Introduction

On 17 September 2020 the Supreme Court answered a crucial question which could affect the reserves for bodily injury claims of all Israeli insurers and hence affect their balance sheets.

According to the decision (CA 19/4025 National Insurance Institute (NII) v Local Authority Dead Sea Scrolls), the relevant annual capitalisation interest that should apply in respect of subrogation claims filed by the NII is 3% regardless of the fact that the NII paid allowances to the injured based on an annual capitalisation interest of 2%.

Vinograd Committee – reduction of annual interest rate

For several years, since interest rates have plunged, plaintiffs that suffer a bodily injury have requested that the courts calculate compensation for the loss of earnings based on a reduced capitalisation interest of 1% or 2% in view of the changes to the global interest rate paid for long-term bonds.

The same question arises regarding allowances paid by the NII, which is the government arm for various types of allowance (including old age pensions and bodily injury allowances).

In 2014 the Vinograd Committee was formed, which recommended that the rate of annual interest capitalisation of NII allowances be reduced to 2%.

The committee also recommended that said rate be examined once every four years based on the average yield of long-term government bonds.

Following the committee's recommendation, in 2017 the NII regulations were amended to reflect the change.

Kaminits Committee – no change in interest rate

In view of said change, a question arose as to whether the same ruling should affect insurers that pay compensation to victims of bodily injuries for loss of future earnings. Obviously, a reduction in the interest rate from 3% to 2% will increase the benefits paid by insurers and oblige them to increase reserves that were calculated based on the 3% interest rate.

In 2017 the Kaminits Committee was formed, which recommended that the interest rate in respect of insurers' payments not be changed. The committee's recommendations were adopted by the Supreme Court in CA 3751/17 (8 August 2019).

In certain cases in which injury was caused during work, compensation is paid partly by the NII and partly by an insurer. In some cases, the NII has a right of subrogation against the insurer of the tortfeasor.

Further, in recent months, the yield for government bonds have plunged; thus, insurers could not be sure that such a drop in yield would not enable the commissioner of insurance to decide to reduce the interest rate similar to that of the NII.

Comment

The recent Supreme Court judgment, which was handed down despite the abovementioned decrease in the yield, provides more certainty to insurers' reserves and can comfort reinsurers with regard to bodily injury motor quota share treaties.