The IMF's Statistical Systems in Context of Revision of the United Nations' A System of National Accounts
Chapter

30 A Further Look at the Treatment of Insurance in A System of National Accounts

Author(s):
Vicente Galbis
Published Date:
September 1991
Share
  • ShareShare
Show Summary Details
Author(s)
André Vanoli

To make it easier to re-examine the way insurance is dealt with in the United Nations' A System of National Accounts (SNA), the relevant paragraphs of the 1968 SNA and the European System of Integrated Economic Accounts (ESA)1 are reviewed. There are differences in the way the two systems assess gross premiums and claims, and it is proposed that, first of all, these points of divergence be eliminated.

I. Assessing Gross Premiums and Claims

Gross premiums, premium prepayments, claims, and reserves against unsettled claims are considered.

Gross Premiums

These do not appear in the accounts but are the basis on which the accounts are drawn up. The SNA (paragraph 7.54) records net premiums due to be paid (received) during the year, whereas the ESA (paragraph 315.k) records gross premiums earned (that portion of the premiums intended to cover risks during the financial year).

Proposal

The ESA solution should be chosen because it is more correct in principle and in line with insurance companies' own accounting practice.

Prepayment of Premiums

It follows from the treatment of gross premiums that the SNA and the ESA do not deal with the prepayment of premiums in the same way.

Proposal

In line with the proposal for gross premiums, the prepayment of premiums should be considered as accounts receivable by the insured persons and as accounts payable by the insurance companies. Prepayments should be entered under a heading of “insurance technical reserves.”

Claims

The SNA (paragraph 7.54) considers that net claims are due on the date when the parties reach agreement or a claim has been adjudicated, whereas the ESA (paragraph 315.k) considers that claims are due at the time that the casualty occurs (there will therefore be some time lag, with the companies estimating the amount of the claim due and revising it if necessary at a later stage).

Proposal

The ESA solution should be chosen because it is more correct in principle and in line with insurance companies' own accounting practice.

Reserves Against Unsettled Claims

In the SNA, insurance claims not yet paid are entered under categories 8.12 or 9.12, “other accounts receivable and payable.” The ESA, however, enters them under the heading “reserves against unsettled claims,” which is a subcategory of the heading “insurance technical reserves.”

Proposal

The ESA solution should be adopted: the heading “insurance technical reserves” should be introduced in the revised SNA, with appropriate subcategories.

II. Claims Circuit

For covering risks run by third parties, the SNA (paragraph 7.56) recommends that claims should be recorded, first, as payments by the companies to policy holders and, second, as transfers from policy holders to injured parties. This treatment is in line with the law on liability but is highly unrealistic and irrelevant to national accounts.

Proposal

It should be considered that claims are paid directly to the units that are the ultimate beneficiaries, as is already done in the ESA (paragraph 455).

III. Assessing Insurance Services: Taking Investment Income into Account

By nature, the gross insurance premium is a composite flow. It would seem that the loading used by insurance companies in their calculations of gross premiums does not provide a practical basis for the calculation of that part of the premium intended to pay for insurance services. First, there appear to be few macroeconomic statistics that include loading data. Second, management costs may be partially covered by resources other than gross premiums (a proportion of investment income). In this case the loading included in the premiums is only partial, and the service component can be assessed only indirectly.

Application of the SNA (paragraphs 6.37 and 6.38) and ESA (paragraph 315.k) definitions appears, however, to have led to amounts being universally underestimated and to abnormal movements in the figures for insurance services. This is the result of insufficient account being taken of the insurance companies' financial activity and its results, especially in the form of income from financial investments made by the companies.

Let us first consider the simpler case of casualty insurance. The SNA assumes that the premium component intended to cover the risk is equal to the amount of claims due during the same period (collectively, of course). Thus, the service charge is calculated—still collectively—as the difference between gross premiums and claims due.2 This solution would be wholly correct if the casualty insurance companies had no reserves and therefore no income from investment of these reserves. Taken to its logical conclusion, there would be an immediate set-off between that part of the gross premiums intended to cover risks and the amount of claims paid. In that case, gross premiums would be used to cover in full both the insurance service charges and claims due.

In reality, casualty insurance companies have major reserves and derive considerable income from investing them. The result is that claims are met not only from gross premiums but also from investment income. If there were no investment income, the total gross premiums paid by the insured persons would have to be much higher than they actually are, other things being equal.

