaidManagement and General Expenses

Management and General Expenses and Commission

Fees Paid

Expenses and Commission as a

Percentage of the Premiums

Migdal Group 541,340 414,280 955,620 18%Clal Group 452,411 310,931 736,342 19%Harel Group 288,848 262,848 551,696 19%Phoenix Group 252,605 251,042 503,647 19%Menorah 189,758 164,524 354,282 22%Israel Land Development

52,662 25,957 78,619 32%

Eliahu 26,343 27,847 54,190 24%Ayalon 25,383 28,800 54,183 22%A.I.G. 1,177 26,725 27,902 73%Direct Insurance - 35,176 35,176 27%Shirbit 6 672 678Total 1,830,533 1,548,802 3,379,335 19%

2006




Fees Paid



Migdal Group 485,082 367,446 852,528 17%Clal Group 475,768 260,370 736,138 20%Harel Group 277,081 252,981 530,062 20%Phoenix Group 240,018 214,056 454,074 18%Menorah 160,554 164,676 325,230 22%Israel Land Development

45,001 24,238 69,329 28%

Eliahu 25,969 26,304 52,273 27%Ayalon 19,031 27,939 46,970 21%A.I.G. 653 19,967 20,620 79%Direct Insurance - 33,828 33,828 31%Total 1,729,157 1,391,805 3,120,962 19%

Source: Data of the Annual Financial Statements of the Insurance Companies, the Provident and Pension Funds and Data Processing of the Capital Market, Insurance and Savings Department.

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6) Efficiency in the Life Insurance SectorMigdal, the most profitable company in the sector, is also the most efficient company in the sector. The generaland management expenses and commissions as a percentage of the total premiums amounts to 18%, a slight deterioration as opposed to 2006 in which the ratio was 17%. The Companies coming after it are the Phoenix, Clal and Harel in which the rate of general and management expenses and commissions of the total premiums was 19%. Clal and Harel have shown an improvement as opposed to 2006, in which the ratio was 20%.

Table B-9General and Management Expenses and Commissions in the General Insurance

Sector (in NIS Thousands and in Percentages)

2007




Fees Paid



Migdal Group 243,495 227,921 471,416 28.0%Clal Group 516,718 439,100 955,818 28.6%Harel Group 481,077 429,468 910,545 26.4%Phoenix Group 338,422 244,378 582,800 26.4%Menorah 327,647 176,634 504,281 26.1%Ayalon 167,035 111,113 278,148 22.5%Eliahu 98,062 90,788 188,850 23.2%Israel Land Development

99,430 70,867 170,297 22.1%

A.I.G. 25,563 139,261 164,824 30.9%I.D.I. Insurance - 174,608 174,608 26.4%Shomera 53,906 38,411 92,317 25.5%Agricultural Insurance

35,244 30,562 65,806 12.8%

Shirbit 47,225 59,448 106,673 18.9%New B.S.S.H. - 22,131 22,131 22.8%EMI (Ezer) - 35,757 35,757 33.6%Inbal - 23 23 9.4%Nature Damage Fund

- 21,549 21,549 12.8%

Karnit - 18,365 18,365 9.5%Avner - 18,740 18,740 -Ashra - 8,347 8,347 16.5%Total 2,433,824 2,357,471 4,791,295 25.6%

Source: Data of the Annual Financial Statements of the Insurance Companies, and Data Processing of the Capital Market, Insurance and Savings Department.

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2006

CompanyCommission

Fees Paid

Management and General

Expenses

Management and General

Expenses and Commission

Fees Paid

Expenses and Commission as a Percentage of the Premiums

Migdal Group 234,105 217,873 451,978 27.1%Clal Group 490,717 426,512 917,229 27.3%Harel Group 336,890 244,005 580,895 27.0%Phoenix Group 486,742 396,894 883,636 25.1%Menorah 306,775 168,814 475,589 26.7%Ayalon 166,889 133,106 299,995 24.9%Eliahu 101,463 86,947 188,410 22.8%Israel Land Development

93,445 68,646 162,091 24.0%

A.I.G. 23,175 113,345 136,520 30.2%I.D.I. Insurance 815 168,957 169,772 27.3%Shomera 45,133 33,110 78,243 25.0%Agricultural Insurance

40,021 37,039 77,060 14.3%

Shirbit 38,024 54,195 92,219 16.4%New B.S.S.H. - 20,604 20,604 23.3%EMI (Ezer) - 20,782 20,782 22.5%Inbal - 24 24 0.1%Nature Damage Fund

- 21,148 21,148 14.3%

Karnit - 18,144 18,144 9.4%Avner - 16,435 16,435 -Ashra - 9,616 9,616 18.4%Total 2,364,194 2,256,196 4,620,390 25.3%

Source: Data of the Annual Financial Statements of the Insurance Companies, and data processing of the Capital Market, Insurance and Savings Department.

7) Efficiency in the General Insurance SectorThe Shirbit Insurance Company has demonstrated by far the greatest degree of efficiency in terms of theamount of management and general expenses and commissions in the ratio to premiums (as opposed to Avner, Karnit, Nature Damage Fund, Inbal, Ashra and Agricultural Insurance, all of whom are engaged in a very specific field of activity). In Shirbit the ratio of management and general expenses and commissions topremiums was 18.9% in 2007, a slight deterioration of the position as opposed to 2006, in which the ratio stood at 16.4%. The next Company coming after it is Israel Land Development, in which the ratio of management and general expenses and commissions to premiums was 22.1% in 2007. This ratio demonstrates some degree of improvement as opposed to a ratio of 24% in 2006.

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4. Risks and Stability Evaluation

A. GeneralIn the course of their activity Institutional Bodies are exposed to a wide range of risks, which are divided into four main categories: market risks, credit risks, insurance risks, and operational risks.

The materialization of risks to which the institutional bodies are exposed is likely to have an adverse effect onthe fair values of their assets and/or on an increase in their liabilities and to impact upon their stability and adversely affect their ability to perform their obligations towards their customers.

The prescription of instruments of measurement for evaluating the risks to which they are exposed will provide the Boards of Directors, senior Management, and the Investment Committees of the Institutional Bodies, with a means of evaluating the potential effects of such risks. Moreover, these tools will provide support to thedecision making process in terms of the setting of overall policy. Insurance Companies that will be applying the methodology for evaluating the potential risks to which they are exposed and of the correlation between them will be proceeding at an early stage with a capital allocation based on risk measurement and an economic capital computation.

At the beginning of 2007 the capital market continued to prosper, but in mid-July there was an increasing degree of fluctuation in the financial markets, and there was a rise in the correlation between the marketrisks. The second half of 2007 was characterized by a sharp rise in the Consumer Prices Index and the high fluctuations in interest rates and in the exchange rate (shekel/dollar). During this period of several monthsan international credit crisis developed, which started off in the “sub-prime” mortgage market in the UnitedStates. However, the direct effect of the sub-prime crisis on the local financial system and including on theInstitutional Bodies, was relatively moderate until the end of 2007, in particular due to the minimal degree of exposure of the Institutional Bodies in Israel to the debt levers that were being used to back up the sub-prime mortgages. However the crisis has had indirect implications on the value of the Institutional Bodies’ assets, and such implications were expressed more intensely at the beginning of 2008, as a result of falls in the rates in the markets both in Israel and overseas.

The fluctuations of prices in the financial markets, the increase in the correlations between risk factors and theincreasing rate of inflation increase the market risks and credit to which the Institutional Bodies are exposed,and present them with a challenge of identification of the risks to which they are exposed, for evaluating theirpotential effects, and to strengthen the supervision and control mechanisms and for the prudent managementthereof.

