ESTP course on National Accounts Insurance and pension funds Luxembourg, 30 May - 3 June 2016 Eurostat, BECH Ampere

The insurance business Claims Premiums Insurance and pension funds

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 Insurance and pension funds

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 transfers Insurance and pension funds

Important consequences: The visible flows (premiums, claims) are not what counts for national accounts 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) Insurance and pension funds

Insurance and pension funds Case A: Premiums paid: 10 No claims Output imputed: 3 Case B: Premiums paid: 10 Claims: 70 Output imputed: 3 Output = consumption = 3 Output = consumption = 3 Net premiums = 7; claims = 0 Net premiums = 7; claims = 70 Insurance and pension funds

Searching for a measure of insurance output Unlike other (non-financial) activities, sales are not a reference for insurance output 2-step calculation: 1) Overall output calculation: output = premiums - claims 2) Allocation of output share paid by each customer Insurance and pension funds

Problem: negative output If premiums < claims  negative output! Why would premiums < claims? Competence lowers premiums. Insurers maximize provisions by investing and getting a return premiums investment return Insurance and pension funds

Insurance and pension funds Premium supplements The provisions belong to the policyholders The investment return is theirs too We need to send the money to its owners…and feed it back to the insurer as a supplement to output Investment income attributable to policyholders premiums investment premium supplements Insurance and pension funds

Insurance Output – ESA 2010 approaches Output = total premiums earned + premium supplements – adjusted claims incurred Expectation approach Adjusted claims estimated from (micro) data / past experience Accounting approach Adjusted claims = claims due - changes in equalisation provisions – changes to own funds Solution for catastrophic losses; leading to negative output in ESA 95; recording as capital transfer Insurance and pension funds

Insurance Output – ESA 2010 approaches Sum of Costs approach Intermediate costs, labour and capital cost Plus allowance for "normal" profit If necessary data is not available In case of insufficient data quality Due to "normal" profit similar to the expectations approach Insurance and pension funds

Insurance and pension funds Interim summary: Risk pooling: the insurers incur in no risk Payments split in productive, distributive Insurance sales are not reference for output  conventional def output The provisions belong to the policyholders other income flows need recording Insurance and pension funds

Life and non-life insurance 2 types of insurance exist: Life insurance Non-life insurance All until now was for non-life insurance The uncertainty in life insurance is not whether there will be a claim, but when Pension Funds and Life Insurance treated in similar way… Insurance and pension funds

Insurance and pension funds Life Insurance Output = actual premiums earned + premium supplements – benefits due – increase in life insurance technical reserves Output calculation: net of holding gains Reinsurance output: calculated according to non-life model Insurance and pension funds

Example: Life Insurance Premiums received in 2015 120 Of which: Premiums for 2016 20 Property income/ 20 premium supplements Adjusted claims paid 65 Change in technical reserves 50 Holding gains 10 Output ? Insurance and pension funds

Example: Life Insurance Premiums received in 2015 120 Of which: Premiums for 2016 20 Property income/ 20 120 premium supplements Adjusted claims paid 65 -65 Change in technical reserves 50 -40 Holding gains 10 Output 15 Insurance and pension funds

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

Insurance and pension funds 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) Insurance and pension funds

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

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 0.6 Insurance and pension funds

Imputations; only db schemes Imputed contribution by the employer = 4.1 Actuarial increase in pension entitlements 15 Less employers actual contribution 10 Less employees contribution 1.5 Plus costs of operating the scheme 0.6 Insurance and pension funds

Output of pension schemes Social security: Sum of costs; if a separate unit is distinguished Own employer schemes: Sum of costs, plus allowance for "normal" profit Scheme operated on behalf of the employer: Fee charged by the insurance corporation Multi-employer scheme: As for life insurance Insurance and pension funds

Insurance and pension funds 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! Insurance and pension funds

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 Insurance and pension funds

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

Thank you for your kind attention!