Non-life insurance services 1 UN STATISTICS DIVISION Economic Statistics Branch National Accounts Section UNSD/ECA National accounts workshop November 2005

Background  Catastrophic events generate massive claims on non-life insurance companies.  Mechanical use of the current SNA formula for non life insurance services may lead to absurd movements in production and consumption of insurance services in current prices in the national accounts.  Some NA compilers neutralize these effects.  The task force on the measurement of non life insurance  Proposed changes that the AEG mostly has agreed.

General principle The concept of insurance service is the service of covering risk. The measurement of insurance services should not be affected by the volatility of the occurrence of risk. Neither the volume nor the price of insurance services should be directly affected by the volatility of the claims.

Main recommendation Continue to use the same formula for output but with adjusted premium earned and adjusted claims incurred to correct for the volatility of observed flows or negative output. Output = Adjusted premium earned - Adjusted claims incurred Capital transfer must be introduced to maintain the same saving of every sector in the economy.

3 practical ways of implementation Expectation approach Accounting approach Sum of costs plus ‘normal’ profit approach The AEG recommends reference to these three solutions in the updated SNA.

Expectation approach Replicating ex-ante models used by the insurers to price premiums, based on expectations for claims and income. Use of micro data or smoothing past data for claims and premium supplements. Formula for output Actual premiums earned + Expected (adjusted) premium supplements – expected (adjusted) claims incurred

Expectation approach U.S. method: For each type of insurance, premium supplements will be calculated as geometric-weighted moving average of past investment gain/loss multiplied by the premiums earned during the current period. PS t = NIR t * P t NIR t =  IR t +  (1-  ) * IR t-1 +  (1 –  ) 2 * IR t-2 + ….. PS t = Premium supplement in period t P t = Premium earned NIR t = Normal Investment Ratio IR t = Investment Ratio – that is I t / P t parameter  = 0.3 (based on the evidence that it provides best prediction of future values)

Accounting approach Consists of (1) Extending the scope of technical reserves (provisions) (2) Applying an extended formula including, when necessary, changes in own funds Formula for output Premiums earned + premium supplements - (claims incurred + addition to, less withdrawal from equalization provisions + additions to, less withdrawal from own funds)

Sum of costs and “normal” profit approach “Normal” profit can be estimated based on smoothed past actual profits. The approach is in practice similar to the expectation approach.

Adjustment in the insurance company accounts Claims incurred 27Premiums earned 22 Output 2Premium supplements 7 Adjusted claims 19Premiums earned 22 Output 10Adjusted Premium supplements 7 Adjusted method Traditional method

Adjustment in the SNA account of insurance company Production cost 2Output 2 Claims incurred 27Net premium earned 27 Saving 0 Traditional method Adjusted method Production cost 2Output 10 Claims incurred 19Net premium earned 19 Capital transfer 8 Saving 0

Other changes Treating reinsurance gross (same formula as for direct insurance) → insurance service as intermediate consumption (now consolidated) Excluding income from own funds from premium supplements and income to policy holders Include equalization provisions and other special provisions in SNA’s definition of provisions for unearned premiums and claims outstanding. Commission and rebates as negative premiums Profit sharing and bonuses as other income transfers Change in terminology: Technical reserves → Technical provisions, Claims due → Claims incurred

Thank You