CHAPTER XIX THE FINANCIAL ACTIVITIES OF PROVIDENT FUNDS AND INSURANCE COMPANIES I. PROVIDENT FUNDS1 1. Main Trends in the Development of Provident Funds During recent years the provident funds have been steadily becoming more important as regards the accumulation of savings and their channelling to investment. This process is the result of the rapid accumulation of money in the funds due to the young age structure of their members, which has reduced the volume of provident and pension payments. Few of the funds' members have asyet ceased to work. On the other hand, the sums due from both members and employers are being regularly paid in, and thus the monetary resources at the disposal of the funds have been growing from year to year. However, quite apart from the above considerations, there has been a con tinuous increase in the annual accumulation of monies, which expanded from IL. 56 million in 1957 to IL. 103 million in 1960. This increase was due to three factors : the number of fund members rose from 27,000 at the end of 1957 to over 300,000 at the end of 1960; the wages and salaries from which employers and employees contribute a fixed percentage to the funds rose also; and there has been a gradual changeover from a system of provident payments to one of pensions, which in general involved increases in the contributions of employers. The rapid pace of accumulation was relfected by a rapid expansion of the funds' assetsfrom IL. 232 million at the end of 1957 to IL. 500 million at the end of 1960. The most important investments of the funds are in securities, and in deposits with banking institutions and the "Gmul" company. They also utilize large sums to extend credit to their members. The decisive weight of the provident funds in the debenture market is relfected by their largescale purchases of new debenture issues. The relative weight of these purchases has been increasing during recent year: in 1958, the funds 1 "Provident Funds", as here deifned, include provident funds, pension funds and funds to provide for compensation on dismissal. The statistical mateiral here cited is based mainly on data supplied by the National Saving Commissioner's Ofifce, which forms part of the Treasury. CHAPTER XIX, PROVIDENT FUNDS AND INSURANCE COMPANIES 337
Transcript
CHAPTER XIX
THE FINANCIAL ACTIVITIES OF PROVIDENTFUNDS AND INSURANCE COMPANIES
I. PROVIDENT FUNDS1
1. Main Trends in the Development ofProvident Funds
During recent years the provident funds have been steadily becomingmore important as regards the accumulation of savings and their channelling toinvestment. This process is the result of the rapid accumulation of money in thefunds due to the young age structure of their members, which has reduced thevolume of provident and pension payments. Few of the funds' members haveasyet ceased to work. On the other hand, the sums due from both members andemployers are being regularly paid in, and thus the monetary resources at thedisposal of the funds have been growing from year to year.However, quite apart from the above considerations, there has been a con
tinuous increase in the annual accumulation of monies, which expanded fromIL. 56 million in 1957 to IL. 103 million in 1960. This increase was due tothree factors : the number of fund members rose from 27,000 at the end of1957 to over 300,000 at the end of 1960; the wages and salaries from whichemployers and employees contribute a fixed percentage to the funds rose also;and there has been a gradual changeover from a system of provident paymentsto one of pensions, which in general involved increases in the contributions ofemployers.The rapid pace of accumulation was relfected by a rapid expansion of the
funds' assets from IL. 232 million at the end of 1957 to IL. 500 million atthe end of 1960.The most important investments of the funds are in securities, and in deposits
with banking institutions and the "Gmul" company. They also utilize largesums to extend credit to their members.The decisive weight of the provident funds in the debenture market is relfected
by their largescale purchases of new debenture issues. The relative weight ofthese purchases has been increasing during recent year: in 1958, the funds
1 "Provident Funds", as here deifned, include provident funds, pension funds and funds toprovide for compensation on dismissal. The statistical mateiral here cited is based mainlyon data supplied by the National Saving Commissioner's Ofifce, which forms part of theTreasury.
CHAPTER XIX, PROVIDENT FUNDS AND INSURANCE COMPANIES 337
Table XIX1The Assets of Provident Funds and their Annual Accumulation, 1957 to 1960
^e^ at gnd Annual Percentage Percentagef accumulationin * increaseYear ' * of assets in fotai /n annual
Source : Ministry of Finance, National Saving Commissioners Oiffce.
bought 40 per cent of new debenture issues valued at IL. 79 million; in 1959 50 per cent of new issues valued at IL. 137 million; and in 1960 60 percent of new issues with a total nominal value of IL. 79 million.In addition, the deposits of provident funds constitute 20 per cent of all
fixedterm deposits in Israel currency held at banking institutions. Furthermore,the funds have been steadily increasing their deposits with the "Gmul" company, which has been serving as their agent for investments since 1951.Even more important is the function performed by the funds within the
framework of institutional saving in this country.1 Their significance is particularly great as regards the savings of employees, since these strata of the populationsave chielfy through the funds. It should be noted that the saving of householdsis relfected not only by the employees' contributions to the funds, but also bythe contributions of the employers, since the latter in fact constitute a part ofwages diverted to saving. The fact that employees' contributions are deductedat source from the pay packet assures a steady lfow of savings.The rapid accumulation of monies by the provident funds has enabled them
to lend increasingly large sums to other sectors of the economy. Most of theseloans have been longterm. Thus the funds constitute one of the major economicfactors ifnancing the demand surpluses of other sectors. The credit they grantdiffers from bank credit in the essential respect that it does not increase themoney supply, but merely diverts purchasing power from households to othersectors.The regulations issued by the Ministry of Finance towards the end of August
1957 have had a decisive inlfuence on the direction in which the funds channelled their investments during the past three years. During 1960, these regulations. were amended as follows : in September, the required proportion of"authorized investments" was raised from 65 per cent to 75 per cent of totalassets, while in November the agreement providing for the inclusion of "special
* See Annual Report of the Bank of Israel for 1959, Table XVIII5, page 328.