In this section we shall consider the principal risks to which the Institutional Bodies are exposed, and we shall examine the directions, that the exposure to risks have taken in the last year, as compared to previous years. The analysis will be made by use of the usually accepted quantitative indicators.

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B. The Risks to which the Institutional Bodies are Exposed

In this section we shall outline the four main types of risk to which the Institutional Bodies are exposed: insurance risks, credit risks, market risks and operational risks.

1) Insurance risksThe essence of the business of Insurance Companies is the acceptance of the insured risk in return for payment of specific insurance premiums payable by the insured persons. However, it is customary tolay part of the insured risk at the door of the insured (for example, by means of a policy excess) in order to reduce the “Moral Hazard”.

An insurance risk comprises a number of sub-risks that pertain both to the risks that are covered by means of the insurance contracts (for example: death, accident, fire, storm, earthquake), and also to theprocedures and conduct of the Company’s insurance business:

(a) Underwriting risk - risk of financial loss owing to unwise selection and acceptance of risks thatthe Insurance Company is to insure.

(b) Pricing risk - risk of financial loss because the pricing of the insurance contract does notsufficiently support the need for future liabilities arises from it.

(c) Structure of the product - risk of financial loss because of the Insurance Company’s exposureto risks that were not taken into account at the time of the planning, design and pricing of the insurance contract.

(d) Claims risk - risk of financial loss due to a higher than anticipated number of claims or as a resultof claims in respect of which the damage is higher than expected.

(e) Economic environment risk - the risk that changes in conditions of the economic or social environment will have a negative impact on the Company.

(f ) Self retention risk - the risk of high exposure to self retention risk upon the occurrence of an exceptionally unusual event the absorption of which is beyond Company’s ability and capital resources.

(g) A risk arising from the conduct of the insured - the risk of a negative impact on the Company as a result of unexpected behavior of the insured (such as cancellations).

(h) Reserves risk - the risk of it becoming evident that the insurance reserves are insufficient.

2) Credit risksA credit risk is a risk of financial loss due to insolvency or a fall in the quality of credit of issuers ofsecurities, holders of loan capital, parties to a contract (for example in reinsurance contracts, derivatives contracts or depositors), brokers and customers to whom the Institutional Body is exposed. A credit risk includes the following components:

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a) Risk of insolvency - the risk of an Institutional Body not receiving/receiving late/partially receiving,

the cash flows or assets to which it is entitled, owing to the other party to the agreement with it

evading payment of one or more of his liabilities.

(b) Risk of a fall in quality of credit rating - the risk that an increase in the probability of future insolvency

of a capital holder will have an adverse effect on the current value of the contract with him.

As part of a credit risk analysis the concentrations risk must be taken into account, which might give

rise to intensification of the loss due to the materialization of one of the aforementioned risks. This

risk is pertinent to the growing exposure to losses owing to concentration of the investments in one

geographical area, in one economic sector, in one individual borrower or in one group of borrowers.

3) Market risks Market risk is a risk of loss as a result of a change in the fair value of the Institutional Body’s assets or of

its liabilities, as the case may be, arising from changes in the market prices of interest rates, securities, currencies and goods, as well as from changes in other indices arising from changes in the market prices of any one of them.21

a) Interest risk - such a risk is a risk of loss occurring as a result of the effect of changes on the yieldcurves.22 This effect is likely to be expressed in several ways, such as an effect on the present valueof future [cash] flows stemming from the assets or liabilities, a change in the margins, a change invalue of embedded options, and so forth.

In the Management Companies of Provident Funds and Pension Funds, as well as in contingent yield liabilities of an insurance company, such changes are likely to have an affect on the fair valuesof the assets only. As opposed to this, as regards liabilities of an insurance company that are not yield contingent, the effect must also be taken into account of such changes, on the presentvalue of future [cash] flows arising from liabilities and on the correlation between such assets andliabilities. In addition account must be taken of the effect of the changes on the option-related risk,a risk arising from interest rates connected with an option inherent in a contract made between the Insurance Company and the client.23

b) Risk of Share Prices and Prices of Goods - Risk of loss as a result of a change occurring in the market prices of shares and stocks which the Institutional Body is holding. This risk generally has an effectonly on the assets side of the Institutional Body.

c) Currency Risk - Risk of loss influenced by changes in the exchange rates on value of the assets that

are held by the Institutional Body. In relation to liabilities that are not contingent on yield of the

Insurance Company one must not only take into account the effect on value of assets but also the

effect on the value of liabilities in foreign currency.

21 One of the main characteristics of the market risks is the existence of an active market for trading therein.22 Periodical nature of no risk interest rates, at no discount, for all redemption periods. 23 An associated option-related risk occurs principally in cases in which the client is given the option of drawing out his savings or repaying loans on a chosen

date, and as to how such changes in the interest rate are likely to influence his decision. The option-related risk materializes when the actual redemptiondate is different from the final redemption date as stipulated in the contract made with the client.

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d) Re-Investment Risk - A risk that the interest on the re-investment date will be lower than the interest rate that was promised to the client. This risk is relevant only to liabilities that are not dependent on the Insurance Company’s yield and in particular in assured yield life insurance.

e) Asset/Liability Mis-Match Risk - a risk arising from the time gaps between cash flows stemming

from held assets as against liabilities that are not contingent on the Insurance Company’s yield

only and cash flows arising from liabilities.

As with credit risk, also when analyzing the market risk, the concentrations risk must be taken into

account which might give rise to an intensification of the loss owing to the materialization of one of

the aforementioned risks.

4) Operational Risks

An operational risk is a risk of financial loss that might occur as a result of failed, defective, or insufficient

internal business procedures, fraud on the part of employees, failures in the information technology

systems or losses due to external events. The following is an outline of some of the risk categories:

a) Fraud and Embezzlement - Embezzlement or fraud is liable to be caused by internal factors in the

Institutional Body (such as employees, officeholders and executives), by external factors (such as

agents or suppliers), including as a result of collaboration between these various parties. In order

for the fraud to materialize a number of essential conditions and components must exist: Motive,

ability, opportunity and concealment.

b) Failures in the Information Systems - We will sub-divide this risk into two main categories:

(1) Hacking into the information system - a defect or weakness in protection of information

technology are liable to make it possible for internal or external parties to break into the system

or take advantage of such a disruption in order to embezzle the organization’s assets.

(2) The data base has not been updated and is unreliable - such a failure might give rise inter alia

to a situation in which the management relies on information that is not relevant at the time of

making business decisions.

c) Flawed Preparations for Dealing with Crisis Situations, Catastrophes and Emergencies - A crisis

occurring as a result of a disaster - such as an earthquake, a terrorist attack or a fire - is likely to

be accompanied by both immediate effects in the short term and long term implications on the

continuing business activity of the Institutional Bodies.

A failure in a resumption of business procedures following a crisis might threaten the provision of services that are required by clients and the continued existence of Institutional Bodies as a going concern. It is of the utmost importance to continue with the management and transaction of the main business activity in various crisis and emergency situations within a short period of time following the occurrence of such a disaster. It is therefore essential that Institutional Bodies are well prepared in advance for the maintenance of their principal business activities in these situations.

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C. Division of the Risks According to Types of Bodies

Institutional Bodies are distinguished from each other by virtue of the types of risk to which they are

exposed and in the nature of the factors giving rise to such risks:

1) Provident Funds - The Management Companies of Provident Funds are managing capital savings

funds in the long and medium term, in which the risks of their investment lie upon the savers

themselves.24 Companies managing Provident Funds do not act as insurers, and accordingly do not

assume for themselves an insurance related risk. When the members of a Provident Fund have group

life insurance cover, it is affected through a risk bearing insurance company.

