Strategic process summary 1 Capital Markets, Insurance and Savings Division The Ministry of Finance,...

Strategic process summary 1

Capital Markets, Insurance and Savings Division

The Ministry of Finance, Israel

Strategic process highlights

July 2003


Strategic plan of the Capital Market, Insurance and Savings Division

The Capital Market, Insurance and Savings Division of the Ministry of Finance, has undergone a process of constructing a five-year strategic plan for the Division.The plan is required particularly in the light of the substantial changes that the financial markets, domestic and worldwide alike, have undergone and of the financial globalization process.The process was conducted by a leading strategic consulting company and included comprehensive analysis of financial supervisory authorities in the world, and meetings with relevant bodies of the financial markets in the banking, insurance and pension field, both in the public and the private sectors.A strategic plan for the Division was formed at the end of this process. The strategic plan comprises several elements, among them the definition of the Division’s vision and mission, and the determination of the Division’s objectives and goals for the coming years in its diverse areas of occupation (capital market issues were dealt with separately).

We hope that the design and contents of the strategic plan will be of interest to you.


Table of contents

• Description of the process

• Goals of the process

• Methodology

• Identity of the Division

• Mission of the Division

• Division’s primary goals

• Supervisory policy

• Goals at the Division level

• Goals at the department level


Strategic process in the Capital Market, Insurance and Savings Division

• The strategic process in the Division includes two main components:

1. Preparation for the management workshop comprised of four elements:

Interviews with the Division Management

Internal work teams prepared position papers on Division’s agenda issues

Interviews with external bodies – Bank of Israel, insurance companies, commercial

banks, pension funds and insurance agents – a total of 9 interviews (with 13

interviewees)

Worldwide models review – review of supervising bodies and methods in the financial

markets in about 30 countries

2. Management workshop – 4 intensive days with Division management and consultant team

participation, where issues central to the Division’s activity were discussed and decisions

were taken.


Strategic process's goals

Definition of the Division:

Identity, mission, primary goals and supervision policy

Next 5 years’ goals and missions

1

2


Methodology Division’s identity

Next 5 years’tasks

primary goals

Action Plan

Feedback

Next 5 years’ objectives and goals at the division

level

Division’s mission


Division’sidentity

Next 5 years’ tasks

Primary goals

Plan of Action

External expectations from the Division

World models

Next 5 years’ objectives and goals at the

Division level


•Identity

•Mission

• primary goals

• Market and authorities

trends

• Convergence

• Organizational models

• Mission

• Supervision policy

• Domestic trends

• Failures and

opportunities

•Goals

• Tasks for action

Methodology

Feedback


Identity definition – who are we?

“A government entity charged with the regulation and supervision of financial services in the State of Israel,

particularly in the insurance, pension, savings and provident funds sectors”



To assure the optimal level of

financial security to the

customers of the financial

services in Israel which are

supervised by the division


The division’s primary goals

Customer’s

side

•A variety of financial products, available to all and for every need

•Integrity, transparency and fair products pricingCustomers’ awareness and comprehension for intelligent

acquisition of financial products

Financial

institutions

•Securing the institutions’ stability to ensure solvency of public

obligations

•Securing system stability

System wide

considerations Open, fair and competitive financial markets

To promote, encourage

and ensure:


Supervision policy

Current situationCurrent situation

High level of Division’s involvement in marketsHigh level of Division’s involvement in markets

When normal market mechanisms fail and essential public interests are compromised, a high level of involvement on the part of the Commissioner

is required

When normal market mechanisms fail and essential public interests are compromised, a high level of involvement on the part of the Commissioner

is required

Lower level of involvement

requires

Lower level of involvement

requires

Creation of market balancing mechanisms: • Competition•Creation of mechanisms for proper corporate governance

•Customers – class actions, customer organizations

Creation of market balancing mechanisms: • Competition•Creation of mechanisms for proper corporate governance

•Customers – class actions, customer organizations

Criteria for involvement level:• Competition level• Product complexity• Evident failure in the market• Potential for damage to the customer• Availability of information• Level of standards and regulation

Criteria for involvement level:• Competition level• Product complexity• Evident failure in the market• Potential for damage to the customer• Availability of information• Level of standards and regulation

Involvement level varies by

sectors

Involvement level varies by

sectors


Supervision policy

• Ramifications of involvement level reduction. Diagnosis of current versus desirable situation, based on

two dimensions, supervision and standards depth:

– First dimension – Supervision and control depth – represents the level of Division’s involvement in

various markets. Represents distinction between direct and indirect supervision methods.

– Second dimension – Regulations and standards depth – what is the extent of detail in standards and

regulations.

