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.
PSt = NIRt * Pt
NIRt = IRt + (1- ) * IRt-1 + (1 –)2 * IRt-2 + …..
PSt = Premium supplement in period t Pt = Premium earnedNIRt = Normal Investment Ratio IRt = Investment Ratio – that is It / Pt
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 27 Premiums earned 22
Output 2 Premium supplements 7
Adjusted claims 19 Premiums earned 22
Output 10 Adjusted Premium supplements 7
Adjusted method
Traditional method
Adjustment in the SNA account of insurance company
Production cost 2 Output 2
Claims incurred 27 Net premium earned 27
Saving 0
Traditional method
Adjusted method
Production cost 2 Output 10
Claims incurred 19 Net 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