Nonlife insurance services

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

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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.

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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.

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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.

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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

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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 earned
• NIRt 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)

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Accounting approach

• Consists of
• Extending the scope of technical reserves
  (provisions)
• 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)

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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.

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Adjustment in the insurance company accounts
Traditional method
Adjusted method
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Adjustment in the SNA account of insurance
company
Traditional method
Adjusted method
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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 SNAs 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

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• Thank You