Israeli insurance companies were appalled to learn that they will shortly be required to increase their equity capital, under new regulations being compiled by the treasury. Talks are ongoing between the insurers and the treasury's insurance department about the new rules.

The main thrust of the change would be in the way the insurers calculate their cost of paying commissions to insurance agents, mainly in respect to health insurance.

The new regulations will apparently require the insurers to increase their equity capital by about 10%, compared with their minimum required equity today. The ultimate purpose of the move is to foil intentions by shareholders to withdraw dividends.

From the perspective of the market, the result will be a drop in return on equity.

Snowballing reform
As things stand, insurers initially lose money on new insurance policies, due to the commission paid to agents. The insurers started profiting from new policies only after a year or more.

The treasury has already amended the way insurers present commission costs in their financial statements. The commission cost is now spread throughout the policy period, which should boost the companies' short-term profit ? at the expense of their long-term profit.

But the treasury now fears that the insurers' shareholders will take advantage of this short-term bonanza to withdraw dividends. The purpose of the latest proposal, to force the insurers to increase their standing equity capital, would be to foil such intentions.

The insurers claim that the requirement will force them to raise additional equity capital.

Recently the Menorah and Phoenix insurance companies raised NIS 210 million from issuing deferred notes. Capital raised in this way is acknowledged as equity capital.