Item 14b: Insurance and Pension Funds ESTP course on National Accounts ESA 2010 Luxembourg, 15 May - 19 May 2017 Eurostat

The insurance business Premiums Claims

Risk-assumption vs. risk-pooling Risk-assumption model: Premiums are revenue claims are insurer’s costs Risk is transferred from policyholders to insurers. Insurers incur in risk Policyholders do not interact with each other

Risk-assumption vs. risk-pooling Risk-pooling model: Risk is shared among policyholders Insurers do not incur in risk; mere managers Insurance output = management fee All premiums/claims potted for distribution as current transfers

National Accounts view point Sales are not a reference for insurers output, thus their output is calculated as premiums less claims Insurers maximise provisions by investing and getting a return Return on investment premiums investment

National Accounts view point However, the provisions belong to the policyholders Thus, we need to send the money to their owners and feed it back to the insurer as a supplement to output premiums investment Return on investment premium supplements

National Accounts view point For each insurer-customer relation, we split the premiums payment into A production flow (P.1 output) A distributive flow (D.71 net premiums) There is a second distributive flow (D.72 claims)

Types of insurance policies 2 types of insurance exist: Non-life insurance Life insurance The uncertainty in life insurance is not whether there will be a claim, but when Special case: term insurance Direct (business) insurance and reinsurance

The output of non-life insurance services are calculated as: [gross] premiums earned + [gross] premium supplements - [gross] adjusted claims incurred * * BUT, If premiums < claims the this leads to negative output ! ! Why would premiums < claims ?

The output of non-life insurance services are calculated as: [gross] premiums earned + [gross] premium supplements - [gross] adjusted claims incurred * * Adjusted non-life claims incurred can be calculated: a) based on past experience (expectation approach), or ; b) as claims due less changes in equalisation provisions less changes to own funds (accounting approach) Catastrophic losses must be eliminated and recorded as capital transfers

Important: Non-life Insurance Allocation of output is based on share paid by each customer In case of non-life, for each insurer-customer relation, we split the premiums payment into A production flow (P.1 output) A distributive flow (D.71 net premiums) There is a second distributive flow (D.72 claims) and correspond other capital transfers recording catastrophic losses (D.99)

Important: Non-life Insurance Premiums + supplements = 100 Claims incurred = 150 Adjusted claims incurred = 70 Output (P.1) = Consumption = 30 Net Premiums (D.71) = premiums – P.1 = 70 Claims (D.72) = 150 Catastrophic losses (D.99) = 80

The output of life insurance services are calculated as: [gross] premiums earned + [gross] premium supplements - [gross] benefits due ± changes in technical reserves (provisions) * * Holding gains (realised and not-realised) must be eliminated

Important: Life Insurance Premiums earned = 100 Premium supplements = 20 Benefits due = 65 Change in technical reserves = 50 Holding gains = 10 Output ?

Important: Life Insurance Premiums earned = 100 Premium supplements = 20 Benefits due = 65 Change in technical reserves = 50 Holding gains = 10 Output = 15

Direct insurance and reinsurance services

Focus on pension schemes Pensions in Social insurance Social Security pensions Other employment-related pension schemes Defined contributions schemes (DC) Defined benefit schemes (DB)

Social Security Treated on payable basis, thus Social Contributions recorded as they are payable (from households) Social benefits recorded as they are payable (to households)

Other employment-related schemes Treated as saving schemes Including funded schemes for government and public corporation employees

Imputations; only db schemes Imputed contribution by the employer = ? Actuarial increase in pension entitlements 15 Less employers actual contribution 10 Less employees contribution 1.5 Plus costs of operating the scheme 0.5

Imputations; only db schemes Imputed contribution by the employer = 4 Actuarial increase in pension entitlements 15 Less employers actual contribution 10 Less employees contribution 1.5 Plus costs of operating the scheme 0.5

What is D8? Recall that social benefits and social contributions are entered before “disposable income”, thus if no further adjustment disposable income and saving would be fully affected by the balance However we take the view that for occupational and funded government sponsored pension schemes the increase in the household’s net equity should be included in saving (households own pension reserves)… and we want the non-financial and financial accounts to balance!

Future pension reporting – Table 29 Compromise at worldwide level All private schemes recorded on actuarial basis Treatment of unfunded government employer schemes flexible (in Europe: no liabilities in core accounts) Social Security treatment unchanged Transmission program: Accrued-to-date pension entitlements in social insurance First obligatory transmission: 31/12/2017 Contact group, Technical Pension Compilation Guide, dedicated web section

Table 29: Core / Non-core allocation of pension schemes Table 29: Accrued-to-date pension entitlements in social insurance Row No. Recording Core national accounts Not in the core national accounts (7) Total Pension   Counter-parts: Pension manager Non-general government General government Schemes Pension entitlements of non-resident households4) Defined contri- Defined benefit schemes and other1) non-defined contri-bution schemes Total Defined contri-bution schemes Defined benefit schemes for general government employees2) bution schemes Classified in financial Classified in general Social security pension schemes corporations govt 3) government Code XPC1W XPB1W XPCB1W XPCG XPBG12 XPBG13 XPBOUT13 XP1314 XPTOT XPTOTNRH Column number A B C D E F G H I J

Pensions in National Accounts: Structure of Table 29 Row Opening balance sheet 1 Pension entitlements at the beginning of the year   Changes in pension entitlements due to transactions 2 Increase in pension entitlements due to social contributions 3 Other (actuarial) change of pension entitlements in social security pension schemes 4 Reduction in pension entitlements due to payment of pension benefits 5 Changes in pension entitlements due to social contributions and pension benefits 6 Transfers of pension entitlements between schemes 7 Change in entitlements due to negotiated changes in scheme structure Changes in pension entitlements due to other flows 8 Changes in entitlements due to revaluations 9 Changes in entitlements due to other changes in volume Closing balance sheet 10 Pension entitlements at the end of the year