338 BANK OF ISRAEL, ANNUAL REPORT 1960
deposits" within the framework of "authorized investments" was cancelled. The"special deposits" created up to that date were to be gradually liquidated.Though the application of the new regulations was optional, almost all providentfunds chose to be coverel by them, since this was a condition for receiving income tax concessions. The survey here presented covers some 400 providentfunds, including some which preferred not to enforce the new rules, forfeitingthe contingent benefits.
2. Developments in the Balance Sheet ofProvident Funds, 1 958 to 1960
Th total assets of provident funds reached IL. 500 million at the end of1960. The four largest funds "Mivtahim", the Histadrut Employees5 PensionFund, the Building Workers' Insurance Fund, and the Agricultural Workers'Insurance Fund accounted for over 55 per cent of these assets.In both 1959 and 1960, the annual accumulation of these four funds re
presented 63 per cent of the monies accumulated by all provident funds, asagainst only 57 per cent in 1958. The growing weight of the four big funds ismainly the result of mergers with smaller institutions.The following items in the consolidated balance sheet of the provident funds
have shown the largest increases since 1958: on the assets side securities anddeposits with banks; on the liabilities side pension funds.
(a) Assets(1) Ordinances. Government ordinances are the main factor inlfuencing
the structure of the provident funds' assets since 1958. These ordinances compelled "approved" funds1 to keep 65 per cent of their assets (other than employers' debts and loans to members from special aid funds) in the form of"authoirzed investments".The latter include investments in linked debenturesissued by the Government, as well as by the National Institutions, public corporations and ifnancial institutions with a Government guarantee (or beneiftingfrom income tax concessions within the framework of the Law for the Encouragement of Savings) . Also included among "authorized investments" were special ifxedterm deposits with banking institutions.2 The banking institutions, inturn, were obliged to invest half of these deposits in approved debentures andlend the remaining half for purposes approved by the Government.3 Theauthorization was given individually for each loan.The maximum proportion of loans to the funds' members was ifxed at 25
per cent of their total assets, and even these were restircted to ifnancing partx Funds which chose to be covered by them in return for tax concessions.2 Banks which had signed a special agreement with the Treasury. For the purpose of thisregulation, "Gmul" was recognized as a banking institution.
3 In fact, the proportion of loans from such deposits far exceeded 50 per cent.
CHAPTER XDC, PROVIDENT FUNDS AND INSURANCE COMPANIES 339
time agircultural activities and the acquisition of dwellings. The remaining 10per cent of their monies the provident funds could invest as they saw fit, exceptfor the fact that the regulations forbade them to invest in the employer's business, as well as forbidding the employer to owe them more than three months'contributions. In return for the implementation of these regulations, tax concessions were granted on members' payments and complete tax exemptionboth on the employers' contirbutions and on the funds' income from theirinvestments.
During the three years that have passed since the ordinances were promulgated, the required percentage of "authorized investments" was duly made.As the weight of such investments increased, so did that of linked assets,1 thelatter constituting nearly twothirds of the provident funds' total assets at theend of 1960. In September 1960, the required proportion of "authorized investments" was raised to 75 per cent, as already mentioned. At the same time, thefunds were permitted to invest 5 per cent of their monies in shares approvedby the Treasury as an "authorized investment", provided such shares werepurchased when issued.The effect of these ordinances on the debenture market was peculiar : they
increased the market's demand for new debenture issues, but since the provident funds are forbidden to trade on the stock exchange, being compelled tobuy their securities at source, there was no inlfuence whatever upon the volumeof postissue transactions in debentures. As from February 1960, the funds werepermitted to purchase securities after issue as an "authoirzed investment" butonly on condition that they paid for them by selling securities subscirbed to atsource.
The agreement concerning "special deposits" was cancelled in November1960, and today purchases of approved secuirties are the only form of "authoirzed investment".2 A decline in the proportion of "special deposits" may thus beexpected in the future, while the demand for approved debentures will rise andmuch larger quantities of them are likely to be purchased. Thus it may beexpected that debentures will constitute an even greater proportion of the provident funds' total assets.
While the ordinances played a decisive part in assuring the required level of"authorized investments", they were less successful as regards their effect uponemployers' debts: not only has the time lag in payments continued to exceedthe permissible, but in the building sector there are even agreements with anumber of employers on a oneyear delay in their contirbutions. In such cases,the provident fund becomes a source of convenient credit for the employer.
1 The said debentures as well as the "special deposits" are linked to the consumer price indexor to the rate of exchange.
2 It seems that one of the reasons for the cancelling of the agreement by the Treasury wasits desire to increase the sales of Government bonds.
340 BANK OF ISRAEL, ANNUAL REPORT 1960
)2( The main assets. The biggest item on the assets side of the providentiunds' balance sheet are secuirties, the proportion of which reached 32 per centat the end of 1960, as compared with 29 per cent at the end of 1959 and 24per cent at the end of 1958. Approximately 97 per cent of all securities purchased by the funds during these years were linked debentures recognized as"authoirzed investments".
Table XIX2
Assets and Liabilities of Provident Funds, 1958 to 1960
Other time deposits1.57.24.116.27.422.6With banks2.211.06.124.37.623.1With "Gmul"32.2160.728.9114.824.073.3Securities16.883.917.770.319.158.3Loans to members10.251.111.244.313.541.2Employers' debts1.57.52.08.23.19.4Loans to business enterprises113.216.23.915.34.012.1Real estate2.110.72.18.52.16.3Miscellaneous"
Balance of proift and loss0.84.00.83.30.92.6account3.115.83.815.04.112.6Creditors'
100.0500.0100.0397.0100.0304.9Total
* Estimate." Histadrut enterprises.c Mainly insurance and interest owed.* Rehabilitation, sickness, paid holiday funds, etc.* Mainly holiday fund and past members.Source : Ministry of Finance, National Saving Commissioner's Ofifce.