2) Pension Funds - the Companies managing Pension Funds are managing pension savings funds in

respect of which the risks of their investment lies upon the savers themselves.25 As distinct from

Companies managing Provident Funds, those Companies that are managing Pension Funds also

act as an insurer, but they do not personally assume the insurance-related risk, but rather manage

mutual insurance which is effective in the framework of the Fund.

3) Insurance Companies - Insurance Companies are engaged in a wide range of branches of

insurance, and the practice is to classify them into a number of main categories according to their

characteristics: Life Insurance, Property Insurance, Liability Insurance, Health Insurance and Finance-

related Insurance.26

a) Life Branches - Insurance Companies offer a wide range of Life Insurance Schemes, which are

distinguishable by the types of cover that they provide, in a mixture of the savings and the risk

component, and in the nature of the party upon whom the investment risk lays, and in the

manner of withdrawal of the funds (capital or annuity).

(1) From the investment risks aspect, life insurance schemes are classified in three main

categories:

(a) Life insurance schemes which as with Provident Funds the investment risks in them lie

with the insured persons (hereinafter - Yield-Contingent Life Insurance Schemes).27

(b) Unit- linked life insurance schemes, which assure the insured persons a minimum level.

The Insurance Company must make additional capital reserves available because it is

bearing the investment risk in respect of the assured minimum level.28

(c) Guaranteed yield life insurance schemes. As distinct from Unit-linked life insurance

policies, under these schemes the Insurance Company bears the investment risk and it is

24 Provident Funds that are not per se legal entities, but are investment accounts which are managed in trust by managing companies25 As with Provident Funds, Pension Funds are not legal entities, but rather are investment accounts that include mutual insurance, and are managed

in trust by the managing companies.26 Finance-related Insurance includes guarantees, credit insurance, and mortgage insurance - generally in Mono Line Companies.27 These schemes are also sold under the name of “With Profits”28 The Insurance Company in actual fact is selling an option to the insured.

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required to make additional capital available because of these risks and because of the

re-investment risk. 29

The three aforementioned categories include insurance schemes that have been approved

as a Provident Fund (Insurance Funds), which entitle the savers through them to tax benefits

pursuant to Sections 45A and 47 of the Income Tax Ordinance; insurance schemes, private

insurance self-employed remuneration schemes which entitle the savers to tax benefits as

aforementioned; and private insurance schemes which do not entitle the savers through

them, to the aforementioned tax benefits.30

(2) From the life risks aspect, life insurance schemes are characterized by two principal risks,

which are the reverse of each other:

(a) Risk of Early Death31 - in insurance schemes that contain a death risk component, the

earlier that the insured dies, thus is the Insurance Company’s loss that much higher.

(b) Risk of Long Life - in annuity pension schemes, the longer the recipient of the annuity

lives and receives it for a longer period of time, thus is the Insurance Company’s loss

damage that much higher.

Insurance risks in life insurance also encompass risks in respect of loss of working capacity,

disability and a situation requiring permanent nursing care.

b) General Insurance Branches (Property, Liabilities, Health and Financial)

General insurance branches, except for health sectors, as distinct from life insurance branches,

provide the insured with short term cover (generally for one year, except in the case of

liabilities).

(1) The investment risks aspect - as distinct from the life branches, in these branches of insurance

the insurance company always bears the investment risk, and it is exposed both to credit

risks and market risks that relate to the investment assets and also to market risks pertaining

to the absence of a correlation between assets and liabilities.

(2) The insured risks aspect - branches of property insurance are characterized by short lived

claims due to the short period of time required for investigation of such claims. As opposed

to these, a long period of time is required for the investigation of liability insurance claims

29 Life insurance policies with an assured yield which were issued up until 1992 are backed by designated government bonds. Since 1992 the issue of designated government bonds for these schemes has ceased. New assured yield schemes are not backed by designated bonds.

30 There are tax benefits under Section 45A of the Ordinance in respect of the risk component.31 Apart from cases of early death, life insurance schemes also include insurance cover for loss of working capacity and in cases of disability.

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and in some health insurance claims. The liability branches are accordingly characterized by

a raft of long claims.

D. Changes and Developments in Exposure to Risks During 2007

1) Insurance Risks

As has been mentioned above, the essence of the dealings of Insurance Companies is the acceptance

of an insurance risk of the persons that they are insuring in consideration of payment of specific

premiums that the insured persons have paid for transferring the risk. In order to examine the

insurance risk, we have examined three quantitative indicators in addition to re-insurance:

a) Ratio of Reserves to Claims32

The degree of preparedness of an Insurance Company against the insurance risks that exist

in general insurance is made by means of the provision of general insurance reserves. The

amount of such reserves is determined by means of evaluation of the future claims by the use

of actuarial calculation methods.

In order to examine the variation in the insurance risk we shall examine the ratio between the

insurance policy reserves in general insurance, on a self insurance residual liability funding

basis, and between the averages of the claims paid in the last three years on the same basis.

This indicator is likely to reflect the quality of the insurance policy reserves evaluation by the

Insurance Company. The use of the average of claims paid in the last three years is intended for

the provision for the occurrence of unusual events in the life of the Company.

A comparison of the survival ratio in branches of insurance as between various companies

is likely to point to problems in the manner of evaluation of insurance policy liabilities in

companies in which the survival ratio is substantially lower than the average. A falling trend

in the survival ratio of a particular company over time is likely, from one standpoint, to be

evidence of a negative development in the evaluation of the Insurance Company’s liabilities,

but it could also be an indication of acceleration in the process of claims resolution on the part

of the Insurance Company. Nevertheless, an evaluation based on the survival ratio alone, is

insufficient, and one must correspondingly examine additional indicators, such as capitalization

of liabilities, a division of the exposure between the insured persons, level of the liabilities and

level of the self insurance residual funding.

In Table B-10 the survival ratio is shown for 2007 as between the Insurance Companies in the

various branches of general insurance. In Table B-11 the development of the survival ratio over

time is outlined as between the various branches of insurance.

32 In text books this ratio is also referred to as the Survival Ratio.

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Table B-10Comparison of the Survival Ratio as between Insurance Companies in the General Insurance Branches in 2007

Sickness and Hospitalization

PropertyCompulsory

VehicleProperty Vehicle

Clal Group 1.5 1.2 4.9 0.9

Migdal Group 1.5 1.7 5.0 1.1

Harel Group 1.0 1.4 4.7 0.8

Phoenix Group 1.1 1.4 4.6 0.9

Menorah Group 1.4 1.2 3.9 1.1

Ayalon 1.5 1.4 4.4 0.9

Eliahu 1.3 1.2 5.4 0.8

Israel Land Development

3.3 1.5 3.7 1.0

Direct Insurance 0.8 1.8 5.8 1.0

AIG Group 2.5 2.1 5.7 1.1

Shirbit 1.9 2.5 3.9 0.7

Agricultural Insurance 2.5 0.8 3.7 0.7

Shomera --- 1.4 3.7 1.2

Total - Solo 1.3 1.4 4.9 0.9


It is evident from the data in Table B-10 that in the Compulsory Vehicle insurance branch the survival ratio is clearly higher than the rest of the branches. This is in view of the length of time necessary to investigate claims and because the insurance company is required to maintain a surplus of revenues over expenditure for a period of three to five years from the beginning of the underwriting year.

