Israel Considers Shifting Insurance Agent Commissions to Direct Client Payments

Israel is contemplating a significant shift in how insurance agents are compensated, moving away from commissions paid by institutional entities to direct payments from clients for advice and services. The annual commission pool in the Israeli insurance sector is estimated at NIS 13.2 billion (approximately $3.6 billion USD), with about 80% of this amount, over NIS 10.5 billion, paid for facilitating funds into pension, manager insurance, and provident funds. Currently, these payments are made by institutional bodies, which then pass the cost on through management fees and policy prices.

The Ministry of Finance argues that when product providers, not clients, pay agents, it creates an incentive to recommend products with higher commissions rather than those best suited for the client. Insurance agents, however, maintain that they provide essential advice and ongoing service that many clients would otherwise not receive. Approximately 13,000 licensed agents operate in Israel, with about 5,300 members in the Insurance Agents Association. The average annual commission per licensed agent is roughly NIS 1 million, though this is heavily skewed, with large agencies handling a significant portion of income.

Commissions have seen rapid growth, increasing by 46% in five years, a rate significantly higher than average wage growth. This rise is partly attributed to increased pension savings contributions and competition among providers for distribution channels. In 2020, total commissions were around NIS 9 billion, growing to nearly NIS 11 billion in 2023, approximately NIS 12 billion in 2024, and an additional NIS 1.2 billion in the past year, a 10% increase in a single year. Real terms growth, after accounting for inflation, is also substantial, with the provident and pension sector experiencing the fastest growth at about 16% annually.

The proposed change, which has been discussed before and was rejected, is expected to be revisited as part of the 2027 Arrangements Law. A 2023 inter-ministerial team investigating insurance companies acquiring agencies concluded that the remuneration model itself was the core issue. Recommendations included direct client payments, commissions independent of policy value or insurer, and enhanced disclosure requirements. The Insurance Agents Association opposed these findings, stating that half of agents earn below the average wage and that independent agents foster competition in a concentrated market.

A major hurdle is public willingness to pay directly for advice, as many clients are accustomed to seemingly free services. The British experience since 2013, where financial advisors were prohibited from receiving commissions from product providers and mandated to charge clients directly, is often cited. While this increased transparency and reduced conflicts of interest, it also created an 'advice gap,' leaving individuals with smaller savings without access to advisors due to high fees. This led to a decrease in active advisors and a shift towards wealthier clients, prompting regulators to repeatedly re-examine solutions for those excluded from advisory services.

In Israel, a similar 'advice gap' could emerge, potentially leaving lower-income workers with default options. The Ministry of Finance has already reduced reliance on agents in pension savings through low-fee default funds, which automatically enroll employees who do not make a selection, thereby reducing potential intermediary income. Insurance companies, while potentially benefiting from lower commission payouts, also face risks to their primary distribution channel, especially for complex products like health and long-term care insurance. The timing of any legislative changes remains uncertain, with potential gradual impacts on financial statements.