CHAPTER XIX, PROVIDENT FUNDS AND INSURANCE COMPANIES 341
Deposits with banks and with "Gmul" include "special deposits" regarded as"authorized investments", other ifxedterm deposits, and demand depositsmainly with the Worked Bank Ltd. and with "Gmul".The increase in "special deposits" during 1958 totalled IL.52.9 million and
was due to transfers from the item "Ordinary FixedTerm Deposits" to the item"Special Deposits". Simultaneously, there was a steep decline in "OrdinaryFixedTerm Deposits" from IL.85 million at the end of 1957 to IL.45.7 million at the end of 1958. The contraction of "Ordinary FixedTerm Deposits"continued rapidly throughout 1959 and 1960, while "Special Deposits" expanded very fast not only owing to transfers of other ifxedterm deposits butchielfy since new deposits were being constantly opened. Most of the "SpecialDeposits" are linked. At the end of 1959, the proportion of linked "SpecialDeposits" reached 71 per cent. The weight of these deposits within the funds'total assets increased between 1958 and 1960, but it must be assumed that>following the cancellation of the agreement under which they were being created, they will contract in the future.Loans to members totalled IL.84 million at the end of 1960. The relative
weight of this item has been declining steadily since 1958, owing to the rulesestablished by the ordinances. Some of these loans are granted through banks.The provident funds' loans to their members are normally mediumterm, andcarry interest at a rate of 6 per cent per annum, which is much lower than theinterest on loans from other sources. Moreover, most of these loans are unlinked.The data cited in TableXIX2 concerning the weight of loans to memberswithin total assets relate to all provident funds as deifned in this chapter. However, funds for the provision of compensation upon dismissal (except in onecase) do not grant such loans, while the three big national funds "Mivtahim",the Building Workers' Insurance Fund and the Agricultural Workers' InsuranceFund which include chielfy temporary labour, give relatively fewer loans thanaverage, and considerably fewer than provident funds serving permanent employees only. This is due to the organizational structure of these three funds,which is quite different from that of permanent employees' funds. In the latter,the management is elected by the membership, and there is a direct link betweendirectors and members. On the other hand, the directors of a central fund fortemporary labour are elected by the constituent bodies of the Histadrut, andthe connection between the individual member and the management is strictlyformal. This structure is due to the mobility of temporary, parttime and seasonal workers, who are not connected with a ifxed place of work. The providentfunds for selfemployed persons hkewise do not give loans to their members.In the case of provident funds for permanent employees, the percentage of
loans to members is, therefore, much higher than average. Within this group,there are certain funds where the proportion of such loans is higher still, butthese are mainly "unapproved funds" and their relative number and importanceare slight.
342 BANK OF ISRAEL, ANNUAL REPORT 1960
Table XIX3oX<
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znM
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ZMtlf
O3
Loans to Members and Employers' Debts as a Percentage of the Provident Funds'Total Assets, 1958 and 1959
19591958
assetsTotalEmployer'sdebt
Loans tomembers
assetsTotalEmployer'sdebt
Loans tomembers
Percentage oftotalassets
Millionsof IL.
as apercentage oftotalassets
as apercentage 0/totalassets
Percentage oftotalassets
Millionsof 1L.
as apercentage oftotalassets
as apercentage 0/totalassets
Type of fund
100.0397.011.217.7100.0304.913.519.1All funds
36.7145.618.812.135.0106.822.011.8Central funds for temporary workers
3.413.612.50.72.67.917.71.3Severance funds
1.97.4_4.11.44.32.3Funds for selfemployed persons
Source: Ministry of Finance, National Saving Commissioner's Office.
The item "Employers' Debts" has likewise been declining conitnuously between 1958 and 1960. Here also there are differences between the central fundsfor temporary workers and funds for permanent employees. The central fundshave a considerably higherthanaverage proportion of employers' debts.1The debt of the employer, which is normally shortterm, often does not carry
interest at all. If we divide the total receipts of the provident funds from intereston employers' debts during 1959 by the average size of these debts during thatyear, we arrive at an average interst rate of only 3 per cent per annum. Onthe other hand, the interest obtained by the funds on debentures is 6.5per cent per annum. Moreover, the debentures are linked, so that the effectiveinterest rate is still higher.
(b) LiabilitiesDuring each of the years 1958 to 1960, pension, provident and compensaiton
monies consittuted 87 per cent of total liabiliites. Most of these constitute longterm liabiliites.
A provident fund administering a pension scheme is obliged to pay a memberwho retires upon attaining pensionable age a monthly allowance at a certainpercentage of his last wage or salary. On the other hand, funds operaitng onthe provident system must pay the retiring member a lump sum equalling theenitre amount standing to his credit in his personal account. The compensaitonfunds constitute a reserve for the payment of compensaiton to members dismissed from their jobs. These funds are maintained solely by contribuitons fromthe employers, while both employers and workers contribute to pension andprovident schemes.As already stated, there has recently been a tendency to change over from
provident schemes to pension schemes, which assure a higher and more stableincome during old age. This tendency has caused an increase in the weight ofpension funds, while the weight of provident fund schemes has been declining(see TableXIX2 ). The weight of severance compensaiton funds has likewiserisen somewhat, owing to the establishment of several central funds of this kindby banks during 1960 and the joining of existing funds by addiitonal employers.The pension monies are concentrated chielfy in the big funds, while most of
the liabiliites of the smaller funds are monies earmarked for provident payments.The 7 pension funds of the Histadrut,2 whose assets consittuted in 1959 approximately 65 per cent of the provident funds' total assets, were administeringduring that year over 91 per cent of all the pension monies. In 1958, these 7funds administered 89 per cent of the pension monies, their assets then repre
נ Most of the debtors are business enterprises, including those of the Histadrut.2 The Histadrut Workers' Pension Fund, "Mivtahim", the Building Workers' Insurance Fund,the Agricultural Workers' Insurance Fund, the Solel Boneh Employees' Pension Fund,"Magen", and the Ofifcials' Provident and Pension Funds.