It is evident from the data in Table B-11 that in all the General Insurance branches the survival ratio has been experiencing a consistently upward trend over time. It can be assumed that this trend stems, inter alia, from the obligation imposed in relation to General Insurance, by the Actuary charged with responsibility for the sector, of furnishing a declaration as to the propriety of the evaluation of reserves. Nevertheless, in the Sickness and Hospitalizations branch a fall has occurred in the survival ratio in the last three years as compared to the previous years. This fall ostensibly stems from cancellation of the Supervisor’s Circular as to the manner of calculating the reserves in respect of medical expenses, a cancellation as a consequence of which a gradual easing has occurred of the reserves hiatus as between the actuary’s evaluation and the requirements of the

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aforementioned circular. A further reason for the aforementioned fall is reclassification of permanent nursingcare insurance businesses and their introduction into the Life Insurance sector.

Table B-11Development with regard to the Survival Ratio as per Branches in 2003-2007

2003 2004 2005 2006 2007

Sickness and Hospitalizations

1.45 1.56 1.01 1.04 1.10

Property 0.48 0.52 0.45 0.48 0.46

Compulsory Vehicle 4.53 5.16 5.07 5.42 5.24

Property Vehicle 0.78 0.80 0.82 0.86 0.89

Total 2.25 2.37 2.32 2.45 2.50


b) The Claims Ratio (Loss Ratio)

The claims ratio is the usually accepted index for an examination of the quality of insurance

business. This index represents the ratio between claims that have been paid and recorded in the

report year and the premiums earned in that year, disregarding the expenditure and revenues

and other components such as management and general, commissions and investments. The

claims ratio is therefore likely to reflect the quality of underwriting in the year under review.

In the liability branches of insurance (and including compulsory vehicle, third party, employer’s

liability, professional liability) the claims ratio measured on the basis of data of the report

year is likely to lead to inaccurate result, which will not give an indication of the quality of

the underwriting in that period. The reason for this is the fact that the investigation of claims

in these branches takes place over a period of several years. In other words, the insurance

premiums are indeed already being received during the period of the report, but claims of

insured persons who have already paid the aforementioned premiums will only be concluded

or reported after a period of several years.

As opposed to this, in the Property Insurance branches (including vehicle, loss of property,

comprehensive insurance of apartments), the claims are investigated at a relatively fast pace.

Therefore, the claims ratio measured on the basis of data of the report year is likely to properly

reflect the quality of underwriting in that period.

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Table B-12Comparison of Claims Ratio between Companies in the General Insurance

Branches in 2007(Excluding Agents’ Commissions)

Sickness and Hospitalization

+ Accidents

The Other Property Branches

Compulsory Vehicle

Property Vehicle

Clal Group 49% 51% 87% 71%

Migdal Group 49% 83% 84% 65%

Harel Group 53% 43% 87% 72%

The Phoenix Group 58% 57% 104% 66%

Menorah Group 33% 61% 77% 68%

Ayalon 53% 51% 94% 70%

Eliahu 73% 47% 68% 72%

Israel Land Development 16% 37% 82% 68%

Insurance Direct 35% 54% 84% 70%

AIG Group 41% 30% 66% 61%

Shirbit 52% 45% 72% 72%

Shomera - 45% 73% 62%

Total - Solo 51% 57% 89% 69%

Source: Data of the Annual Financial Statements of the Insurance Companies, the Provident and the Pension Funds and data processing of the Capital Market, Insurance and Savings Department.

From the data contained in Table B-12, when comparing the claims ratio between the Insurance Companies in the General Insurance branches in 2007, one can ascertain a difference both asbetween the various insurance branches among themselves and also as between the various Insurance Companies in relation to each branch in itself.

It is possible to point to a number of reasons for the differences in the claims ratio between thevarious branches, including the level of competition in the branch, quality of the underwriting, the Company’s experience, uncertainty, etc. for example, the compulsory vehicle branch, which as mentioned is included with the liability branches in which the claim’s ratio does not accurately reflect quality of the underwriting in the report year, is characterized by a highclaim’s ratio, in particular owing to the high degree of competition in it and a fall in prices over time. This is as opposed to the relatively low claims ratio in other property related branches and in the sickness and hospitalization branches.

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In 2007 a growth occurred in the claim’s ratio in the compulsory vehicle branch and in the

property vehicle branch in comparison to the 2006 data.

In Table B-13 development is outlined of the claim’s ratio in the General Insurance branches in

the last seven years. It is possible to identify a falling trend in the claims ratio in the sickness and

hospitalization branches, relative stability over time in the property vehicle branch and a high

degree of fluctuation in the compulsory vehicle and other property branches.

Table B-13Development of the Claims Ratio in the General Insurance Branches33 in the Period

2001-2006

Loss Ratio

2001 2002 2003 2004 2005 2006 2007

Compulsory Vehicle

101% 77% 92% 76% 90% 77% 89%

Property Vehicle 72% 69% 76% 72% 72% 70% 69%

Total of loss of other property (vehicle excluded)

60% 43% 47% 49% 78% 44% 57%

Sicknes and Hospitalization

65% 64% 64% 65% 54% 52% 51%

Total 78% 65% 74% 70% 76% 63% 69%

Source: The supervisory systems of the Capital Market, Insurance and Savings Department.

c) The Development of Premiums

A price growth in the premiums is likely to point to a growth in demand or to aggressive

marketing of policies by most of the companies. It is nevertheless quite possible that this

indicates under-pricing or also flexibility in underwriting instructions. This situation is likely

to increase the risk because the insurance company’s infrastructures will not be suitable for or

sufficient for the management of the risk

A growth in the insurance premiums in one of the branches is likely to point to the entry into a

new sector or to the introduction of activity in another geographical area. As opposed to this,

a reduction in the insurance premiums is likely to point to an adverse impact on the ability of

the insurance company to compete in such branch of activity.

33 Except for the mortgage and credit branches

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In Table B-14 the rate of the change in the insurance premiums recorded between 2006 and

2007 is outlined, in the various Insurance Companies, divided up as between branches of

general insurance.

Table B-14The Rates of Change in the Insurance Premiums in the General Insurance Branches

between 2006 and 2007

The other

Property

Branches

Compulsory

Vehicle

Property

Vehicle

Sickness and

Hospitalization

+ Accidents

Mortgages

and Credit

Insurance

Total of the

General

Insurance

PremiumsClal Group -11% 6% -2% 6% 29% -1%Migdal Group -2% -8% 21% -2% -10% 1%Harel Group -18% 4% 7% 9% -6% -2%The Phoenix Group -2% -10% -6% 23% 228% 3%Menorah Group 12% 7% 15% 6% -67% 10%Ayalon 4% 0% 1% 14% 5% 2%Eliahu 10% -2% -4% 5% -68% -2%Israel Land Development 11% 27% 2% 51% - 14%Insurance Direct 5% 4% 8% 31% -102% 6%AIG Group 31% 6% 11% 47% -92% 18%Shirbit 23% 11% -6% -35% - 0%Agricultural Insurance -6% -3% -2% -61% -22% -5%Shomera 15% 15% 18% 18% - 16%Nature Damage Fund - - - - - 14%The New B.S.S.H - - - - 13% 10%Total - Solo -5% 3% 4% 10% 10% 2%

Source: Data of the Annual Reports of the Insurance Companies, and data processing of the Capital Market, Insurance and Savings Department.

d) Reinsurance

The Insurance Companies in Israel usually arrange cover through re-insurers in respect of a

substantial portion of the insured risk that they have undertaken.

