The Capital Market Authority published today (Sun.) the final circular with directives prohibiting short-term discounts in life insurance policies. This, just days after a series of insurance companies published promotions with aggressive discounts of up to 85%, but for seven years only, with the main discount being for the first two years. The new directives fix a constant discount rate for a minimum of ten years and will come into force on February 1, 2027. This, after the draft circular published in August proposed that discounts be for the entire life of the policy. Now, the directive has been softened. Main points of the change:
* The discount rate determined in the policy will not decrease for at least ten years. The insurance company will be entitled to offer a discount for a longer period, or a discount at a rate that increases over time.
* The rules will also apply to additional covers – the directive also applies to policy riders, such as coverage for accidental disability. The new directives make it possible to give each coverage a discount at a different rate, but in any case the proposed discount will not decrease before ten years have passed.
* An insured who replaces an existing life insurance policy with a new policy (for example incidental to a mortgage) will be able to receive a special discount in the first month only, up to a full exemption from payment, in order to prevent payment for two policies in the same month.
* One month advance notice – the insurance company will be required to notify the insured in advance about a discount that is about to end or decrease, by email and SMS. The notice will include the end date, the discount rates before and after, and the amount of the old and new monthly payment. The main question that arises with the publication of the final circular is why did the Capital Market Authority soften the directives, and instead of a discount for the entire life of the policy, limited the companies to a ten-year discount? The Authority explains that the directive was updated after comments received following the publication of the draft within the framework of public participation were seriously considered. Among other things, the risks involved in a regulatory directive mandating the tying of a long-term contractual connection (decades ahead that potentially could reach up to 60 years) were taken into account, and in light of the uncertainty regarding the development of mortality risk in these time ranges. Subsequently, and out of a desire for cooperation and attentiveness to voices coming from the market, a more cautious regulatory step was decided upon at this stage, while later its implications will be examined and, if necessary, updating the directive according to the direction proposed in the draft will be considered. The Regulatory Impact Assessment report published by the Authority presents four alternatives that were considered. Alternative A – Leaving the existing situation. Alternative B – Improving disclosure and comparison tools. Alternative C – A discount for the entire life of the policy. Alternative D – A non-decreasing discount rate for at least ten years and notice to insureds before a change. Reasoning for the choice Within the framework of publishing the draft circular, Alternative C was selected due to its great value to the insured public, and despite the infringement on the freedom of action of the parties to the insurance contract. However, within the framework of the hearing process held after the publication of the draft, claims were voiced regarding the risks involved in regulation having long-term implications, as well as regarding the scope and implications of the various detriments that might be created due to narrowing the freedom of the contract parties to shape it as they wish regarding the discount to be given in it. This, among other things, against the background of the fact that inherently in a life insurance product, as a long-term insurance contract, lies a risk due to the uncertainty regarding developments that will occur in spheres having a direct or indirect impact on the mortality risk imposed on insurance companies. In light of the above, and paying attention to the fact that there might be additional implications that have not been sufficiently assessed at this time, despite their thorough professional examination, it was decided at this stage to choose Alternative D. This is because the degree of intervention proposed in its framework is softer, and constitutes a more cautious regulatory step compared to Alternative C due to the reduced risks involved in it. Choosing this alternative will enable the Authority to examine the implications of the regulation and the need and possibility to expand the degree of intervention required to achieve the optimal result. In the Authority’s view, this alternative will be of value to the insured public who will benefit from higher certainty alongside more convenient conditions for making comparisons between different proposals for term life insurance. Improving the ability to compare is expected to support more informed decision-making on the part of insurance candidates and will also have a positive contribution to competition in the sector. Although the insurance companies will be required to make adjustments in light of the regulation that involve costs of financial resources and time, their scope is not material in relation to the described contribution for the insured public and competition, and in relation to the value yielded by the business activity of the insurance companies in the life insurance sector. Additional comments from the hearing were accepted: group life insurance was excluded from the circular, and offering a discount at a different rate in the first month when replacing a policy was permitted, to prevent double payment.