• Diagnosis method:

– Analysis of methods and supervision level in every sector

– Definition of terms for reduction for Inspectors’ involvement in markets

– Setting criteria for the desired level of involvement in every market

• In order to determine the optimal Division’s supervision policy, a detailed two dimensional analysis

of the utility function, in general and in respect to every sector, is required.


Supervision policy

Standards and

regulations depth

Supervision and control depth

Direct, a-priori, examination of all products, aspects and issues

Post factum, exceptions and special clauses examination

High

Low

X

X

X

X X Market perception

Current statusHome and

vehicle

Division’s perceptionIndividual health(long-term care)

Division’s perception Group health

Division’s perceptionHome and vehicles

USA

Regulation

Supervision

Desired scope


Goals at the Division level


Goals prioritization criteria

• Prerequisite – goal’s compliance with mission and primary goals set

• Existing or anticipated severity of failure if division fails to act

– Economic magnitude of failure

– Size and type of public exposed to failure

• Impact of goal on other issues

• Level of market pressure to deal with the problem

• Feasibility – Division’s ability to fulfill the goal


No.

Subject/area Goal

.1 Lateral issues Insurers stability/risk management – emphasis on life and pension insurance

.2 Pension Execution of recovery plans for old funds

.3 Lateral issues Adequate transparency and disclosure in insurance transactions, particularly in these stages: prior to transaction – customer’s side, claim phase – customer’s and insurer’s sideCreation of customers’ awareness and understanding of insurance transaction

.4 General insurance Fight against insurance fraud

.5 Savings channels Comprehensive policy formation (including dealing with tax distortions in different channels)

.6 Intermediaries Enhancement of agent’s and consultant’s status and obligations regulation

.7 Health insurance Regulation of group long-term care insurance

.8 Lateral issues - insurance Procedures for claims processing in companies, particularly in general insurance

.9 Financial services convergence Definition of principles and suitable conditions for mergers in financial services markets in Israel

.10

Globalization Relationships with supervision systems in the world


1. Maintaining the stability of insurance companies

Risk-based supervision - through assessment of insurer’s risk management and his condition

• Corporate governance in an insurance company (position and training of the actuary, dynamic inspections of capital adequacy, board activity, internal audit, etc.)

• Update of professional standards for reserves setting • Re-examination of capital requirements


2. Pension

• Management and supervision – appointment of special administrator

• Operational umbrella – uniformity, clarity and equality• Deficit reset – rights level and governmental assistance• Balancing mechanism – deficit prevention safety cushion

The test is in execution and in restoration of public confidence


3. Transparency and adequate disclosure

• Adequate disclosure – proper scope, appropriate context (an adequate disclosure is not a full disclosure).

• Transparency – ways, means and what information channels are used to present the adequate disclosure, and its availability and friendliness.

• The more the adequate disclosure is fully applied, the sooner a transition from direct to indirect supervision can be achieved.

• Adequate disclosure is required during pre-transaction phase (marketing and selling), policy life and the insurance occurrence.


Insurance transaction information – transparency, availability and adequate disclosure – failures mapping and prioritization

PhaseInformation user

Customer Insurer

Pre-transaction •Policy’s terms and exceptions•Reasonable awareness with respect to transaction’s essence (needs)•Publications• Comparative information regarding products, suppliers, distribution channels and their evaluation methods

Underwriting information (customer’s characteristics)

During transaction execution

•Transaction’s fulfillment (validity) •Status•Value•Policies and insurers switching options

Underwriting information update

Exit point Procedures and methods for rights exhaustion ClaimLiability to the insured

Claim (insurance occurrence)Claim settlement

Procedures and methods for rights exhaustion at claimRights fulfillment status and salvage value

Claim’s existence Claim’s detailsLiability’s status and salvage valueA-divisionA-division

A-division


4. Fighting insurance fraud

• Insurance fraud’s larger picture: false account at policy acquisition, claim inflation, fallacious report on circumstances of insurance occurrence, fabrication of occurrence

• Regulator’s involvement required because of: trade restrictions, privacy, public product

• Phase A: dealing with mandatory insurance• Phase B: extension to remaining insurance lines


5. Comprehensive savings policy formation

• Long-term savings encouragement policy redesign • Harmonization and creation of priorities according to the

new policy (for instance, tax distortions elimination) • Transparency, elimination of ambiguity• Channel friendliness and simplicity enhancement


