Addressing Selected Issues in Estimates of U.S. International Services: Improved Measures of Insurance, Wholesale and Retail Trade, and Financial Services Maria Borga U.S. Bureau of Economic Analysis OECD-Eurostat Expert Meeting on Trade-in-services Statistics September 13, 2006

2 Introduction  In June 2002, BEA identified issues affecting the measurement of  Insurance services  Distributive services of wholesalers and retailers  Financial services  Data gap  FATS statistics cover nonbank affiliates only  Measure with limited usefulness  Insurance services supplied through affiliates reflect gross premiums

3 Addressing the Measurement Issues  To address the issues identified, BEA  Initiated new data collections  Developed new methodologies  Identified and used data from outside sources  Estimates presented are not yet official

4 Output of Insurers  Components of output  Financial protection against specified risks  Financial intermediation services  Auxiliary insurance services  Assume insurers set premiums to maximize profits given expectations of  Future claims  Investment income

5 Insurance Services Sold through Affiliates  One of the larger services sold through affiliates  Currently, measured as services-related operating revenues  Mainly premiums  Fees for auxiliary insurance services  Missing important aspects  No deduction for losses paid  Premium supplements

6 Premiums less Normal Losses  “Normal” losses: proxy for insurers’ expectations  Consist of:  Regularly occurring losses  A share of catastrophic losses

7 Premiums less Normal Losses  To construct, BEA collected  Premiums earned  Losses paid  Collected on  2002 benchmark survey of foreign direct investment in the United States (FDIUS) and follow-on annual surveys  2004 benchmark survey of U.S. direct investment abroad (USDIA) and follow-on annual surveys

8 Regularly Occurring Losses  6 year, arithmetic moving average of ratio of actual losses to premiums  Excludes current year  To avoid waiting until 6 years of data have been collected  Used data on the U.S. domestic insurance industry

9 Catastrophic Losses  If a catastrophe affects the insurance sold through affiliates  Then,  Develop estimate of catastrophic losses  Remove it from actual losses in calculating the normal losses in that year  Spread over next 20 years

10 Preliminary Estimate for 2002: Premiums less Normal Losses Estimated premiums earned:$63.3B Multiplied by 6-year moving average of losses/premiums: 76.1% Normal losses=$48.2B Premiums less normal losses=$15.1B

11 Premium Supplements  Applies to non-life insurers  Collect data on investment income  Combine with data on domestic insurance industry to estimate investment income on technical reserves

12 Preliminary Estimate for 2002: Premium Supplements Estimated investment income earned by non-life insurers: $11.8B Estimate of share of investment income earned on technical reserves 48.3% Premiums supplements$5.7B

13 Changes in the Estimates of Sales of Insurance Services by U.S. Affiliates of Foreign MNCs 2002 Worldwide sales of services Sales to U.S. residents Current estimates LESS Premiums earned EQUAL Auxiliary insurance services or services from other industries PLUS New measure of insurance services EQUAL New estimate of sales of services Difference from current measure (Billions of dollars)

14 Wholesale and Retail Trade  Distributive services  SNA measures as trade margins  Sales of goods less cost of goods resold  Important service industries in U.S. economy  In 2004, accounted for almost 13% of GDP

15 Wholesale and Retail Trade in Estimates of Sales Through Affiliates  Sales of services through wholesale and retail trade affiliates are insignificant  Because BEA treats the total value of sales associated with wholesale and retail trade as sales of goods  Sales of services of these affiliates are  Sales from secondary, service activities  Not the distributive services provided

16 Data Collection for Wholesale and Retail Trade Services  To construct estimates, BEA collected  Goods for resale  Beginning- and end-of-year inventories of goods for resale  Collected on:  2002 benchmark survey of FDIUS and follow- on annual surveys  2004 benchmark survey of USDIA and follow- on annual surveys

17 Preliminary Estimates for 2002: Wholesale and Retail Trade  New data collected indicate $134.9B in distributive services sold to U.S. residents  Offsetting reduction in the sales of goods in broader FATS statistics  Sales of goods were $1,561.6B  Would fall by 8.6%

18 Financial Services  Sales through affiliates exclude bank affiliates  Services supplied by banks can be charged for  Explicitly—fees and services charges  Implicitly—financial intermediation services indirectly measured (FISIM)

19 Data Collection for Bank Affiliates  To construct estimates, BEA collected  Explicit fees and service charges  Total interest received  Total interest paid  Collected on:  2002 benchmark survey of FDIUS  2004 benchmark survey of USDIA

20 Preliminary Estimates for 2002: Bank Affiliates Data collected indicate sales to U.S. residents of: For explicitly charged services:$14.1B For implicitly charged services:$16.4B Total sales of services:$30.5B

21 Impact on the Estimates of Sales of Services by U.S. Affiliates of Foreign MNCs, 2002

22 Conclusions  More meaningful measure of insurance services  Measure distributive services provided by wholesale and retail trade affiliates  Closed data gap by including bank affiliates