344 BANK OF ISRAEL, ANNUAL REPORT 1960
senting only 60 per cent of the total assets of the provident funds. The samecentralized structure of pension funds continued to exist in 1960.Most of the "Miscellaneous Fringe Benefit Funds" (the Holiday Fund, the
Sickness Fund, the Rehabilitation Fund, etc.) are administered by the three bigcentral funds for temporary labour,1 and their monies accrue from employers'payments only. It may be assumed that due to the incomplete information possessed by their members and the tenuous contact between them and the centralmanagement, the membership does not fully exploit its rights in the fringe benefit funds, and consequently large unclaimed sums accumulate there.
3. Money FlowsThe receipts of the provident funds consist mainly of contributions and to a
lesser extent of income from their investments. The funds use these monies inthree ways:a) Payments to members upon their retirement from work, under provident,
pension and severance compensation schemes, and fringe beneift payments tomembers.b) Investments.c) Current expenditure.After covering payments to members, current expenses and purchases of real
estate, the provident funds are left with a surplus of financial resources whichis channelled to other sectors in the form of credit. At present, this surplus is solarge that credit constitutes the overwhelming proportion of all uses.2
(a) ReceiptsThe employers' contributions to provident funds are relatively larger than
those of employees, generally amounting to twothirds of the total3 or evenmore. The typical rates of contribution for employers equal 11 to 13^3 per centof the employee's wage, while the employees themselves contribute only4to 5per cent. However, in certain central funds, and particularly those for temporaryworkers, the employers' contribution is higher still, since they have to contributealso to "Miscellaneous Fringe Beneift Funds" administered by these providentfunds and covering rehabilitation, sickness, convalescence, etc.The increase in the number of members, and the constant rise in wages dur
2 "Mivtahim", the Building Workers' Insurance Fund and the Agricultural Worked Insurance Fund.
2 The ifgures cited below for financial transactions relate to net changes in the consolidatedbalance sheet from end of year to end of year. Since the "Gmul" company serves as achannel for a considerable proportion of the funds' investments, its activities have beenintegrated into the said balance sheet.
s Including contributions to pensions, provident and severance compensation funds, as well asvarious fringe benefit funds.
CHAPTER XIX, PROVIDENT FUNDS AND INSURANCE COMPANIES 345
ing the last three years have broadened the base for the contributions, and thusalso the annual accumulation of money. The transition from parttime to fulltime work has likewise increased the ifnancial resources of the provident funds,since the employer has to contribute 4.16 per cent to the dismissal compensationfund for each parttime worker, while for fulltime employees the contributionis 85/3 per cent.Recently, there has also been a tendency to change over from the system of
provident payments to pensions. Such developments generally involved an increase in the contribution of the employer. If before the change the employercontributed both to a provident scheme ( about 5 per cent of the employee'swage) and to a severance compensation fund (at a rate of 8*/$ per cent), histotal contribution did not grow with the introduction of a pension scheme. Butif he had previously contributed only to a provident scheme (as was the case inmost provident funds where the change was made), he had to give his assentboth to the new system and to the increase in his contribution. The pensionsystem obliges the provident fund to pay its retiring members until they die.It is, in essence, a method of insurance the success of which depends on the sizeof the fund. Consequently, many of the funds deciding to change over to thepension system merged with central, allcountry funds already operating a pension scheme. This development was especially characteristic of provident fundsconnected with institutions of a public nature. However, the trend towardsmergers, which reached its zenith during 1959, appears to have weakened considerably in 1960. Mergers have been one of the main reasons for the extraordinarily fast rate of growth in the assets of the central funds, another reasonbeing the larger contributions of employers to such funds.
A further cause of increase in the monies available to the provident fundsector was the creation of funds for selfemployed persons. Though in Israel thistype of provident fund has only come into being very recently, by the end of 1960their membership reached 23,000 out of the country's 140,000 selfemployedearners. In contrast to employees' funds, the funds for the selfemployed havetheir development and accumulation limited by two factors :a. The employee's membership in a fund is dependent on an agreement be
tween labour organizations and his employer, and not on hisown. free choice ;
on the other hand, the selfemployed person is entirely free to decide whetherhe wishes to belong to a provident fund or not. The organization of the selfemployed in this country is far less advanced than that of wageearners. Dueto these differences, the number of selfemployed members in provident fundsis relatively small.b. Whereas in the case of employees two parties contribute to the fund, and
the total contribution equals between 10 and 20 per cent of the worker's wage,in the case of selfemployed only the member himself contributes. Moreover,the funds for selfemployed are restricted by the law to collecting no more than
346 BANK OF ISRAEL, ANNUAL REPORT 1960
5 per cent of the member's earnings, up to a maximum of IL.600 per annum,if they wish to benefit from income tax concessions. During the last three years,the tax concessions granted to members through these funds (most of whichwere established by banks) caused a considerable number of people to join themand save by this method. Nevertheless, the number of members still does notexceed 16 per cent of all selfemployed persons.The central dismissal compensation funds, most of which were established
during 1959 on the initiative of the banks and with the help of tax concessionsfor employers ready to contribute, likewise accelerated the accumulation ofmonies in the provident fund sector.The higher income from investments was chielfy due to the larger weight of
securities and "special deposits", which carry interest at a relatively high rate,while the proportion of employers' debts, cash and demand deposits, which carrylittle or no interest, declined. During 1959 there also began a fairly largescaleredemption of linked debentures acquired in 1956 and 1957 and due to beredeemed in equal annual lots as from 1959. This redemption allowed the fundsto reap the profit of the linkage, since in the meantime there had been a rise inthe consumer price index.As already mentioned, most of the funds' income accrues from contributions,
which are best regarded as "transfer receipts", while the remainder representsthe yield of their investments. In 1959, transfer receipts increased more slowlythan investment income (see Table XIX4), and consequently their weightwithin total receipts declined. On the other hand, there was a fairly sizeableincrease in the income from interest during both 1959 and 1960, though itsweight within the total increment of resources available to the funds hardlychanged as compared with 1958. Nor was there any change in the compositionof interest receipts. Interest on deposits in banks and with "Gmul" totalled IL.8.5million in 1959, constituting approximately half the funds' total income frominterest. During the same year, interest on securities totalled IL.5.6 million,interest on loans to members IL.2.2 million, and interest on employers' debtsIL. 1 .2 million. The larger amount of interest collected was the chief reason forthe improvement in the profitability of the funds. Another factor with a similareffect was the considerably larger profit from linkage accruing in 1959, thoughthis cannot be considered ordinary profit, constituting rather compensation forlosses occasioned by the fall in the purchasing power of the currency. Altogetherthe average profitability of the provident funds rose from 3.8 per cent in 1958to 5.1 per cent in 1959.1 In 1960, it was also around 5 per cent.