Re-insurance cover has many advantages in terms of the stability of the principal insurer,

because they enable it to spread the risks to which it is exposed, to improve its ability to absorb

additional risks and with higher amounts and to increase its ability to protect its shareholders

equity capital from exceptional events. In certain circumstances, re-insurance is the only means

of enabling the insurance company to provide insurance cover.

Re-insurance contracts signed between the principal insurer and the re-insurer, do not prejudice

the contractual rights of the parties who are insured by the principal insurer, and in general

85


terms they are not even aware that a re-insurance transaction has been concluded. In other

words, the principal insurer is the party that is liable for payment of claims to the insured under

the contract with them, and it itself is entitled to compensation from the re-insurer under the

contract with it in respect of claims made against the principal insurer.

This means that transference of an insured risk to cover through a re-insurer does indeed reduce

the insurance risk, because it exposes the principal insurer to the financial strength and ability

to pay of the re-insurer. In the Supervisor’s circular published during 2006 in relation to the

functions of the risks manager and his relationship with other functionaries within the insurer,

it was specified that those within the insurer with responsibility for re-insurance shall forward

a report to the risks manager which includes a reference to the financial strength of the re-

insurers, their corporate administration and the geographical dispersal of their obligations, in

so far as such information is available.

Table B-15Rate of Re-Insurance Premiums as a Percentage of the Total Insurance Premiums

that the Insurance Companies received in the Period 2004-2007

2004 2005 2006 2007 2004 2005 2006 2007Clal Grpup 32% 31% 29% 25% 6% 6% 4% 5%Migdal Group 28% 30% 30% 28% 3% 2% 3% 2%Harel Group 30% 29% 32% 26% 6% 4% 4% 5%The Phoenix Group

19% 19% 19% 21% 6% 5% 3% 3%

Menorah Group 24% 20% 21% 20% 7% 7% 7% 7%Ayalon 9% 9% 9% 9% 6% 7% 6% 5%Eliahu 7% 7% 6% 7% 9% 9% 7% 10%Israel Land Development

24% 11% 13% 10% 18% 12% 18% 16%

Insurance Direct 5% 6% 6% 5% 16% 16% 12% 13%AIG Group 19% 17% 21% 23% 29% 29% 27% 26%Shirbit 6% 6% 5% 7% - - - -Agricultural Insurance

46% 31% 32% 31% - - - -

Shomera 15% 10% 8% 8% - - - -The New B.S.S.H 625 63% 63% 57% - - - -Total - Solo 23.7% 22.4% 22.7% 20% 5.3% 4.7% 4.2% 4%

Source: Data of the Annual Financial Statements of the Insurance Companies, the Provident Funds and the Pension Funds and data processing of the Capital Market, Insurance and Savings Department.

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In Table B-15 the development is outlined in the amount of re-insurance premiums as a percentage

of the total amount of insurance premiums received by the Insurance Companies in Israel in the

General Insurance branches and in the Life Insurance branches over the period of 2004-2007.

The comparison of each branch as between various companies with regard to the amount of the

re-insurance premiums as a percentage of the insurance premiums received is likely to indicate

difficulties. For example, a high rate in a particular company in relation to the rest of the companies

in the same branch might be a reflection in its case of a lack of available capital for support of the

risk. It is likewise quite possible that the re-insurer has taken a negative view of the business of the

principal insurer, and is charging it higher than usual re-insurance premiums. In any event, the data

in Table B-15 is not sufficient in order to make a comparison between the Companies in the General

Insurance branches, because this table does not indicate specific branches in the sector.

The data contained in Table B-15 shows a consistently falling trend throughout the period of 2003-

2007 in re-insurance premium rates as a percentage of the insurance premiums received both

in the Life Insurance branches and in the General Insurance branches. This could mean that the

Insurance Companies had elected to assume responsibility for greater insurance risks, but it may

well be that the reason for this stems from the transition of the companies to different contracts or

to other insurers.

It is further evident from the data in Table B-15, that the amount of re-insurance in the Life Insurance

branches is substantially lower than the amount of re-insurance in General Insurance. This stems

from the fact that in the main the premiums in Life Insurance include a savings component, in

respect of which there is no re-insurance.

Table B -16 which is set out below specifies in detail the amount of re-insurance as a percentage

of the insurance premiums and the compensation payments as per branches of insurance. The

data shows that while in the property branches (apart from the property vehicle branch) there

is an abundance of re-insurance, the amounts of re-insurance in the compulsory vehicle branch

and in the property vehicle branch are low, which is explained by the characteristics of the risk

in the single item branches - a single element risk in a widely dispersed portfolio, as opposed to

characteristics of the risk in business branches - high variations, low dispersal and risks of major

size and extent.

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Table B-16Amount of Reinsurance as a Percentage of the Insurance Premiums and Insurance

Compensation Payments in the Period 2004-2007

Amount of Insurance premiums

Amount of Payments


Amount of Payments


Amount of Payments


Amount of Payments

The other property branches

61.0% 62.9% 62.1% 74.6% 62.0% 54.5% 59.3% 65.4%

Compulsory Vehicle

5.4% 3.4% 3.1% 6.6% 3.2% 4.2% 2.9% 3.4%

Property vehicle 5.8% 6.7% 3.8% 5.2% 2.2% 3.0% 2.3% 2.4%Sickness and Hospitalization + Accidents

15.9% 14.4% 15.1% 14.0% 14.0% 13.4% 13.7% 13.6%

Mortgages and Credit Insurance

58.5% 68.6% 57.3% 68.4% 58.5% 70.9% 46.8% 62.7%

Source: Data of the Annual Financial Statements of the Insurance Companies, the Provident Funds and the Pension Funds, and data processing of the Capital Market, Insurance and Savings Department.

Transfer of risks to cover by means of re-insurers exposes the insurer to the financial strength of

the re-insurers, such as where the re-insurer is of low rating or where deterioration has occurred

in its rating. Furthermore, substantive exposure of the insurance company to a single re-insurer

might threaten its stability due to the concentration of exposure in one party. Accordingly, not

only the quality of the re-insurers must be examined but also the manner of dispersal of the risks

as between the various re-insurers. For example, the concentration of exposure in an AAA rated

re-insurer is likely to be the preferred option, in terms of quality of credit rating, as opposed to

its dispersal between three A rated re-insurers, although in the first case the principal insurance

company is also exposed to the risk entailed in the concentration of its re-insurance in one party.

The Israeli Insurance Companies are working in the main with re-insurers with a rating of A and

above. In 2007, 97.4% of the insurance premiums for re-insurance were remitted to A-rated and

above re-insurers as compared to 95.7% in 2006. Likewise, the exposure to re-insurers ranked A,

and above was 95.4% of the total exposure of re-insurers as opposed to 93.2% in 2006.

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Table B-17Rate of Exposure to a Single Re-Insurer in Relation to the Total Assets Being Managed and in Relation to the Equity Capital of the Insurance Companies

(December 2007, in NIS)

Total Exposure to Single Re-Insurer

Percentage of the Equity Capital

Percentage of the Total Assets

Migdal 425,006 16.8% 1.9%

Clal 405,533 11.2% 2.2%

Harel 1,840,998 80.9% 15.6%

The Phoenix 336,570 20.4% 3.1%

Menorah 101,903 4.8% 1.4%

Eliahu 52,170 4.9% 1.6%

Ayalon 44,753 8.4% 1.5%

Israel Land Development 18,362 5.5% 0.9%

Insurance Direct 57,010 20.5% 4.9%

Dikla 1,297 0.9% 0.1%

Agricultural Insurance 83,582 50.8% 9.1%

A.I.G. 132,941 53.2% 16.0%

Shirbit 8,861 6.6% 1.2%

Shomera 18,558 25.2% 3.5%

BSSH 10,285 11.6% 7.2%

Inbal 901 1.4% 1.3%


Table B-17 outlines the extent of the exposure34 to a single re-insurer in relation to the total managed assets as against liabilities that are not contingent on yield and in relation to the equity capital of the Insurance Companies. It can be seen that in several companies the extent of exposure to a single re-insurer constitutes a substantive amount of its assets, and also exceeds one half of the Insurance Company’s equity capital.

