Parallel session IARIW 2014

1. The New Treatment of Reinsurance in
SNA2008: Implementation and Impact
www.bea.gov
Author: Wolfgang Eichmann (FSO Germany)
Discussant: Dylan G. Rassier (BEA)
Presentation Prepared for the IARIW 33rd General Conference
Session 8B: Issues in the Implementation of the 2008 SNA II
Friday, August 29, Afternoon

2. Economics of Insurance Services
▪ Direct Insurance
 Individual policy holder pays premiums
 Insurer covers risk of loss and pays claims
▪ Reinsurance
 Insurer cedes premiums
 Reinsurer covers risk of loss and pays claims
▪ Risk Reduction
 Risk is spread across policy holders and across time
 Reinsurance spreads risk further and facilitates business growth
▪ Continuous Production
 Insurer sets premiums ex ante based on expected claims
 Margin = premiums + investment income – expected claims
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3. Measurement in SNA2008 and ESA2010
▪ Gross Recording
▪ Implicit Service Charge (Output)
 Designed to mimic margins of insurance corporations
 Direct (non-life) insurance Reinsurance
= Premiums earned = Premiums earned
– Commissions
+ Premium supplements + Premium supplements
– Adjusted claims incurred – Adjusted claims incurred
– Profit sharing
 Each component is based on accrual concepts
▪ Premiums Earned
 Apply to the accounting period rather than the coverage period
 Premiums written less change in reserve for unearned premiums
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4. Measurement in SNA2008 and ESA2010
▪ Premium Supplements
 Investment income on technical reserves (exclude own funds)
 Dividends plus interest plus net operating surplus on real estate
▪ Adjusted Claims Incurred
 Amounts due for insured risks that have been realized
 “Expectations approach” based on historical claims experience
 “Accounting approach” based on business accounting records
 Claims paid plus change in regulatory reserves plus change in own funds
 Approach used by FSO
 Sum of costs approach
▪ Technical Reserves for Reinsurers
 Unearned premiums, claims outstanding, and other reserves
 Realized and unrealized holding gains and losses
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5. Reinsurance Transactions in
SNA2008 and ESA2010
▪ Production and Consumption
 Output and intermediate consumption (domestic)
 Imports and exports of services (cross-border)
▪ Distribution of Income
 Investment income is returned as premium supplements
 Net premiums = adjusted claims incurred
 Adjusted claims incurred
▪ Other Transactions
 Catastrophes are treated as capital transfers
 Changes in technical reserves in the financial account
 Holding gains and losses in the revaluation account
 Technical reserves in the balance sheet
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6. Measurement of Reinsurance
for Germany under ESA2010
▪ Federal Financial Supervisory Authority (BaFIN)
 Requires annual financial statements
 Provided data to FSO for 2010
▪ Adjust Profit and Loss (P&L) Data
 Estimate domestic and cross-border transactions
 Determine the effect on GDP and GNI
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7. Results for Germany
Implicit Service Charge of Reinsurers under ESA2010
Line Component Million Euros Data Source
1 Premiums written 43,307 2010 P&L
2 Plus: Specific insurance technical incomes 17 2010 P&L
3 Less: Fire brigade tax 67 2010 P&L
4 Less: Commissions 11,041 2010 NW202
5 Less: Change in reserve for unearned premiums 688 2010 P&L
6 Equals: Premiums earned 31,528
7 Interest 2,783 2010 NW201
8 Plus: Dividends 7,600 2010 NW201
9 Plus: Net operating surplus on real estate -616
10 Rent 169 2010 NW201
11 Less: Interest paid 785 2010 P&L
12 Equals: Total investment income 9,767
13 Less: Investment income on own funds (47.4%) 5,137 2010 P&L
14 Equals: Premium supplements 4,630
15 Claims paid 27,963 2010 P&L
16 Plus: Change in provisions for claims and claims handling costs 2,173 2010 P&L
17 Plus: Other change in reserve for claims outstanding 166 2010 P&L
18 Less: Net holding gains (realized and unrealized) 857
19 Holding gains (realized and unrealized) 5,287 2010 P&L
20 Less: Holding losses (realized and unrealized) 4,430 2010 P&L
21 Equals: Adjusted claims incurred 29,445
22 Implicit service charge of reinsurers (6 + 14 - 21) 6,713
Note: P&L = profit and loss statement, NW201 = income and expenses for capital assets, NW202 = cost types
included in specific expense types