6. Agent's/consultant’s duties and status regulation

• Brokerage/consultancy separation and insurance consultant status regulation

• Model of insurance broker?• Distribution channels expansion• Training reform, certification and agent’s professional

responsibility


“Customer-agent-insurer” relations triangle (brokers) – goals and priorities

Goal Priority

Agent’s/consultant’s duties and status regulation evolvement (including analysis and regulation of specific types, such as: captive agent, independent broker and special broker)

A-division

Creation of basic awareness and comprehension among customers (ability to make the right choice), through education and information

A-division (lateral issues)

Ensuring simple, transparent and fair procedures for dealing with claims, especially in general insurance, in the companies

A-division (lateral issues)

Products’ availability improvement/ distribution channels expansion and regulation A-area

Creation of objective mechanisms for claim/settlement management (courts and alternative mechanisms) B

Encouragement of development of simple and comprehensible (for the customer) products B

To ensure companies’ fair conduct, while the companies maintain adequate disclosure towards the customers B

Creation of commissions structure without conflict of interests B


Brokers - statusCustomer’s welfare hurt

Purchase productUnsuitable Price too highWrong quantity

The problem

Solutions options

Customer1. Doesn’t understand product2. Ignorant in conduct vis-à-vis the insurer

The company1. Doesn’t know how to handle the customer2. Does not entirely believe the customer

Customer and insurer are agent dependent

Why?

Simple and manageable shelf products

Means of settlement management process

Customer’s awareness (making the right choice)

Responsibility taking by the companies

SaleClaim management

Commission structure

Availability-at POS

Product simplicit

y

Fairness

Fairness

Procedure simplicity

Possible outcome

SA*

IA*

DA*

Confidence buildingand anxiety reduction

Expenses reduction

Complaints and conflicts examination mechanisms

(courts and others)

Agent

Enforcement

EducationAdequate disclosure

Objective sales counseling

“Insurance consultant”

Objective settlement counseling

“Settlement agent”

* DA –Dependent Agent ; * IA –Independent Agent ; * SA – Special Agent


7. Group long-term care insurance regulation

• Market structure: most of the policies – group policies (sick funds – 3.5 million insured)

• The flaw: long term need, but no obligation for continuity• Required: finding the right balance between availability

level and the need for continuity


8. Claims settlement processes

• Fairness in claim settlement: enforcement• Transparency: process simplicity, consulting mechanisms

for the insured, comprehension of the process


9. Financial services convergence• Convergence: financial service production or distribution by

an institution which customarily does not deal with this• Worldwide: widespread phenomenon in Europe, beginning

of cooperation between banks and insurance in the US• The conflict: effectiveness enhancement against

centralization enhancement• Current situation: relations between banks and insurance

companies


10. Globalization

• In the long term: analysis of the integration of Israeli financial markets into a large economic bloc

• Examination of the required adaptations for financial services marketability enhancement, transparency, regulation

• Cooperation with international bodies – relevant professional elements in international organizations who are dealing with issues related to the Division


Goals at the area level


Pension area – goals and prioritazation

Goal Priority

Execution of old pension funds recovery plan A-division

Resolution of tax system distortionsA-division (will be dealt with within the savings channels framework)

Rectification of existing corporate governance distortions

• Managerial purity

• Ownership structure balancing (trade unions)

A-area

Centralization reduction A/B

Completion of the new market regulation B

Transparency B

Facilitating a real choice of fund for the customers B

Improvement of professionalism and level of knowledge C


Provident funds – goals and prioritisation

Goal Priority

Dealing with potential conflict of interests in funds management A-area

Codification completionA-area

Centralization reduction B

Proper management of risks embedded in the high level of fund fluidity B


Life insurance – goals and prioritisation

Goal Priority

Ensuring proper integration of changes in this insurance line, especially

insurance companies’ stability in the life insurance area, through indirect

supervision tools

A-area

(will be dealt with

within the lateral

issues on divisional

level)

Dealing with life insurance’s inferiority vis-à-vis pension annuity

A-area

(will be dealt with

within the savings

channels framework

on divisional level)

Product structure transparency and adequate disclosure B

Enhancement of customers’ awareness of the cost and implications of

policy elementsB


General insurance – goals and prioritisation

Goal Priority

Fight against insurance fraud A-division

Fairness in claims settlement

A-division (will be dealt

with within lateral issues

framework)

Dealing with market flaws which cause “above normal” product

prices in several segments: mandatory vehicle, health, homes

(mortgages)

A/B

Policies market regulation (not admitted, not certified (group,

overseas, health))B


Health insurance – goals and prioritization

Goal Priority

Group long-term care insurance regulation A-division

Regulation of retroactive underwriting A-area

Regulation and reduction of insurance duplication B

Dealing with “market flaws” which cause “above normal” prices B

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