1 Proiftability has been calculated as follows : the surplus of income (interest, rent, linkageprofits and commissions) over current expenditure during a certain year was divided by anaverage of the value of the assets at the beginning and end of that year.
CHAPTER XTX, PROVIDENT FUNDS AND INSURANCE COMPANIES 347
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Table XIX4
The "Balance of Payments" of Provident Funds, 1958 to /960
)millions of IL.)
Receipts
I960' I960'
1958 1959 Millions Percentof IL. ages
Payments 1958 1959 Millions Percentof IL. ages
<f
h Employers1 contributionsvft Members' contributions
toCDO
Total
Transfer receipts and transfer payments
Payments to members and53.578.762.649.5
17.826.219.816.6past members626.038.234.629.4
4.97.25.23.8Mutual insurance payments
78.9 97.2 116.9 79.5 Total 20.4 25.0 33.4 22.7
Current income and expenditure
15.422.618.714.1Income from interest
Fixed income, commission
2.53.73.12.5and other income
2.63.85.11.2"Linkage" proifts
Current expendiutre 6.8 .B3 10.5 7.2
Total 17.8 26.9 30.1 20.5 Total 6.8 3.3 10.5 7.2
Financial transactions
$3S
I
.zH
VC2OM
<ס
3C
2nw
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MW
OS
Total receipts 96.7 124.1 147.0 100.0
Net loans through securities
and other credit:
To the public sector0
and Government
corporations 16.8 30.8 32.7 22.2
To ifnancial and banking
institutions* 32.9 38.4 43.8 29.8
To households and non
proift institutions 9.0 10.5 13.6 9.3
To private business
enterpirses0 9.1 7.9 12.1 8.2
Investments in immovable
assets 1.7 3.2 0.9 0.6
Total
Total payments
69.5 90.8 103.1 70.1
96.7 124.1 147.0 100.0
* Estimate.*" Pension, provident and severance payments and other fringe beneifts." Government, National Institutions and local authorities.d Excluding the funds' deposits with "Gmul", recorded in this table as investments in the public sector, in business and in nonproift insti
tutions.* Mainly Histadrut enterprises.Source: Ministry of Finance, National Saving Commissioner's Oiffce.
)b) Utilization of resourcesThe chief use to which the monies of the provident funds were put is relfected
by the item "Loans and Investments", which during the period 1958 to 1960accounted for some 70 per cent of the total. These transactions were madepossible by the surplus of financial resources, which the funds invested in othersectors of the economy. The surplus reached IL.102.2 million in I960, as compared with IL.87.6 million in 1959 and IL.67.8 million in 1958. The monetaryinvestments of provident funds in banks and ifnancial institutions also indirectlyfinance the demand surplus of other sectors. As regards the sectors v/here thesemonies were invested, we must mention the larger shares of the public sector,the banks and the ifnancial institutions, which relfect the provident funds' compliance with Treasury directives, since loans to these sectors are included within the framework of "authorized investments". It must also be stressed thata considerable part of the funds' "special deposits" was passed on to Histadrutundertakings in the form of credit from banking institutions or from "Gmul".
4. The "Gmul" CompanyThe "Gmul" company was established by the provident funds and "Hevrat
Ovdim"1 at the end of 1950 to serve as an agent for the funds' investments. Itstask is to purchase securities and to grant loans from the funds' resources. Since
Table XIX5
Main Balance Sheet Items of the "Gmul" Company, 1958 to 1960IL.()millions of
Main liabilities78.573.959.843.353.935.7"Special" deposits11.711.030.124.334.923.1Other time deposits9.89.210.18.211.27.4Other liabilities
" Less contingent assets.Source : "Gmul" reports.
1 "Hevrat Ovdim" is the general holding company of the Histadrut.
350 BANK OF ISRAEL, ANNUAL REPORT 1960
"Gmul" is a company which, in the last resort, operates solely on behalf of itsclients, all of which are provident funds, it cannot be regarded as a ifnancialinstitution, being clearly a part of the provident fund sector. Of some 400 existing provident funds, about 180 are today investing through "Gmul". And these180 include the biggest pension funds and provident funds.In 1958, there was a considerable increase in the activities of "Gmul", follow
ing its recognition by the Treasury as a banking institution for the purpose ofthe regulations governing the investment of monies accumulated by providentfunds. The funds increased their deposits with "Gmul" after this recognitionwas granted, and these deposits were approved as "authoirzed investments". In1960, the Treasury promulgated an ordinance under which "Gmul", being acentralized investment fund, was compelled to invest 65 per cent of its owncapital in "authorized investments" (besides investing the monies deposited withit in this manner) in order to become eligible for income tax concessions. Theregulations, which apply both to "Gmul" and to the provident funds, inlfuencedthe composition of "Gmul's" investments, just as they affected the volume ofthe funds' deposits with "Gmul".Most of the securities. held by "Gmul" have been approved by the Treasury
as "authorized investments". The proportion of these linked secuirties withinthe company's total assets has risen during the last three years.The majoirty of other loans granted by "Gmul" are likewise linked, and the
biggest percentage of them has been extended to Histadrut enterprises. Yet theproportion of such loans within the company's total assets declined somewhatover the last three years. The provident funds' deposits with "Gmul" utilized bythe company to execute these investments were in the main linked "specialdeposits".
