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Measurement of the Output of Non-Life

Insurance

Brent R. MoultonWorking Party on National Accounts, OECD

Paris

October 25–28, 2011

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SNA 2008 measure of non-life insurance

▪ Only a portion of insurance premium is a payment for services rendered by the insurance carrier. The other portion is needed for paying claims.

▪ Formula in SNA 1993 (premiums plus premium supplements minus claims) very volatile when a catastrophe occurs Volatility doesn’t reflect change in services

provided

▪ SNA 2008 recommends adjusted claims and adjusted premium supplements

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Example

▪ Immediately after September 11, 2001 terrorist attacks on World Trade Center and Pentagon, BEA’s SNA 1993-based treatment showed (not at annual rate): Imports of services reduced by $11 billion Household final consumption expenditures

reduced by $5.5 billion GDP (current prices) raised by $5.5 billion Treated as changes in price, not volume Household final consumption price index: –

0.3 percentage point GDP price index: +0.2 percentage point

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Why adjusted claims?

▪ Because insurance premiums provide for both the production of services and the payment of claims, the production of insurance services must be measured indirectly

▪ While insurance carriers must charge premiums that on average cover the cost of claims and the production of services, there is no requirement that they cover these costs period by period

▪ Ex ante, insurance carriers set premiums on the basis of expectations

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Example

▪ SNA 1993 measure: Value of insurance services for years 1, 2, 3, and 4 = 45, 65, 55, 25.

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Expectation approach

▪SNA 2008 treatment: In calculating insurance services,

expected (adjusted) claims will be deducted instead of actual losses.

▪ In the example: In year 4, if expected claims = 60,

then value of insurance services = 100 – 60 + 15 = 55.

▪Approach was developed by the Australian Bureau of Statistics Presented at OECD meeting in 1999

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Formulas used in U.S. national accounts

▪ Loss ratio is ratio of actual losses (claims) to premiums LRt = Lt/Pt

▪ Normal loss ratio calculated as a geometric weighted moving average of past loss ratios NLRt = aLRt + a(1-a)LRt–1 + a(1-a)2LRt–2 …, The weight, a, is assigned a value of 0.3, based

on correlation with future values

▪ Normal losses (adjusted claims) calculated as normal loss ratio times premiums NLt = NLRt Pt

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U.S. national accounts (continued)

▪ For major catastrophes, the losses were spread equally over a 20-year period.

▪ Geometric-weighted moving averages were also used for premium supplements.

▪ Calculations were applied to each of 22 lines of non-life insurance.

▪ BEA implemented the new output measure in 2003. See Moulton and Seskin, Survey of Current

Business, June 2003, and Chen and Fixler, SCB, October 2003, available at www.bea.gov.

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Household insurance – SNA 1993 method

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PCE Household Insurance - Published

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Bill

ions

of

dolla

rs,

SA

AR Premiums

Claims

PCE = Premiums - Claims

Hurricane Andrew

Sept 11

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Household insurance – SNA 2008 method

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PCE Household Insurance - Revised

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Bill

ions

of

Dol

lars

, S

AA

R

Prem ium s

Norm al Claim s

PCE = Prem iums - Norm al Claims

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Current vs. capital transfers

▪ SNA 1993 treated all non-life insurance claims as current transfers (D72) in the secondary distribution of income account

▪ For major catastrophes: Damages to assets are recorded as other

changes in volume of assets. Recording a large value for claims (without

an offset for the assets lost) could distort measures such as disposable income and saving.

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Example – Hurricanes Katrina & Rita (2005 Q3)

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Sector Claims (billions) Percent of quarterly GDP

Paid by:

Private insurance $27.9 0.9

Public insurance 17.7 0.6

Rest of world 15.4 0.5

Received by:

Financial corporations

$0.9 0.03

Nonfinancial corp’s

13.6 0.4

Noncorporate business

11.6 0.4

Government 2.1 0.1

Households 32.8 1.0

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SNA 2008 treatment

▪SNA 2008 recommends that claims resulting from a major catastrophe should be recorded capital transfers (17.40)

▪ In the United States, insurance industry sources are able to provide source data on claims related to major catastrophes

▪BEA implemented the capital transfers treatment in 2009

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Challenges

▪ Estimates are more robust for sectors paying insurance claims than for recipient sectors Lack of counterparty data – claims must be

allocated by insurance line

▪ For estimating catastrophic losses of fixed assets, assumptions are needed (e.g., uninsured losses, relationship between claims and losses)

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