AEG recommendations on the Measurement of Non-life Insurance Production

1. AEG recommendations on the Measurement of Non-life Insurance Production F. Lequiller, OECD

2. Introduction • The current recommendation of the SNA leads to uninterpretable movements in the current price value of non life insurance output and consumption, in particular in the context of catastrophes • In general, NA compilers neutralise this unwelcome impact on volume measures. • However, the impact is as unwelcome on price indices of output or consumption.

3. Introduction • In the USA, in the third quarter of 2001 (9/11 terrorist attack), the implementation of the current SNA recommendation led to a decrease to the price index of household consumption of 0.3%, and an increase of 0.2% of the price of GDP: ??? • In France, the implementation of the current recommendation on the fourth quarter on 1999 (exceptional storm) would have decreased total household consumption by 1.3%: ???? • The objective of the AEG recommandations is to avoid such uninterpretable results

4. General principle • In the SNA the output of insurance is to « provide financial protection against the occurence of specified events », • However, the SNA recognises that there is no explicit charge for this output, • Therefore one must use an indirect estimate based on the formula (1):actual premiums earned plus premium supplements minus claims due. • The AEG confirmed that, conceptually, the SNA should not be changed. In particular it rejected other conceptually based measures of output (such as premiums).

5. General principle (continued..) • However, the AEG rejected the mechanical implementation of formula (1) • The measure of the concept of insurance output should not be affected by the occurence of the risk. • The unusual difference between premium and claims in a given period is not to be attributed to a movement of output in this period. • The volatility of claims should not affect the measure of production

6. The principle: same formula but.. • adjusted claims rather than observed claims • adjusted premiums supplements rather than observed premium supplements • This principle can be obtained through three methods: • Using expectations • Enhanced accounting • Sum of costs plus « normal » profit

7. Solution 1: using expectations • Insurers fix their premiums based on their expectations of the occurence of risks, and of their other revenues (of which premium supplements). • Based on these expected claims and expected premium supplements, the insurer is capable of fixing the level of premium that will normally cover its administrative costs and its normal profit. • The measurement of the SNA service margin (premiums plus supplements minus claims) should be based on such expectations. • This is a way to obtain a measure of output and consumption consistent with the concept aimed by the SNA.

8. The principle of using expectations • Recommendation 3: expected claims and expected premium supplements should replace actual claims and actual investment income in the calculation of the output and consumption of non-life insurance services. This applies for all claims –regular, catastrophic and unexpected – and for all years. This applies for all investment income. Formula (1) should be adapted to this recommendation and become: • Formula (3): [Actual premiums earned [i.e. premiums receivable less changes in the reserves due to pre-payment of premiums] + Expected premiums supplements - Expected claims due.

9. Estimation of expected claims • If insurers were willing to transmit the amount of their (confidential) expected claims, it could be used by national accounts compilers • However, a macro estimate is more realistic (smoothed past claims) • Several methods were discussed to estimate expected claims. They should be available in a new annex for insurance or in an implementation manual.

10. Other AEG recommendations for current price measures • Change of terminology: use the term « insurance technical provisions » • Extend the range of insurance provisions in the SNA • Do not include revenues from own funds in the formula • Do not include holding gains/losses in the formula • Decouple the value of net insurance premiums (D71) and non life insurance claims incurred (D72). The difference is a transfer from insurance companies to policy holders • This difference can be treated, in cases of catastrophes, as a capital transfer (D99) • Treat reinsurance on a gross basis and use exactly the same formulae as for direct insurance.

11. Prices and volumes : insurance services Statistical offices do calculate price indices for non-life insurance services included as a PPI or as a CPI. These price indices, called here “premium price indices”, measure the change in the price of insurance policies with fixed characteristics. They are different from the ideal index, and should not be used to deflate the current price output unless there is evidence that the deflator for claims moves with the premium price indices.

12. Prices and volumes : insurance services In the absence of this ideal deflator, it is recommended to compile a direct volume indicator using one of the methods proposed below, and obtain the price index as the ratio between the current price series and the volume series: 2. In the absence of adequate premium price indices, a volume indicator can be compiled using quantity indicators such as the number of policies, by line of product (house-owner insurance, motor vehicle insurance, third party liability, etc.) appropriately weighted preferably by net premiums or, when not possible, by gross premiums. • Obtain a direct volume measure of the output (and by extension, the consumption) of non-life insurance services by extrapolating the current price measure of the base year by the rate of change of a volume index, which is obtained deflating gross premiums earned by a premium price index (PPI or CPI, depending of the context). When the premium price index covers premium supplements, it is advisable to use the rate of change of a volume index compiled as gross premiums plus adjusted premium supplements deflated by this extended premium price index. 1. Direct volume measure 2. Deflated premium method