Israel is a relative oasis of calm in a region being torn apart by civil war and natural disaster. GR reports on the state of the nation for the reinsurance sector
It may not have the slick marketing campaigns of some other Middle Eastern insurance centres, but Israel is slowly and surely growing in prominence on the global insurance stage.
In May, senior representatives from the global reinsurance industry will gather for the fourth annual Tel Aviv Reinsurance Conference. The event’s popularity is a good reflection of how Israel is perceived by the brokers and carriers.
Boasting a mature market and some of the Mediterranean’s biggest reinsurance buyers, the event is an important market for international players. With one of the highest premiums per capita in the world at $1,500, and a total turnover of $11bn in 2009, the market has been growing at a steady pace over the past decade.
Despite softening rates over the past few years – driven by low loss experience and intense competition – this well-regulated, mature market with its big reinsurance accounts continues to attract plenty of interest.
Speaking at last year’s Tel Aviv Re event, the chairman of the Israel Insurance Association and president of Harel Group, Gideon Hamburger, said the conference had taken off as a significant event in the global reinsurance calendar. “We are very proud that the Israeli insurance market is growing from year to year, and that it has not suffered from the worldwide economic turbulence,” he said.
The traffic is not just one-way. While Israel’s local carriers have kept a comparatively low profile, they are increasing their involvement in other markets. “The Israeli market has grown over the past 20 years,” says Aon Benfield Israel’s London-based head, Morris Mindel. “We have seen mergers and acquisitions – mainly of a domestic nature – but we’ve also seen Israeli companies investing outside Israel in central Europe, the USA and in London.”
London and Israel have continued to cement their risk-sharing relationship over the past decade. In 2001, Clal Insurance Holdings established a presence in the Lloyd’s market with its acquisition of Broadgate Syndicate 1301, which underwrites a portfolio of six main classes, including property, accident and health, and bloodstock.
In turn, Lloyd’s granted delegated underwriting approval to Israeli insurer Kesh International Underwriting Agency in December 2010. The new coverholder will continue to focus on niche lines of business – including directors’ and officers’ cover – some of which will be placed in the Lloyd’s market.
State of play
As with many mature insurance markets, the top five players (Clal, Migdal Group, Harel, Phoenix and Menora Mivtachim) account for a large proportion of premiums: 61% of the non-life market in 2009, down from 63% a year earlier. Consolidation has helped to concentrate the market, with the introduction of a more stringent regulatory system driving further mergers and acquisitions.
Motor dominates the primary sector, accounting for around 52% of the non-life premium volume, followed by property at about 20%, with liability and health covers coming in third and fourth positions.
Aside from the compulsory covers – motor and workers’ compensation – non-admitted carriers are able to underwrite most lines of business. As a result, some of the larger risks are placed outside the local market in London and Europe.
The majority of primary placements are made via agents, with few Western-style brokers in operation. The intense competition between agents and insurance carriers exerts downward pressure on rates.
“The higher-valued property business tends to be more driven by what’s available in the facultative reinsurance market,” Mindel says. “The medium-sized values tend to be more about domestic competition, and in 2010 there was more competition on the medium-sized commercial and industrial business.”
The local carriers are big purchasers of reinsurance capacity from the global market. “On the property side, domestic insurers have a significant exposure to natural hazards – mainly earthquakes – but there is an element of flood and hailstorm exposure,” Mindel says. “Cedants are astute in ensuring they have sufficient protection for their balance sheets, and quite often they’re working with our analytics experts to ensure they’re buying the right structures and the right level of reinsurance.”
A large proportion of reinsurance is purchased direct from European reinsurers, such as Swiss Re, Partner Re and Hannover Re, although reinsurance brokers have been increasing their presence in the market.
“Historically, the insurance companies have bought proportional reinsurance, as it’s been a good method of insuring their portfolio – especially because of the earthquake exposure – and in the early days that was mainly done on a direct basis,” Mindel explains. “In more recent years, Aon Benfield has played a much bigger role in supporting the cedants in the placement of their fire treaties.”
The world’s richest man, Warren Buffett, put Israel on the global investment map when he paid $4bn for an 80% stake in metal-cutting tool company Iscar Metalworking Cos in 2006. He is full of praise for the country and its economy, saying: “If you’re going to the Middle East to look for oil, you can skip Israel. If you’re looking for brains, look no further. Israel has shown that it has a disproportionate amount of brains and energy.”
Israel’s well-documented security issues have had little impact on the economy or the flow of foreign investment into the country. The economy is thriving, having emerging relatively unscathed from the financial crisis. It has become a world leader in technology, software development and biotech industries, backed by a thriving venture capital industry.
Israel’s diamond market also maintains a global reputation. The major industrial sectors include metal products, electronics, biomedics, processed foods, chemicals and transport equipment.
The country has shown no signs of being swept up in the wave of political unrest that has crashed through Arab nations, such as Bahrain, Egypt, Libya, Oman, Jordan, Saudi Arabia, Tunisia and Yemen. Mindel believes that Israel’s democratic parliament means it is highly unlikely to experience the type of unrest recently witnessed in neighbouring countries.
But the direction of pricing may be set to change for catastrophe-exposed lines of business – in particular reinsurance. This is not necessarily a reflection of events at home, but potentially as a result of catastrophes in other parts of the world. “Following Japan, there is quite some focus on the catastrophe area – that’s both on the life and non-life areas of the business,” Mindel says.
“On the non-life side, there’s a focus on catastrophes, and companies are buying their programmes up to a [Risk Management Solutions] return period of 1 in 1,000 years. In view of Japan, they are also looking at whether this is sufficient or whether they should be considering additional purchases.”
Israel itself has not experienced any major hits or losses in recent years, despite its exposure to earthquake risk and other natural hazards. Its neighbours have been less lucky, with a magnitude 6.1 earthquake in Turkey causing 42 deaths and several building collapses in March 2010.
“There have been no significant earthquakes to speak of,” Mindel says. “There have been some minor storm losses, but in general the natural peril losses and loss experience in Israel has been excellent – in fact better than Greece, Italy and Turkey.”
But the potential for a major quake is never far. On 1 April, a strong magnitude 6.2 temblor hit Crete, with shockwaves felt throughout Egypt, Israel and Malta. According to catastrophe modeller RMS, while Israel is considered to have moderate seismicity, it is threatened by the Dead Sea Rift, which creates a series of faults running across the length of the country.
RMS’s Israel earthquake model captures the Dead Sea Rift hazard and its faults, including the Jordan Valley Fault in the north, which generates magnitude 7 or larger quakes every 1,000 years. The last major event was in 1033, increasing the current probability that a major quake will occur soon.
This is a particular threat to Jerusalem, which is located less than 40km from the fault. Should a 7.5 magnitude quake occur here, it could cost more than $30bn in losses. As the country continues to develop its economy and infrastructure, its exposures to natural perils such as earthquakes will grow.
Turning to man-made perils, terrorism insurance remains tougher to place than other classes of business, according to Tal Nahari Amrami, managing director of Toren Insurance Agencies. Local insurers provide cover for property damage, with the government covering bodily injury and death, he explains in an article for Worldwide Risk Solutions.
“This cover for property is expensive and the insurance companies purchase reinsurance from European reinsurers,” Amrami explains. “The terror cover is excluded under directors’ and officers’ and bankers’ blanket bond policies.”
Terrorism risks and the potential for quake losses may be a key concern. However, with its well-developed (re)insurance sector, and a solid economic infrastructure to support that, Israel is well equipped to handle any major events that lie ahead. GR