For life insurance, the SNA and ESA both to a certain extent take account of the results of financial activity. To estimate the part of gross premiums that corresponds to the savings component, the SNA (paragraph 6.38) deducts from the change in technical reserves “the interest on these reserves, which accrues to policy holders.”3 Even though the results of financial activity have to some extent been taken into account, the assessment of life insurance services—like that of casualty insurance—has also produced deviant results.

When the French System of National Accounts (SECN)4 was last revised, the assessment of insurance services was redefined. Insurance services are still defined as the difference between gross and net premiums, but paragraph 13.17 of the SECN defines net insurance premiums as the difference between technical charges and net investment income. Technical charges are claims due, together with the change in actuarial reserves and reserves for with-profits insurance. Net investment income represents the difference between the income from all investments in real estate and movable assets (rent, interest, dividends), together with the sum of the costs incurred for such investments (acquisition and maintenance costs, and so on) and the interest paid by the insurance companies in connection with reinsurance.

Net premiums are therefore equivalent to that part of the technical charges not covered by net investment income, and the latter is therefore by convention allocated first to coverage of technical charges.5 Strictly speaking, not all the net income from investments—included in France for reasons of data availability—should be included in the calculation, only the part of income that does not come from investment of the companies' equity capital. The correct formulation is as follows:

or

or

With casualty insurance, if it is assumed that there are no actuarial reserves,6 the definition becomes

Two rules thus apply, as follows:

  • The technical reserves are a debt owed to insured persons collectively by the insurance companies, even though it is not always possible at the microeconomic level to determine the amount of the share of each insured person in those reserves.

  • The net income from the investment of those reserves is used to finance the insurance technical charges. It is therefore allocated in full to the insured persons collectively. With casualty insurance, it works to reduce the amount of net premiums entered in the income and outlay account.7 For life insurance, interest imputed to insured persons also includes—and this is an extension of the SNA (paragraph 7.48) and the ESA (paragraphs 432 and 433—the total income from the investment of technical reserves (SECN, paragraphs 13.33 and 13.34).

The first rule was applied in the ESA, whereas the SNA applied this rule only to the prepayment of premiums. The second rule was applied in both systems only in part. With perhaps some minor differences between the SNA and the ESA, the net investment income is allocated to insured persons only if the insurance companies have actually somehow credited that income to them. It seems that statutory or accounting practices may in this case conceal the economic logic behind these ideas.

The philosophy behind this treatment has been recommended by others. In a doctoral thesis presented in 1980–81 van den Berghe concentrates on the financial intermediary aspect of insurance activity.8 He arrives at a solution close to that of the SECN for the assessment of insurance services but, in particular, does not include the income from real estate investments in his calculations.

In his discussion of the background to this problem, van den Berghe reminds us that Richard Stone had already adopted a similar solution in his 1947 work for the Subcommittee on National Income Statistics of the League of Nations Committee of Statistical Experts.9 It can be seen from Stone's work that the counterpart of the interest and dividends from investments is imputed to insured persons, whereas the payment of services is calculated as the balance of an account showing, on the one hand, gross premiums and the counterpart to investment income and, on the other hand, technical charges.10 Apart from differences in terminology and a few nuances, the identity

introduced by the SECN in the 1980s thus appeared as long ago as in Stone's 1947 text. Similarly, as long ago as in the 1952 standardized system of the Organization for European Economic Cooperation, solutions other than that in the 1947 appendix were being used.

IV. Taking Account of Investment Income: A Component in the Calculation of Insurance Services or the Imputed Output of Financial Services?

As Schiltz has indicated, an alternative solution would have been to keep to the method used to assess insurance services in the 1968 SNA and to add to the insurance companies' production account an imputed output of financial services along the lines of the imputed output of bank services.11 In this way, the emphasis would have been on the insurance companies' role as financial intermediaries.

This solution did not appear to be satisfactory, however, for two main reasons. First, it would have left the abnormal movements noted in the value of the output of insurance services. Second, it would have obscured the fact that the insurance companies' financial activity is a vital part of insurance activities proper and cannot be dissociated from them.

V. Assessing Insurance Services: What Happens to Capital Gains or Losses?

A comment in paragraph 13.33 of the SECN raises the question of gains realized by insurance companies when they dispose of assets. These gains, measured as the difference between the selling prices of the asset disposed of and the book values on the assets side of the balance sheet (in France, historical cost, corrected, if necessary, in the margin), have been considerable over the past few years. French insurance regulations include them in the financial revenue distributable to insured persons. Should they have been taken into account, either wholly or in part, in the new method of calculating insurance services? While recognizing that a problem did exist, the 1987 SECN did not settle the matter.