II. INSURANCE COMPANIES1
1. Main Trends in the Development ofInsurance Companies
The following survey covers Israeli insurance companies, branches of foreigninsurance companies operating in Israel, and Lloyds' brokers. The total numberof insuirng bodies operating in the country in 1960 was 96. Of these, 24 wereIsraeli companies, 58 were branches of foreign companies, and 14 were Lloyds'brokers. There are 6 big Israeli companies which have made their mark on theentire sector, and whose activities account for 75 per cent of the insurancetransactions in the country.
* The statistical material is in the main based on data supplied by the Oiffce of the Superintendent of Insurance in the Treasury, and in part on data received from certain Israeliinsurance companies.
CHAPTER XIX. PROVIDENT FUNDS AND INSURANCE COMPANIES 351
The three main types of insurance carried out by insurance companies are:(a) elementary insurance which in 1960 covered 76 per cent of all premiumreceipts; (b) maritime insurance which covered 7 per cent of premiums ; and(c) life insurance 17 per cent of premiums."Elementary insurance" includes insurance against loss of property, ifre, sick
ness or personal accidents, the insurance of motor vehicles, etc."Maritime insurance" is the insurance of cargoes and the hulls of ships."Life insurance" possesses an element of saving, as well as insuring against
the loss of earning capacity due to retirement at the pensionable age or thedeath of the breadwinner.In contrast to life insurance, which is essentially akin to longterm saving,
neither elementary insurance nor maritime insurance can be regarded as savingin any sense, since they are shortterm and necessitate a high level of liquidityin the insurance companies concerned.The insurance branch practises a system of "reinsurance", under which the
insuring company shares the risk with others. A part of the premium is transferred by the insuring company to the companies participating in the risk. Thedifference between the premium receipts of the insuring company and its payments on account of reinsurance is called the self retention.
The major preoccupation of the insurance companies is with the provisionof insurance services. But in the process of carrying out these activities theyamass funds, which they normally invest in securities and other ifnancial assets.There is thus an essential difference between insurance companies and ifnancialinstitutions, the latter being chielfy concerned with the granting of credit. Thisdifference becomes still clearer upon examination of the structure of ifnancialresources in the two types of institution. While most receipts of the ifnancialinstitutions are on account of security lfotations and longterm deposits, the mainincome of the insurance companies is from premiums. From this aspect, thereis no difference between insurance companies and provident funds, the latterbeing, to all intents and purposes, mutual insurance funds. During the ifve yearsbetween 1956 and 1960, the insurance sector expanded its activities, both asregards the supplying of insurance services to various economic sectors andhouseholds, and as regards the granting of credit to these sectors. This expansionwas relfected, inter alia, by a considerable increase in all the assets of the sector,1which totalled only IL.38 million at the end of 1955, but as much as IL.100million at the end of 1960. This 270 per cent growth far exceeded the rise inthe price level over the same period.The above expansion was due to two principal factors :a. The rapid development of the economy, for which elementary insurance
must be regarded as an essential service.
1 The assets of Israeli companies plus the investments of foreign insurance companies operating in Israel.
352 BANK OF ISRAEL, ANNUAL REPORT 1960
Table XIX6Insurance Sector: Assets, Premiums Collected, Number of Life Insurance Policies,
and Self Retention of Israeli Insurance Companies/ 1956 to 1960: (millions of IL.(
Total assetsat end of year
Percentage
Millions increaseof IL. over pre
cedingyear
Total premiumscollected*
Number of lifeinsurance policies
(thousands(
Millionsof IL.
Percent>age
increaseover precedingyear
Endof year
Percentage
increaseover precedingyear
Self retention asa percentage oftotal premium
paymentsPercentage
Annual increaseaverage over pre
cedingyear
1956195719581959I960'5
45.355.365.278.1100.0
22.117.919.828.0
35.943.251.059.267.7
20.318.118.014.4
128149169187208
16.413.411.211.2
57.859.459.761.866.3
2.80.53.57.3
" Self retention is here deifned as the difference between premiums collected by Israelicompanies and the amounts paid by them to insurance companies abroad for reinsurance.
b Premiums collected and registration fees from business in Israel and abroad, less premiumsreceived for reinsurance from other insurance companies.
Source: Based on data from the Superintendent of Insurance.
b. The linking of life insurance policies to the rate of exchange or the consumer price index as from 1957 (which safeguarded the value of the saving),as well as income tax concessions granted to selfemployed saving in this manneror through pension schemes sponsored by the insurance companies, increased thedemand for life insurance in the country.Most of the monetary receipts of insurance companies accrue from premiums
paid by their clients. (In this they resemble provident funds, the main receiptsof which are from employees' and employers' contributions. ) Since the amountof premiums and other receipts exceeds the volume of payments on account ofclaims (especially in the life insurance branch) together with current expenditure and outlays on the purchase of real estate, the insurance sector disposes ofa surplus of monetary resources, which it invests in other sectors. As in the caseof provident funds and financial institutions, the insurance companies thus grantcredit to other sectors in a form which does not entail tthe creation of additionalmeans of payment. However, the volume of such financing does not remotelyapproach that furnished by the provident funds, which is several time larger.The credit extended by insurance companies is mainly channelled to their
clients, be they business undertakings or households. However, a substantialpart of their ifnancial resources are invested in accordance with the Treasury'sordinances of 1955, which compel insurance companies to buy Government or
CHAPTER XTX, PROVIDENT FUNDS AND INSURANCE COMPANIES 353
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Table XIX7Assets and Liabilities of Israeli Insurance Companies, 1958 to /960
1958 1959
Millionsof IL.
