Q&A: insurance & reinsurance regulation in Israel
Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.
According to the Supervision of Financial Services Law (Legislative Amendments) 5776-2016, the Capital Market, Insurance and Savings Authority (CMISA) is the supervisory authority over all Institutional Investors (insurance, pension and provident funds companies). CMISA is also responsible for licensing insurance brokers and pension advisors, and it oversees their operations and interactions with their members, insured individuals and policyholders. The authority’s primary purpose is to ensure the stability and the competitiveness of these markets.
There may be other regulatory bodies over insurance company relating to specific matter such as Anti Money Laundering, antitrust and the Securities Exchange Commission (to the extent the insurance company is publicly traded or held by a traded company). The main functions of the authority, according to the laws under which it operates, are:
- to protect the interests of insureds, members and clients of the regulated entities;
- to ensure the stability and proper functioning of the regulated entities;
- to promote fair competition in the financial system, and specifically in the capital market, and the insurance and savings sectors;
- to promote technological and business innovation in the regulated entities’ operations; and
- to promote competition in the field of financial services.
Formation and licensing
What are the requirements for formation and licensing of new insurance and reinsurance companies?
A company or a person who wishes to engage in insurance business (an insurance company, broker or advisor) in Israel must be licensed.
According to the law, with the application for a licence, the entity will need to disclose information, such as, insurance branches in which the company shall engage, policies to be marketed, reinsurance arrangements, its directors and officers, financial and credibility information regarding the controlling shareholders, and other financial information.
To receive a licence to operate as an insurer in Israel, the applicant must:
- establish a company in Israel; or
- if the applicant is an insurer incorporated outside Israel, be registered in Israel as a foreign company.
Other licences, authorisations and qualifications
What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?
As stated above, writing insurance in Israel requires a licence. This means foreign insurers cannot write insurance in Israel; however, Israeli entities are able to buy insurance from foreign insurers. Furthermore, according to a regulation from 1951, Lloyds Underwriters are permitted to write insurance directly in Israel.
Having said the above, the authority is authorised to license a foreign insurer if it is registered in Israel and subject to regulation in the country of origin.
Other than a licence to engage in the insurance branches specified in the licence, insurance plans in general must have the prior approval of CMISA before marketing, along with the tariffs and terms of the policy. Certain policies are subject to default approval (deemed approved if no objection is presented within the defined period), some are exempt if they are within a pre-approved master policy.
Officers and directors
What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?
The regulations provide detailed requirements for a board member of an insurance company involving the following aspects:
- fit and proper (no criminal records, bankruptcy or investigations);
- sufficient time;
- lack of conflict of interest.
Other than individual requirements that are obligations on the board’s diversity with minimum requirement for professional expertise directors, financial expertise directors and other expertise requirement mandate by the board’s resolutions.
In addition, there is a minimum requirement for ‘outside directors’ (directors who have no prior business or personal relationship to the company and its controlling shareholder) depending on various variables relating to controlling shareholder and whether he or his family members serve on the board or as officers of the company.
Capital and surplus requirements
What are the capital and surplus requirements for insurance and reinsurance companies?
Capital requirements of an insurance company are governed by the Solvency II regime, as adopted (along with adaptations) in Israel based on the EU regulations. These rules provide for economic capital requirement calculated based on the portfolio of each company, the insurance coverages sold by it, the risks to which the company is exposed thereby and correlation of these risks.
What are the requirements with respect to reserves maintained by insurance and reinsurance companies?
For each financial statement (annual and quarterly), the actuary must prepare a report providing for the appropriate reserves according to actuarial rules and practices along with CMISA’s regulations. This Actuary report is part of the financial statement of an insurance company and is, thereby, governed by the laws of financial statements.
What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?
Insurance plans in general must have the prior approval of CMISA’s approval before marketing, along with the tariffs and terms of the policy. Certain policies are subject to default approval (deemed approved if no objection is presented within the defined period), some are exempt if they are within a pre-approved master policy.
The Insurance Contract Law 1981 and the Control over Financial Services (Insurance) Law 1981, are the two main laws that govern the insurance industry. A massive regulation was promulgated under these statutes to address the proper disclosure of the terms and conditions of the police and the manner in which it can marketed.
What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?
The supervision of CMISA over an insurance company is of a wide nature and unlimited in scope or frequency. Other than the quarterly financial reports and extensive fillings that the insurance company has to make with CMISA in pre-fixed timing or occurrences, CMISA may, and does, conduct any review it wishes that pertain to the ongoing business and corporate governance of the company. CMISA is authorised to receive documents, minutes and internal reports, as it deems necessary and to call upon officers and directors for questioning.
All of the above does not derogate from CMISA’s authority to investigate and to initiate administrative proceedings against the company or its directors and officers.
What are the rules on the kinds and amounts of investments that insurance and reinsurance companies may make?
Insurance regulation allows a wide range of tradable and non-tradeable (real estate, PE, credit) activity while including detailed limitations and restrictions, usually as a percentage of the portfolio or the issuer and dependant of rating.
Change of control
What are the regulatory requirements on a change of control of insurance and reinsurance companies? Are officers, directors and controlling persons of the acquirer subject to background investigations?
To hold 5 per cent means of control in an insurer, the holder must receive the approval of the Commissioner of capital markets, insurance and savings.
The term ‘means of control’ means:
- the right to vote in the general assembly of a company or in a parallel body of another incorporation;
- the right to nominate a director to a board of directors;
- the right to participate in a company’s profits by way of dividends; and
- the right to receive the balance of a company’s assets in case of liquidation after payment of the company’s debts.
Change of control will require approval of the controlling shareholder as per the above.