E. Credit Risks

In this section we consider the credit risks that are incidental to investment activity only, making a distinction between a credit risk that lies with the clients and a credit risk that is carried by the insurance company.

34 For this purpose, “exposure” - means the share of the re-insurer of reserves for risks that have not yet lapsed and for pending claims, with the addition of current debit balances and after deduction of deposits.

89


Table B-18Development of the Amount of Credit in the Assets Portfolio of the

Institutional Bodies in the Period 2004-2007

2004 2005 2006 2007

Amount of Credit as a Percentage of the Total

Liabilities that are not Contingent on Yield of Insurance CompaniesAmount of Credit excluding Government Bonds and Deposits

12% 16% 17% 20%

Amount of deposits 12% 11% 9% 10%Amount of Government Bonds 43% 40% 40% 38%Total 67% 67% 66% 68%

Liabilities Contingent on Yield of Insurance CompaniesAmount of Credit excluding Government Bonds and Deposits

21% 29% 31% 34%


Pension FundsAmount of Credit excluding Government Bonds and Deposits

13% 23% 27% 29%


Provident FundsAmount of Credit excluding Government Bonds and Deposits

19% 27% 32% 41%



The Table B-18 data shows that the amount of credit in the investments portfolio of the Institutional Bodies, which does not include government bonds and is not in the form of deposits in the banks, grew consistently

90

over time, while the amount of government bonds and deposits in the banks fell correspondingly. It is also evident that in respect of liabilities that are not contingent on yield, of the Insurance Companies, the credit exposure that is not government bonds and bank deposits is substantially lower than the amount of exposure in other institutional bodies and in respect of liabilities in which the clients are bearing the risk.

In 2007 a sharp growth occurred in the amount of credit from assets of the Provident Funds, and as against this a sharp fall occurred in the amount of their investments in government bonds. However, in respect of yield-contingent liabilities of Insurance Companies and in Pension Funds the amounts of growth in credit are of a more moderate nature.

Table B-19The Development of Marketable and Non-Marketable Credit in the Assets Portfolio

of Institutional Bodies in the Period 2004-2007 (in percentages)

Credit Components excluding Government Bonds and Deposits (with Debt Certificates)

Amount of Credit as a Percentage of Total Assets

2004 2005 2006 2007

Insurance (Nostro)

Marketable 3.0% 5.7% 5.9% 8.5%

Non-Marketable 9.1% 10.1% 11.3% 11.8%

Participating

Marketable 6.2% 10.3% 11.5% 14.3%

Non-Marketable 14.9% 18.8% 19.3% 19.6%

Provident

Marketable 6.1% 11.4% 14.1% 23.4%

Non-Marketable 13.4% 15.4% 17.5% 17.4%

Pension

Marketable 4.9% 9.4% 12.1% 11.9%

Non-Marketable 8.2% 13.4% 15.3% 16.6%


In Table B-19 the division can be seen as between credit that is not government bonds and is not deposits in the banks, according to marketability. It is evident from the data contained in the table that the amount of non-marketable credit in all categories of the Bodies and the liabilities is higher than the amount of marketable credit, although the rates of growth in non-marketable credit as opposed to marketable credit, as between the Bodies and as between the liabilities, are not consistent.

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During 2006 the Director proceeded with a change in the arrangement of non-marketable credit being extended by the institutional bodies, and in particular on the question of the evaluation of the non-marketable credit.

Table B-20The Split of Credit according to the Issuer’s Risk, Division according to

Categories of Bodies and Liabilities35

Insurance

Liabilities not Contingent on

Yield

Liabilities Contingent on

YieldProvident Pension

Government Securities

55.4% 26.4% 31.1% 55.3%

Securities Rated AA and above

31.7% 52.4% 51.7% 30.7%

Securities Rated A-BBB

5.8% 12.3% 11.6% 9.4%

Non-Rated Securities

3.1% 3.9% 5.2% 4.2%

Loans to Members 0.8% 2.0% 0.3% 0.4%

Loans secured by other Securities

0.3% 0.8% 0.0% 0.0%

Unsecured Loans 2.9% 2.1% 0.1% 0.0%


From the data contained in Table B-20, which outlines the split of credit according to the issuer’s risk in relation to the Bodies and the various liabilities, it can be seen that more than 80% of the credit assets in all categories of the Bodies and the liabilities are invested in government securities or in AA and above rated credit, and that 10% of the credit assets are invested in BBB and above rated securities.

35 The data presented in this table are percentages of the total credit assets only and not of the total assets

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F. Market Risks

At the beginning of 2007 the capital market continued to flourish and prices of securities rose. In the second half,

beginning in mid July, fluctuations intensified in the financial markets and the correlation between risk factors in

the market rose.

The second half of 2007 was characterized by a sharp increase in the Consumer Prices Index and the high rate of fluctuations of interest and of the exchange rate (Shekel/Dollar). This corresponded to the development ofan international credit crisis, which originated in the “sub-prime” mortgage market in the United States. Up to the end of 2007 the direct effect of the sub-prime crisis on the local financial system and including on theinstitutional bodies, was indeed relatively moderate, in particular owing to the small extent of the exposure of the institutional bodies in Israel to the debt leavers backing sub-prime mortgages. However, the crisis did have indirect implications on the value of the assets of the institutional bodies. These implications were expressed more intensely at the beginning of 2008, as a result of falls of the rates in the markets in Israel and overseas.

1) The Management of Exposure to the Geographical Risk The dispersal of investments in various geographical regions is likely to diminish and reduce the affect, ofexternal events of an extreme nature that occur in one geographical area, on the assets portfolio of the Institutional Bodies.


Yield-Contingent LiabilitiesPension Provident Liabilities that are Non-Yield Contingent

2003

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Chart B-4: the amount of assets outside of Israel as a percentage of the managed assets (2003-2007)

2004 2005 2006 2007

93


Chart B-4 outlines the amount of assets invested outside of Israel as a percentage of the total amount of assets being managed by the various Institutional Bodies, including the liabilities that are not contingent on yield of the Insurance Companies.

The chart shows a material difference in the rates of investment outside of Israel as between the bodies on theone hand and the liabilities on the other, the source of which inter alia, is in regulatory barriers.

In the last few years a consistent trend has been recorded that a growth in the amount of investment outside of Israel in the portfolio of investee assets as against the unit-link liabilities of Insurance Companies. In 2003, the amount of investment outside Israel already stood at 9% of the aforementioned assets, and it grew to 14.5% of the assets in 2006 and 15% in 2007.

Also in the investee assets portfolio as against non-yield-contingent liabilities of Insurance Companies there was a substantial growth in the amount of investment outside Israel from 2% of the assets in 2004 to 4% of the assets in 2006 and 6% of the assets in 2007.

As opposed to the Insurance Companies, in 2004 the Provident Funds and the Pension Funds invested very low amounts of their assets outside Israel. This stems, inter alia, from the high amounts of investment of the Pension Funds in designated bonds in these years (see Chart B-5) and from taxation differentials betweenrevenues of Provident Funds from investments outside Israel and their revenues from the investments in Israel. These differentials were cancelled as part of the taxation reform which came into force at the beginning of2005, and at the present time the investments of Provident Funds outside Israel and their investments in Israel are on the same tax level. And indeed, from 2005 a substantial growth trend was recorded in the amount of investment of the Pension Funds and of the Provident Funds outside Israel. These amounts stood at 13% and 11% respectively at the end of 2007, as compared to 8.6% and 7.6% respectively at the end of 2006.

