Chapter 3.3: Insurance companies’ accounts to national accounts (2/2)

1. Chapter 3.3: Insurance companies’ accounts to national accounts (2/2) EN/ADM/2014/Pres/12 Ramesh KOLLI Senior Advisor on National Accounts, African Centre for Statistics At Expert Group Meeting on Use of Administrative Data in National Accounts 23-27 June 2014, Umubano Hotel, Kigali, Rwanda

2. Conceptual issues specific to insurance (1/2) • The activity of insurance is a form of financial intermediation. In this, funds are collected from policyholders and invested in financial or other assets (which are held as technical reserves) to meet future claims arising from the occurrence of the events specified in the insurance policies. • Typically, insurance enterprises do not charge for services they provide in arranging the financial protection or security which insurance is intended to provide. Therefore, these service charges are estimated indirectly. • However, there could be cases where insurance enterprises do make explicit charges to their policyholders. In such cases, these explicit charges are treated as payments for services rendered in the normal way. • The insurance terminologies that are most referred to in the compilation of national accounts are premiums earned, premium supplements, net premiums, changes in reserves, claims incurred/due, adjusted claims incurred and benefits. It is necessary for national accountants to familiarise themselves with these terms.

3. Conceptual issues specific to insurance (2/2) • The insurance company sets the level of the actual premiums to be such that the sum of the actual premiums plus the investment income earned on them less the expected claim will leave a margin that the insurance company can retain; • This margin represents the output of the insurance company. • This margin, which is the output of the insurance industry, is determined from the premium setting policies of the insurance corporations. • The components involved in premium setting are (i) premium earned, (ii) premium supplements, (iii) claims (or benefits) incurred and (iv) reserves. • Value of output of services produced by insurance enterprises is calculated as

4. Life insurance (1/5) • Normal life insurance is distinct from social insurance. • Life insurance is entered into on own initiative, whereas social insurance involves a third party intervention, such as the government or employer. • Benefits from life insurance policy are recorded in the financial account. Benefits/pensions from social insurance are recorded as income in the secondary distribution of income account. • If we consider transactions between domestic insurers and residents only, then : • Life insurance transactions take place only between insurance corporations and households, as life insurance policy is always held by an individual. Therefore, output of life insurance services (recorded under resources in production account of insurance corporations) equals the household final consumption expenditure (recorded under uses in the use of disposable income account of households). • Investment income (including bonuses declared) attributed to insurance policyholders (known as premium supplements) in respect of life insurance is recorded in the allocation of primary income account. There will be corresponding entries for households in the same account. • Recording of entries for imports and exports of insurance services will arise if non-residents and/or non-resident insurers are involved.

5. Life insurance (2/5) • The investment income attributed to insurance policyholders (premium supplements) includes property income from real estate, bonuses attributed to the policy holders but retained by insurers, and excess of income from the investment of life reserves over any amounts explicitly attributable to the policyholders. • This property income is deemed to be paid out to policyholders and then paid back again as premium supplements even though in actuality the property income is retained by the insurance enterprises. • The amount involved is earnings forgone by the policyholders by putting the funds at the disposal of the insurance corporation and is thus recorded as property income in the allocation of primary income account. • Premiums and claims are not shown separately in the case of life insurance and are not treated as current transfers. Rather they constitute components of a net transaction in the financial asset life insurance and annuities entitlements, recorded in the financial account.

6. Life insurance (3/5) Output and net premiums of life insurance are calculated as • 2008 SNA suggests estimating output of life insurance as sum of costs plus an allowance for normal profits, if adequate data are not available for the calculation of life insurance, according to this formula. • The key items used in compiling national accounts for life insurance are, earned premiums, unearned premiums, investment income or premium supplements, benefits due and changes in life insurance technical reserves.  

7. Life insurance (4/5) Example to calculate output of life insurance Calculation of output and net premiums for data presented in above Table

8. Life insurance (5/5) The values are recorded in different accounts of insurance corporations, as follows: • Production account • Resources • P1 output : 378 (8) • Uses • Balancing item, B1g value added: 378 (derived) • Allocation of primary income account • Resources: • Balancing item, B1g value added: 378 • D4 property income : 63 (5) • Uses • D441 investment income attributable to insurance policy holders : 63(5) • Balancing item, B5g balance of primary income, gross: 378 (derived)

9. Non-life insurance (1/6) • Output of non-life insurance is based on the principle of adding premiums and premium supplements and deducting adjusted claims incurred. • The 2008 SNA introduced additional methods to compute adjusted claims, considering volitility in claims arising from exceptional events. • Accordingly, three different methods of estimating output of non-life insurance have been suggested  Expectations approach Sum of costs approach Accounting approach