Percentages
Millionsof IL.
Percentages
I9601
Millionsof IL.
Percentages
AssetsSecuritiesLoansImmovable assets and investmentsin subsidiary companies
Time deposits for a period exceedingone year
Various debtorsDemand deposits and othershortterm deposits
Total assets
9.015.2
2.8
2.217.2
7.7
16.728.1
5.0
4.031.9
14.3
54.1 100.0
" Estimate." Mainly agents and premiums to be collected.Source: Superintendent of Insurance, Ministry of Finance.
14.119.0
3.4
2.319.8
8.4
21.128.5
4.5
3.529.8
12.6
67.0 100.0
19.325.3
4.9
3.124.6
10.8
88.0
21.928.7
5.6
3.528.0
12.3
100.0
Liabilities13.612.013.28.812.97.0Own capital38.834.237.425.138.821.0Life insurance fund10.08.89.96.69.65.2Elementary fund3.63.23.42.33.51.9Special contingencies fund
Deposits of other insurance18.216.018.612.517.99.7companies
Pending or approved claims (mainly11.410.012.38.211.96.4elementary insurance)4.43.85.23.55.42.9Various creditors
100.088.0100.067.0100.054.1Total liabilities
Governmentguaranteed securities for a minimum of 20 to 35 per cent of theirvarious capital funds.1 Though a considerable proportion of premium moniesreceived by Israeli companies are transferred abroad for reinsurance purposes,these sums are later redeposited with them, so that this factor does not limittheir ability to extend credit.
2. Developments in the Balance Sheets of InsuranceCompanies, 1958 to 1960
The character of the insurance companies' operations necessitates a relativelyhigh degree of liquidity in order to enable them to meet unexpected claims frompolicyholders who have suffered damage. This applies particularly to elementary insurance. Consequently, the companies concerned must invest a considerable proportion of their resources in liquid assets. The high liquidity raito isrelfected, inter alia, by a very high proportion of demand deposits and othershortterm deposits with banks.The "Loans" item2 is the most important on the assets side, while the life
insurance fund is the largest of the funds appearing on the liabilities side of thebalance sheet. During the past three years there have been hardly any significantchanges in the balance sheet structure of insurance companies, apart from themarked increase in the proportion of securities within total assets.Two factors were chielfy responsible for increasing the weight of securities :
Government ordinances and the changeover to linked life insurance.(a) Government ordinances. In 1955, the Superintendent of Insurance issuedordinances establishing the rules governing financial investments by Israeli insurance companies. According to these ordinances, insurance companies mustinvest at least 35 per cent of their paidup capital and at least 20 per cent of themonies accumulated in their life insurance funds in Government or Governmentguaranteed securities. Monies accumulated in the elementary insurance funds donot have to be invested in such securities.Following the promulgation of the above ordinances, there was a rise in the
proportion of Government and Governmentguaranteed securities held by insurance companies, and by the end of 1960 they constituted 74 per cent of allsecurities held by these companies, the value of which was IL.19 million. On theother hand, the ordinances limit the permissible volume of other types of investment. Thus insurance companies may not purchase nongovernmental securitiesfor more than 70 per cent of their paidup capital, more than 50 per cent oftheir life insurance fund monies, or more than 30 per cent of their elementaryinsurance fund monies. Moreover they are forbidden to lend more than 40 percent of their paidup capital and life insurance funds, or more than 15 per cent
J The percentages vary for various types of funds.2 Most of these loans are granted to clients.
CHAPTER XIX, PROVIDENT FUNDS AND INSURANCE COMPANIES 355
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TableXIX8
Investment by Foreign Insurance Companies in Israel, 1958 to 1960
)millions of IL.)
1958 1959
Millionsof IL.
Percentages
Millionsof IL.
Percentages
I960'Millionsof IL.
Percentages
Securities
Other loans
Immovable assets
Various debtors
Demand deposits and cash held with
banks, and vairous shortterm deposits 1.9 17.1
47.55.744.65.0 .44.24.9
19.22.319.72.221.62.4
1.70.21.80.20.90.1
20.82.522.32.516.21.8.
Total investment 11.1 100.0
1.3 11.6
11.2 100.0
1.3
12.0
10.8
100.0
" Estimate.Source : Superintendent of Insurance, Ministry of Finance.
of the monies accumulated in elementary insurance funds. The redemptionpeirod of the loans is likewise fixed by the ordinances : it may not exceed 10years in the case of loans from life insurance funds, 5 years in the case of loansfrom paidup capital, and 18 months in the case of loans from elementary insurance funds. These disitnctions between the vairous funds are due to the factthat paidup capital and life insurance funds consittute longterm liabiliites,while the elementary insurance funds are essenitally a shortterm liability.
(b) The changeover to linked life insurance. So as to assure the value ofsavings against the decline in the purchasing power of the currency, a numberof Israeli insurance companies insittuted a system of linked life insurance("Hetz"). Since life insurance has a longterm character, it is paritcularly importairt to safeguard its value. In contrast to the depression prevailing in thisbranch duirng the 19501955 peirod, the linking system brought renewed expansion. The number of life insurance policy holders increased, and most ofthem switched from ordinary to linked insurance policies (see TableXIX6)'.The life insurance fund, has always been the companies' main financial source
for investments, owingto its close affinity to savings funds] Thus the change;over to linked life insurance !was largely responsible for the increases in securitypurchases. The savings factor in life insurance is. one of the main reasons for thegreat expansion that has taken place in the assets of the Israeli companies mainlyconcerned with this type of insurance. This expansion was far greater than thatin the assets of companies the main business of which is in the elementaryinsurance branch.