94

2) Split of the Investment Assets of Institutional Bodies

Table B-21Split of the Investments Portfolio of Institutional Bodies according to Classes of

Assets and Types of Linkage in 2007 (In Percentages)

Insurance - Nostro Participating Provident Pension

Marketable Assets

UnlinkedIndex

Linked

Foreign Currency

LinkedUnlinked

Index Linked

Foreign Currency

LinkedUnlinked

Index Linked

Foreign Currency

LinkedUnlinked

Index Linked

Foreign Currency

LinkedCash and Equivalents

3.1% 0.0% 0.2% 3.1% 0.0% 0.4% 4.4% 0.0% 0.9% 2.5% 0.0% 0.4%

Govt. Bonds 5.4% 5.2% 0.1% 7.9% 6.0% 0.1% 7.9% 10.5% 0.2% 5.1% 4.2% 0.1%Govt. Corporations

1.3% 5.9% 1.4% 0.6% 11.8% 1.8% 1.4% 19.6% 2.4% 0.4% 10.1% 1.5%

Shares 3.0% 0.0% 0.0% 22.8% 0.0% 0.0% 19.4% 0.0% 2.2% 12.8% 0.0% 3.3%Basket Certificates

0.1% 0.0% 0.3% 0.3% 0.0% 2.4% 0.8% 0.0% 3.1% 0.5% 0.0% 3.4%

Trust Funds 0.1% 0.0% 0.5% 0.1% 0.0% 4.4% 0.1% 0.0% 0.8% 0.1% 0.0% 0.5%Non-Marketable Assets

Govt. Bonds 36 0.0% 27.0% 0.0% 0.0% 1.0% 0.2% 0.0% 2.0% 0.1% 0.0% 30.8% 0.0%

Loans 5.3% 0.0% 0.1% 4.9% 0.0% 0.2% 0.8% 0.0% 0.0% 2.7% 0.0% 0.0%Corporate Bonds

0.2% 5.6% 0.7% 0.7% 13.1% 0.7% 0.3% 14.5% 1.7% 0.5% 12.2% 1.3%

Deposits 0.0% 7.3% 0.4% 0.0% 5.1% 0.8% 0.0% 4.6% 0.3% 0.0% 2.9% 1.1%Shares and Invested Companies

2.7% 0.0% 0.0% 1.1% 0.0% 0.0% 0.2% 0.0% 0.2% 0.2% 0.0% 0.2%

Real Estate 2.2% 0.0% 0.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0%Investment Funds

0.4% 0.0% 0.9% 1.1% 0.0% 5.0% 0.4% 0.0% 1.1% 0.7% 0.0% 2.4%

Other Assets (including marketable)

11.7% 8.6% 0.2% 0.9% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%

Total 35.5% 59.6% 4.8% 46.5% 37.5% 16.0% 35.7% 51.2% 13.0% 25.7% 60.2% 14.3%


36 Including deposits of the Accountant General

95


Table B-21 shows an outline of the split up of the investments portfolio of the Institutional Bodies - including liabilities that are not contingent on yield - in classes of assets, with a division into linkage sectors. It can be seen that in respect of liabilities that are not contingent o the yield of Insurance Companies the rate of investment in shares is substantially lower than its rate in other investment portfolios. This is because of regulatory restrictions and also because of the short “Maham” (average life expectancy) of some of the liabilities. As opposed to this, the difference between the amounts of investment in shares in yield-contingent liabilities of Insurance Companiesand the amounts of investment in shares in Provident Funds has diminished, and is almost of equal proportions. The amount of investment in shares as a percentage of Pension Funds’ moneys indeed grew to approximately 16%, as compared to approximately 13% in 2006, but it is still lower than the amount of investment in shares of Provident Funds and yield-contingent liabilities.

The rates of foreign currency linked investment in liabilities that are not contingent on yield of Insurance Companies and in liabilities that are yield-contingent fell in 2007 from 6.4% and 18.8% respectively to 4.8% and 15.9% respectively, this in comparison to a growth in the amounts of the foreign currency linkages in Provident Funds and Pension Funds from 7.9% and 8.5% respectively to 13% and 14.1% respectively.

The amounts of index-linked investment in liabilities not contingent on yield of Insurance Companies and in Pension Funds were approximately 60% in the two Groups. The high rate stems from the high rates of investment in designated bonds. As opposed to this, the amount of investment on an index linkage basis in Provident Funds and in liabilities contingent on yield of Insurance Companies was approximately 51% and approximately 38% respectively. In this instance the principal investments are in government bonds, corporate bonds and deposits in the banks. The differentials as between the Provident Funds and liabilities contingenton yield of Insurance Companies are derived from investment that is higher than moneys of yield- contingent liabilities in shares outside of Israel, in Investment Funds, in “basket certificate” , and income-generating real estate.

37 Designated Bonds in yield-contingent liabilities originating in Fund 9; designated bonds in Provident Funds; Accountant General deposits of eligible Provident Funds.

96

3) The Split of Assets in the Investments Portfolio of Institutional Bodies according to their Marketability37


In Chart B-5 the split is outlined of the assets in the investments portfolio of Institutional Bodies, including liabilities that are not contingent on yield of Insurance Companies, according to their degree of marketability.

In relation to liabilities that are not contingent on yield of Insurance Companies the amount of non-marketable assets in the investments portfolio remained constant over time, and there is a turnover as between designated bonds that have been redeemed and other non-marketable assets. As it appears, this trend relates to a reduction in the fluctuating nature of the yields in this portfolio. By contrast, in the investments portfolio of liabilitiescontingent on yield there is a growth over time in the non-marketable investments at the expense of the marketable portfolio, except for 2007.

In the investment’s portfolio of the Provident Funds the regular mixture has been maintained over time between marketable investments and non-marketable, whereas in the investment’s portfolio of Pension Funds the designated bonds that have been redeemed are being converted both for other non-marketable investments and marketable investments, with a consistent growth in the amount of marketable investments.

Chart B-5: the Amount of Marketable Assets in the Investments Portfolio of Institutional Bodies as a Percentage of the Total Managed Assets.

100%90%80%70%60%50%40%30%20%10%

0%

74%

2%

24%

62%

1%

37%

26%

27%

47%

NostroWith ProfitsProvident FundsPension Funds

36%

33%

11%

40%

43%

17%

45%

35%

21%

45%

31%

24%

73%

2%

25%

71%

2%

27%

71%

2%

27%

61%

1%

38%

58%

1%

41%

55%

1%

44%

24%

29%

47%

25%

28%

47%

26%

27%

47%

2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007

Non-Marketable Assets Designated Bonds and Accountant General Deposits Marketable Assets

97


4) Equity Capital The minimum capital requirement for an Institutional Body is intended to act as a layer of protection against general unforeseen risks. The requirements in respect of Provident Funds and Pension Funds are different fromwhat is required of Insurance Companies. The Companies managing the Provident and the Pension Funds do not carry the insurance and investment risks - which lie with the clients - and they are required to have a low fixed amount of equity capital of NIS 1 Million and NIS 7.5 Million respectively. As compared to them, theInsurance Companies carry the insurance risks themselves, as well as market risks, credit risks and operational risks, except for market and credit risks in liabilities that are contingent on yield. As a result of this, the minimum requirements of the Insurance Companies as to equity capital are higher, and are a reflection of the scope oftheir activity.