10. Non-life insurance (2/6) • Adjusted claims incurred are determined as the sum of actual claims incurred plus the changes in equalization provisions (i.e. additions to / less withdrawalsfrom equalization provisions) and, if necessary, changes to own funds (i.e. additions to / less withdrawals from own funds). • The item “changes in equalization provisions” is an entry in the accounts of insurance corporations that gives a guide to the funds the insurance corporations set aside to meet unexpectedly large claims. In circumstances where the equalization provisions are insufficient to bring adjusted claims back to a normal level, some contribution from own funds must be added also. • Adjusted claims = claims incurred + changes in equalization provisions • Output of non-life insurance is recorded in the production account of insurance corporations. This output is consumed by the sectors using insurance services as intermediate consumption (recorded in the production account) or by the households (representing consumer households) as final consumption expenditure (recorded in the use of income account). If there are any payments by the rest of the world, these are recorded as exports in the external goods and services account.

11. Non-life insurance (3/6) • The redistributive transactions cover investment income attributed to policyholders in respect of non-life insurance, net non-life insurance premiums, and insurance claims: • Investment income is attributed to policyholders. It is recorded as receivable and payable by insurance corporations and receivable by all sectors and the rest of the world, in the allocation of primary income account. • Net non-life insurance premiums are payable by all sectors of the economy or the rest of the world and receivable by insurance corporations. • Insurance claims incurred are payable by insurance corporations and receivable by all sectors of the economy and the rest of the world. Both net premiums and claims are recorded in the secondary distribution of income account. • “net” as applied to premiums implies that the service charge for the insurance services has been deducted from actual premiums paid plus premium supplements. • There is no netting between direct insurance and reinsurance; each is recorded in full and separately from the other.

12. Non-life insurance (4/6) • An important point to note here is that net non-life insurance premiums only consider the earned premiums, i.e., the amounts due to obtain cover in the period of account, not the amounts of premiums actually paid in the period. The balance premiums, i.e. the unearned premiums and reserves against outstanding claims are shown as a change in liabilities of insurance corporation (with a negative sign if necessary) and a change in assets of all sectors and the rest of the world. • Non-life insurance claims are treated as current transfers. However, there could be cases when such claims are recorded as capital transfers, particularly in the wake of a major catastrophe. • The following table provides steps to compute various items involved in measuring output of non-life insurance, using the accounting approach. For simplicity sake, it is assumed that this property income is payable by other resident sectors and that all the investment income attributable to policyholders comprises this property income.

13. Non-life insurance (5/6) Data from insurance corporations on non-life insurance transactions Calculation of claims and adjusted claims incurred, non-life insurance output and net non-life insurance premiums from data presented in above Table

14. Non-life insurance (6/6) • The values are recorded in different accounts of insurance corporations, as follows: • Production account • Resources : P1 output : 252 (9) • Uses : Balancing item, B1g value added: 252 (derived) • Allocation of primary income account • Resources: Balancing item, B1g value added: 252 D4 property income : 63 (6) • Uses : D441 investment income attributable to insurance policy holders : 63(6) Balancing item, B5g balance of primary income, gross: 252 (derived) • Secondary distribution of income account • Resources: Balancing item, B5g balance of primary income, gross: 252 D71, D711 net non-life direct insurance premiums: 561 (10) • Uses : D72, D721 non-life direct insurance claims: 361 (7) Balancing item, B6g disposable income, gross: 452

15. Sequence of accounts • Bridge table of life and non-life insurance corporations

16. Concluding remarks • This section provides a summary of guidelines and key points to be considered while compiling national accounts in respect of life and non-life insurance corporations. • This section also includes illustrative examples of bridge tables. • The compilation of national accounts for insurance corporations sector requires special considerations, unlike in the case of non-financial sector. • Estimates of output to be recorded in the national accounts for these corporations cannot be computed directly from their financial statements, and can only be estimated in an indirect manner. • There are several typical terminologies and features used in the compilation of national accounts for insurance corporations, and it is important to familiarise with these terms and concepts. • One of the advantages of compiling national accounts for insurance corporations is that this sector is most regulated in almost all the countries, therefore, financial statements are submitted to the regulatory agencies, besides maintaining detailed information internally. • The national accountants, therefore, would need to establish a mechanism with either the regulatory agencies or the individual insurance corporations (generally they may not be many) to provide access to the detailed information.

17. Thank you Ramesh KOLLI Senior Advisor on National Accounts, African Centre for Statistics At Expert Group Meeting on Use of Administrative Data in National Accounts 23-27 June 2014, Umubano Hotel, Kigali, Rwanda