3. Money Flows :': :
The receipts of insurance companies accrue chielfy from premiums, and to a
lesser extent from profits on investments. The expansion of the elementary insurance branch and the changeover to the system of linked life insurance (whichincluded a linked pension scheme for selfemployed persons) were the pirncipalfactors causing the increase in premium receipts. Income from investments hasrisen mainly because the companies increased their security holdings as well asthe volume of their ifxedterm loans.Three uses are made of the above ifnancial resources :
a. Payments of claims and transfers abroad for reinsurance purposes.b. Investment and loans to other sectors.c. The ifnancing of current expenditure.At ifrst sight, this structure of assets and liabiliites would appear to resemble
that of the provident funds, but while the main use of resources by the latter isfor investments in other sectors, in the insurance branch payments of claims havehitherto been by far the largest item, while investments in other sectors sitll represent a small proporiton of the companies' acitviites. The reason for this difference is that today the accumulation of money by provident funds is proceed
CHAPTER XIX, PROVIDENT FUNDS AND INSURANCE COMPANIES 357
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TableXIX9"Balance of Payments" of the Insurance Sector," 1958 to I960
)millions of IL.)
196(f I960"
Receipts 1958 i959 Millions Percent.of IL. ages
Payments 1958 1959 Millions Percentof IL. ages
Income from premiums andregistration fees in Israel
Income from interest andcommission in Israel
Transfers from abroad (onaccount of reinsuranceand premiums)
Total
Total receipts
48.1
2.5
65.8
56.4
3.3
15.2 15.7
64.4
3.5
16.9
65.8 75.4 84.8 100.0
real assetsTransactions inClaims paid and loss settle
28.524.221.620.2ment expenses in Israel76.018.315.514.712.3Commissions10.48.88.37.9Current expenditure4.1
Transfer payments abroad(mainly on account of
22.619.219.016.2reinsurahce)19.9
Total 56.6 63.6 67.7
75.4 84.8 100.0
Transactions in ifnancial assetsNet loans through security purchases and other creditTo public sector" and Government corporations
To financial and bankinginstitutions
To private businessenterprises
To households and nonprofit institutions
Investments in immovableassets
Total
Total payments
9.2 11.8 17.1
79.8
1.8 5.9 6.3 7.5
1.4 8.0 3.0 3.5
4.5 4.1 5.1 6.0
1.2 0.8 . 2.7 3.2
0.3 0.2
20.2
65.8 75.4 84.8 100.0
a Excluding intrasector transactions ; including transactions of foreign companies in Israel.b Estimate. Government, National Institutions and local authorities.SoTIRCE ! SunprinfpnHpnt nf Tncnranrp Ministrv nf Finnnr**
Table XIX10
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Transactions within the Insurance Sector, 1958 to /950
(millions of IL.(
Receipts1960 1960
1958 ^59 Millions Percentof IL. ages
Payments ^58MM Millions Percentof IL. ages
Transactions in real assets
|2 Receipts from other companies
TO on account of reinsurance 6.0 8.9 10.5 75.0 .
Payments to other companies
on account of reinsurance 6.0 8.9 10.5 75.0
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Deposits of other insurance
companies
Total resources
Transactions in ifnancial assets
Deposits with other insurance
1.7 2.7 3.5 25.0 companies 1.7 2.7 3.5 25.0
7.7 11.4 14.0 100.0 Total uses 7.7. 11.4 14.0 100.0
>0 Source: Superintendent of Insurance, Ministry of Finance.
ing very rapidly, and that almost all the contribuitons to these institutions arechannelled to their savings funds. On the other hand, receipts from life insurance premiums account for less than a fifth of the insurance companies' totalpremium receipts, and this fact is relfected by the size of the savings funds administered by these companies. Whereas the provident funds' savings funds *totalled IL.450 million at the end of 1960, the sum total of life insurance fundsand the paidup capital of Israeli insurance companies reached only IL.46 million on that date, i.e. about a tenth of the resources available to the providentfunds.2 This huge gap is, of course, relfected by the respective volume of investments of each type of institution. The increase in the investments of the Israelinsurance sector in 1960 was only IL. 17 million (see TableXIX9) whilethe increase in the investments of provident funds during the same year totalledIL. 103 million (see Table XIX4).The two largest items among the uses of financial resources are payments of
claims and transfers abroad. But these payments are made in the main fromelementary insurance funds. In contrast, the growing activity in the linked lifeinsurance branch has enabled the companies to utilize steadily increasing sumsfor the granting of longterm credit. Not only has the volume of loans grantedby the insurance sector expanded, but the proportion of such loans within totaluses rose during 1960, as did the weight of companies operating chielfy in thelife insurance branch among financial institutions investing in other sectors.The larger share of loans received by the public sector relfects the adjustment
of the insurance companies' policies to Government ordinances. Most of the 1959increase in loans to the public sector was due to the purchase of linked debentures issued by the Palestine Electric Corporation, Ltd., which carry a Government guarantee. This purchase followed a special agreement between the insurance companies and the Palestine Electric Corporation, which provided forthe investment of a considerable part of the savings accumulated throughthe "Hetz" linked life insurance scheme in these debentures. The relatively largeproportion of insurance companies' loans granted to the private sector is dueto credits extended to policy holders.Internal transactions within the insurance sector cover in the main reinsur
ance executed by companies operating in Israel, each company reinsuring withothers. The annual rate of expansion for such transactions exceeds that for thetotal receipts of the insurance sector. However, side by side with the increasein the weight of intrasector transactions, there was also an increase in the percentage of the Israeli insurance companies' self retention (see Table XIX6 )which indicates a decline in the relative proportion of reinsurance abroad.
* Pension funds, provident and severance compensation funds, the reserve fund, the "Investment Realization Fund", and the balance of proift.
2 This picture does not change even if we take into consideration the investments of foreigninsurance companies in Israel, which totalled IL.12 million at the end of 1960.