The capital requirements that apply at the present time to an Insurance Company in Israel are prescribed in the Control of Insurance Business (Minimum Equity Capital Required of an Insurer), Regulations, 5758-1998. They are attributed to the sort of models that are based on factors that relate to a single individual saver, and they are designed to cover the case of insurance-related savings only (except for capital requirements due to market and credit risk in respect of assured yield life insurance policies). The capital level has been fixed as apercentage of the premiums in General Insurance or of the pending claims in General Insurance in respect of self insured residual liability

Against a background of a multitude of bankruptcies and falls in the credit ratings of Insurance Companies worldwide, stemming inter alia from the recession in the capital markets in the period of 2002 -2003, and in view of expansion of the sectors of activity of Insurance Companies and their complexity, in recent years the regulators have become increasing aware of the importance of appropriate practices in the management of risks, of their potential effects and of the need for the efficient allocation of capital resources.

On July 10, 2007 the European Union adopted the format of the Solvency II Directive (hereinafter - the Proposed Directive). The Proposed Directive constitutes a fundamental and comprehensive change in the regulation pertaining to the appropriate assurance of capital in Insurance Companies in the countries of the European Union and their payment capacity, and its aim is to improve the protection of funds of the policyholders, to deepen the integration between markets and to increase the competition in the sector.

The Proposed Directive is based on three tiers. The first tier is concerned with quantitative requirements. Thedraft sets out rules for evaluation of liabilities vis a vis the policyholders, for the evaluation of assets being held as against the liabilities and for the capital requirements in respect of the exposure to insurance risks, market risks, credit risks and operational risks. In this section two levels of required capital are defined: “MinimumCapital Requirement” (MCR) and “Capital Required to Secure Payment Capacity” (SCR), which represents two different levels of supervisory involvement. The Insurers have the option of calculating the SCR on the basisof a given standard formula or on the basis of an internal model that has been approved by the Supervisory Authority.

98

The second tier relates to qualitative requirements. This section is concerned with the process of supervisory examination, which focuses on the proper evaluation of capital resources, as well in the context of the risk management procedures. The Supervisors may require insurers to allocate additional capital in respect of risks not taken into account under the first tier.

The third tier is concerned with requirements of disclosure. In order to increase discipline in the market, the Directive increases the level of disclosure and of transparency, and requires the Insurance Companies to publish details concerning the risks to which they are exposed, and concerning their equity capital and the system of risk management practiced by them.

According to the timetables set by the European Union, implementation of the Proposed Directive in the member states of the Union is expected to occur from the second half of 2012.

In recent years, even before the Solvency II Directive was formulated, the Supervisory Authorities in several countries, including the members of the European Union, went over to more sophisticated models based on factors concerned with several types of risk (multi-risk factor based), which are a combination of reference to all the risks and simple methods of calculation.

An examination of the implications of implementation of the aforementioned models by the Israeli Insurance Companies reveals a major gap between the requirements under the foreign models and requirements under the models normally in use in Israel.

Charts B-6 and B-7 give an outline of the ratio between the capital requirements in respect of General Insurance business according to the Israeli model and the capital requirements according to the existing models in England and in Australia. This ratio varies, in general terms, in between 1.4 to 2.5.

99


3

2.5

2

1.5

1

0.5

0

Chart B-6: The Ratio between the Capital Required under the English Model and the Capital Required under the Existing Israeli Model in respect of Israeli Insurance Companies engaged solely in Branches of General Insurance (December 2006 Data)

Small CompaniesMedium Size Companies

Major Companies

England to Israel Israel

3

2.5

2

1.5

1

0.5

0Small CompaniesMedium Size

CompaniesMajor Companies

Chart B-7: The Ratio between the Capital Required under the English Model and the Capital Required under the Existing Israeli Model in respect of Israeli Insurance Companies engaged solely in Branches of General Insurance (December 2006 Data)

Australia to Israel Israel

100

In 2007 the Supervisor announced his intention of implementing the Solvency II Directive in Israel on the date of its implementation in the European Union. As an interim stage, the Supervisor published a proposed amendment to the regulations as to the minimum amount of equity capital required of an insurer.

In the proposed amendment of the capital regulations it was proposed to add the following requirements to the existing capital requirements in Israel:

a) Capital requirements in respect of investment assets and in respect of exposure to re-insurers (the credit risk of re-insurers) - similar to the usually accepted practices in other countries, at twice the amount of every asset in the amount of capital prescribed for it, with an adjustment for differences as between localrating and international rating.

(b) Capital requirements in respect of exposure to loss as a result of a single catastrophic event in General Insurance business - to the level of the self insured residual liability of the Insurance Company in respect of exposure to loss as a result of a single catastrophic event in General Insurance business and at the level of an amount that is double the share of re-insurers in the amount of exposure to a natural disaster in terms of general insurance in fixed amounts, pursuant to the rating of the re-insurers.

(c) Capital requirements in respect of operational risks - according to the standard formula that is prescribed in the quantitative tier in the draft of the Proposed Directive.

The Insurance Companies are also required to prepare an organizational mechanism for implementing the Proposed Directive and to calculate the quantitative requirements in accordance with a quantitative evaluation survey published by the European Union.

Owing to the anticipated growth in the capital requirements of the Insurance Companies and due to the business results in the last quarter of 2007, Insurance Companies have been requested not to distribute dividends of an amount that exceeds one half of the earnings from normal activity from the beginning of 2008, other than with the prior approval of the Supervisor.

In Table B-22 a detailed breakdown has been inserted of the minimum amount of equity capital required of the Insurance Companies, the existing equity capital and the amount of surplus existing equity capital as compared to the capital required in the period of 2004- 2007.

From the data contained in the Table it can be seen that the amounts of recognized surplus equity capital beyond the minimum capital required under the provisions of the law, were substantially reduced in 2007 as compared with 2006.

101


Table B-22Existing Equity Capital as Compared to the Minimum Equity Capital Required in the

Insurance Companies in 2005-2007 (In NIS Millions)

2005 2006 2007

Minimum Equity Capital

Equity Capital

Amount of

Surplus Equity Capital


Equity Capital

Amount of



Equity Capital

Amount of


Migdal Group 1779 2185 23% 1954 2510 28% 2098 2530 21%Clal Group 2093 2895 38% 2172 3279 51% 3234 3606 12%The Phoenix Group 1695 2284 35% 1144 1580 38% 1371 1654 21%Harel Group 1143 1188 4% 1810 2013 11% 2233 2414 8%Menorah Group 1348 1482 10% 1488 1575 6% 1923 2184 14%Ayalon 293 313 7% 368 396 8% 486 532 9%Eliahu 663 666 0% 688 822 20% 1007 1065 6%Israel Land Development

278 251 -10% 279 280 0% 322 332 3%

Insurance Direct 131 307 61% 171 326 91% 219 278 27%AIG Group 102 160 57% 109 191 75% 296 414 45%Agricultural Insurance

87 131 51% 135 142 5% 146 164 13%

Ezer 101 91 -11% 122 132 8% 160 165 3%Shirbit 76 93 22% 91 113 25% 120 135 12%The New B.S.S.H 46 58 28% 45 68 50% 26 89 247%Inbal 50 56 12% 50 63 26% 51 63 23%Shomera 50 55 9% 56 60 7% 71 74 4%Ashra 12 15 21% 12 15 21% 13 15 18%Total * 9947 12230 22% 10694 13565 27% 13776 15714 14%


* The sum total data includes additional companies, including Government Companies.

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