What keeps us awake

Milken Fellows

Almost two years ago, fresh out of university, I set myself a personal goal- to use the skills I acquired through my academic studies for the benefit of the Israeli public.

I thereby joined the Fellows program and was placed at the Capital Markets, Insurance and savings Division at the Ministry of Finance. A part of my first year internship was to conduct a research that would assist policy makers to improve the Israeli economy. At the beginning of my internship I gathered some possible topics for my research and presented them to the head of the Capital Markets, Insurance and savings Division, Prof. Oded Sarig. We talked about different threats to the stability of institutional investors and the public savings and when I asked about the extension of life span Prof. Sarig told me “this keeps me awake at night”.

The extended life span and pension deficits are a worldwide problem. Israel, as a young country with more urgent problems, is not as worried about this problem as other countries in Europe and the U.S. Never the less Israel pension market has a unique product which gives a Guaranteed Annuity Rate (GAR). That means that the retiree’s monthly stipend would not be reduced if life span goes up. The problem is that the Insurance companies who sell this product (“Bituah Menahalim”) take a huge risk that could not be properly hedged. I therefor decided to examine how changing life span might affect the stability of the Israeli insurance companies. My research showed that no other country has a product that is exposed to longevity risk as those sold in Israel. In addition my simulations showed that a small change in longevity would generate a huge loss for the insurance companies. Therefor I recommended that it would be prohibited to sell products with GAR and that the insurance companies would add up to 730 million NIS to their technical provisions in order to make sure that in all scenarios they would be able to pay their obligations to the public. Two weeks ago prof. Sarig accepted my recommendation. The reaction was quick and sharp- the five biggest insurance companies’ equity decreased by 850 million NIS in one day. “Migdal”, the largest insurance company in Israel, lost 10% of its value in just one day.

I think that the GAR product was a time bomb waiting to go off. It threatened the stability of the insurance companies and also, because of its size as ¼ of Israel pension market, the entire Israeli economy. So I’m glad I had the opportunity to investigate this issue and even more so that my results were accepted and would assist Israeli economy in the future.

I believe that the elimination of this product would improve the stability of the financial system. And with some assistant from this year fellow, Ms. Maya Haran, which researched withdrawal products we could make stronger and more sophisticated pension market.

Lior Tavori Fellow of class 2010-2012

Lior Tavori
As a fellow, Lior interned in the Director-General's Office in the Ministry of Finance. During his first year, he interned in the Capital Markets, Insurance and Savings Division in the Ministry of Finance. His research focused on the effect of...
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