Financing of an acquisition
What are the requirements and restrictions regarding financing of the acquisition of an insurance or reinsurance company?
Corporations holding means of control, directly or indirectly, in the institutional body will be required to maintain the following conditions at all times:
- the equity ratio of the total solo balance sheet shall not be less than 50 per cent at any time, in any corporation through it the institution is held institutional;
- the corporation held directly by the applicant for the control permit shall at all times retain equity; and
- compare at least to the basic capital of the institutional body double the minimum holding rate required for the purpose of controlling the same institutional body.
Equity will be examined according to the company’s current financial report prepared according to accounting rules and audited or reviewed without findings that cast doubt on its credibility.
The number of entities that finance all corporations that hold means of control, directly or indirectly in the institutional body, will be determined in accordance with the total credit in controlling corporations:
- When the total credit in all corporations is more than 200 million new Israeli shekels but less than 1 billion shekels, at least two funding bodies are required and when the total credit in all-controlling corporations is 1 billion shekels or more, at least three funding bodies are required.
- When the insurance company is required to be financed by a number of entities, as stated above, then the shares of any Israeli banking corporation shall not exceed 60 per cent of the total credit in all corporations.
What are the regulatory requirements and restrictions on investors acquiring a minority interest in an insurance or reinsurance company?
There is no designated regulatory requirement for minority investors, other than the above requirement for the approval of the Commissioner for any holding over 5 per cent.
What are the regulatory requirements and restrictions concerning the investment in an insurance or reinsurance company by foreign citizens, companies or governments?
To hold over 5 per cent means of control in an insurer, the holder must receive the approval of the Commissioner. Although there are no restrictions regarding foreign investors, the identity of the investors will be taken into consideration before granting a permit for holding means of control.
The Commissioner takes into consideration a variety of factors, such as sufficient capital and business background; prevention of potential conflicts of interest; and issues of money laundering, including the transparency of information about the potential investor, among others.
Group supervision and capital requirements
What is the supervisory framework for groups of companies containing an insurer or reinsurer in a holding company system? What are the enterprise risk assessment and reporting requirements for an insurer or reinsurer and its holding company? What holding company or group capital requirements exist in addition to individual legal entity capital requirements for insurers and reinsurers?
In general, there is no regulation of insurance groups or group members who are not insurers or agents. There are various provisions in the law regarding an insurer’s parent company, but these are specific restrictions (such as the restriction on acquisitions of companies engaged in yield-based long-term savings to the extent that the group as a whole has more than 15 per cent).
The current regulation includes a ban on insurance companies holding more than 20 per cent in subsidiaries, except for companies whose business is part of the insurance business or that has received the approval of the regulator. Recently, there have been some ease of procedures for investments in technology and insurtech companies.
What are the regulatory requirements with respect to reinsurance agreements between insurance and reinsurance companies domiciled in your jurisdiction?
Under the regulation, the board of directors has to rule on the maximum level of the insurance exposure ceded to one reinsurer of its total reinsurance exposure in order to manage the credit risks associated with the reinsurance payment.
Joint insurers’ activities may fall under the antitrust laws and may amount to a restrictive arrangement.
Ceded reinsurance and retention of risk
What requirements and restrictions govern the amount of ceded reinsurance and retention of risk by insurers?
This is determined by the insurer’s risk appetite and is the responsibility of the board of directors.
What are the collateral requirements for reinsurers in a reinsurance transaction?
In the past, there was a demand for collateral in certain types of reinsurance, including bank guarantees or deposits with the insurer. Currently, there are requirements and the issue is subject to a decision of overall credit risk management, supervised by the board of directors. However, on 14 September 2021, the CMISA issued a draft circular, returning the obligation to provide collateral for various types of reinsurance that involve transfer of funds to a reinsurer outside Israel for in certain insurance categories and types of reinsurance.
Credit for reinsurance
What are the regulatory requirements for cedents to obtain credit for reinsurance on their financial statements?
Insurers are required to hold capital in an amount reached by multiplying the value of the investment in the asset or the value of the exposure to a reinsurer’s credit risk by the percentages determined pursuant to many factors (type of assets and capital percentage).
For instance, with damages resulting from a natural disaster, insurers are required to hold capital equal to the amount of costs it will bear in general insurance, less the part of such exposure ceded to reinsurers. In addition, insurers are required to hold capital with respect to the re-establishment costs of reinsurance policies for coverage of such events.
Insolvent and financially troubled companies
What laws govern insolvent or financially troubled insurance and reinsurance companies?
The law grants CMISA extensive supervision powers to ensure that insurers meet their obligations and maintain proper management and stability. CMISA has the authority to appoint a special administrator to manage the affairs of the insurer.
The insurance laws mandate for separation of accounts of life insurance and other lines. In addition, the regulations provide that all assets to be held are to be free of any lien or setoff rights of a third party.
These provisions along with solvency-based capital requirements and overall supervisions of CMISA are aimed to ensure that other than insureds, the insurance company shall have no other preferred creditors.
Claim priority in insolvency
What is the priority of claims (insurance and otherwise) against an insurance or reinsurance company in an insolvency proceeding?
The law grants CMISA extensive supervision powers in order to ensure that insurers meet their obligations and maintain proper management and stability. CMISA has the authority to appoint a Special Administrator to manage the affairs of the insurer.
What are the licensing requirements for intermediaries representing insurance and reinsurance companies?
According to section 24 of the Control Over Financial Services (Insurance) Law 1981, a person serving as an intermediary between an insured and an insurer must hold a licence. Furthermore, an agent, whether an individual or corporation, may act as an intermediary only if all of the individuals engaged in brokering services hold a licence.