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8. Results for Germany
Reconciliation of Production Accounts for Reinsurers under ESA2010 and ESA95
Line Component Million Euros
1 Total output under ESA2010 7,852
2 Less: Other output under ESA2010 1,139
3 Equals: Implicit service charge under ESA2010 6,713
4 Plus: Commissions 11,041
5 Plus: Other insurance technical receipts 93
6 Less: Premium supplements 4,630
7 Less: Balance of passive reinsurance transactions 709
8 Less: Holding gains and losses (realized and unrealized) 857
9 Less: Other insurance technical expenditures 138
10 Equals: Implicit service charge under ESA95 11,513
11 Plus: Other output under ESA95 1,139
12 Equals: Total output under ESA95 12,652
13 Intermediate consumption under ESA2010 4,338
14 Plus: Commissions 11,041
15 Less: Balance of passive reinsurance transactions 709
16 Equals: Intermediate consumption under ESA95 14,670
17 Gross value-added under ESA2010 3,514
18 Less: Gross value-added under ESA95 -2,018
19 Equals: Effect on gross value-added of reinsurers 5,532
20 Premium supplements 4,630
21 Plus: Holding gains and losses (realized and unrealized) 857
22 Plus: Other insurance technical expenditures 138
23 Less: Other insurance technical receipts 93
24 Equals: Effect on gross value-added of reinsurers 5,532
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9. Results for Germany
Cross-Border Transactions of Reinsurers under ESA2010
(million Euros)
Line Component Totals
Receipts from
Nonresidents
Percent of
Gross
Premiums
Earned
Payments to
Nonresidents
1 Gross premiums earned from nonresidents 32,100
2 Gross premiums paid to nonresidents 7,577
3 Implicit service charge 6,713 5,055 15.8% 1,197
4 Premium supplements 4,630 3,486 10.9% 826
5 Net premiums / adjusted claims incurred 29,445 22,172 69.1% 5,236
6 Capital transfers paid 888 669 2.1% 159
7 Gross premiums earned / paid 42,619 32,100 100.0% 7,577
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10. Results for Germany
Effects on GDP and GNI under ESA2010 and ESA95
(billion Euros)
Line Component ESA2010 ESA95
Absolute
Difference
Relative
Difference
1 Exports of reinsurance services 5.055 4.017 1.038
2 Less: Imports of reinsurance services 1.197 1.932 -0.735
3 Balance on reinsurance services 3.858 2.085 1.773
4 Investment income received from nonresidents 0.826 0.000 0.826
5 Less: Investment income paid to nonresidents 3.486 0.000 3.486
6 Balance on investment income -2.660 0.000 -2.660
7 GDP 2,496.8 2,495.0 1.8 0.07%
8 Plus: Balance on primary income 51.7 54.4 -2.7 -4.96%
9 GNI 2,548.5 2,549.4 -0.9 -0.04%
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11. General Comment
▪ Transactions within MNEs
 Vertical integration internalizes costs associated with
asymmetric information and economic inefficiency
 Factors affecting the location of reinsurance affiliates
 Regulation of capital
 Tax minimization
 Transactions may lack economic substance (Lipsey 2010)
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12. Specific Comments
▪ Is current measurement of reinsurance in German accounts consistent with business
accounts?
▪ The exposition in overview 1 does not seem complete or accurate.
 Are claims in business accounts based on claims paid or expected claims?
 Is the change in technical reserves specifically included in business accounts or merely captured in
premiums earned, expected claims, and holding gains and losses?
 If we include the change in technical reserves under ESA2010 instead of adjusted claims incurred, then we
need to refer to “premiums written” and “claims paid”.
 What about commissions and profit sharing under ESA2010?
▪ Why are holding gains and losses in table 6 deducted from the change in reserve for
claims outstanding rather than the change in reserve for unearned premiums?
▪ Why are holding gains and losses a source of difference between ESA95 and ESA2010
in table 8? Are holding gains and losses included in output under ESA95?
▪ Should the reader be able to derive the implicit service charge under ESA95 based on
the data provided in the paper or is the 11,513 in table 8 just given?
▪ What is the balance of passive reinsurance transactions in table 8 and table 9?
▪ Why do the components in table 11 not add to gross premiums earned (42,619)?
▪ According to table 13, Germany is a net exporter of reinsurance services. Some
additional background information on the industry would be helpful for context.
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