On further consideration, the following conclusion may be suggested. If the amount of technical charges, as it appears in the insurance companies' accounts, includes a revaluation component for those investments that are the counterpart of the technical reserves, that amount should be corrected by the revaluation component before being included in the formula for the calculation of insurance services.

The formula proposed.

supposes that the technical charges are covered only by the net income from investment of the technical reserves and part of the gross premiums, since what is being determined is precisely that part of those gross premiums that covers technical charges, so that the amount of insurance services can be worked out as the residue.

If some of the technical charges result from the allocation of capital gains (realized or unrealized) to insured persons (actually paid to them, if added to claims due; or increasing their equity, if added to reserves), the estimated value of the insurance services is reduced by the same amount.

Under this hypothesis, the above formula should be completed as follows, taking into account also the possibility that capital losses may be allocated to insured persons:

or, preferably.

Insurance services are thus assessed as follows:

Net premiums are defined as follows:

The formula applies whether the capital gains or losses are realized as a result of the sale of the assets concerned or are potential—that is, resulting from the writing up to market value of assets remaining on the companies' balance sheet. These gains or losses need only be a book allocation to the insured persons when the technical charges for the year are calculated by the companies. Only part of the capital gains or losses actually made may, of course (and, in general, probably will) be included.

The proposed solution is an extension of the treatment in the ESA (paragraph 315.k), which deducts from the change in actuarial reserves and reserves for with-profits insurance not only (as the SNA does) the interest credited to insured persons but also realized capital gains that are actually distributed to insured persons. The treatment proposed here does away with the restriction to realized gains allocated. Any capital gain or loss allocated to insured persons and included in the technical charges must be excluded from those technical charges when insurance services are calculated.

Practical implementation of the proposed solution entails obtaining from the insurance companies data that they have but that probably do not appear in their published accounts. In effect, the components of the insured persons' shares in the profits have to be known.

VI. Where Should Capital Gains or Losses Allocated to Insured Persons Be Recorded?

Capital gains or losses allocated by the companies to insured persons may be actually paid to insured persons or may increase their claims on the insurance companies. In either case, the ESA (paragraph 4112.i) records such gains or losses under capital transfers if they are in fact a redistribution of capital gains or losses realized.

It would appear that the SNA (paragraph 7.98) tackles the question only as regards pension funds. Because the equity of the individuals equals the net total value of the funds, the SNA provides for adjustments in the revaluation accounts (previously known as reconciliation accounts) of households and pension funds for all capital gains or losses (by implication, whether realized or not, with adjustments made annually).13

The Provisional Guidelines (M 60, paragraphs 5.31 to 5.33 and 7.9) adopt a different position from that of the SNA.14M 60 lumps together mutual insurance companies, where the policy holders are also the owners, and pension funds. It considers that in both cases there are reserves separate from those of the policy holders.15 Capital gains realized and, perhaps, unrealized may be transferred to the policy holders' reserves when they are of a certain size and are liable to be permanent. If this transfer takes the form of a bonus, it appears under capital transfers. Otherwise, M 60 (see Table 7.1) enters an adjustment component in the reconciliation account, “transfers to households' equity on life insurance and pension fund technical reserves.”

To clarify this point, assume that the insurance companies' assets are revalued regularly every year (with certain precautions being taken, of course) and that the equities of insured persons and shareholders, which are obviously not the same, would also be revalued by the appropriate amount. This hypothesis further assumes that the capital gains or losses would automatically be allocated annually to the insured persons' equity in proportion to their shares in the companies' assets. The corresponding accounting flows would be recorded in the reconciliation accounts of the national accounts.

On the insurance companies' side, the various types of assets would be revalued, as would the companies' liabilities toward insured persons, and the net value of the companies (shareholders' equity) would be increased by the difference. For households, their equity on the insurance companies would increase (as would their net assets, by the equivalent amount). Realization or otherwise of the gains or losses would be immaterial, as would the fact that a fraction of the gains may actually have been paid to the policy holders. This latter transaction is considered to be a reduction in the households' assets, or a reduction in the companies' liabilities, in the same way as the payment of life insurance claims by a withdrawal from the actuarial reserves or the reserves for with-profits insurance.

Difficulties arise for several reasons. On the one hand, in some countries (the United Kingdom, the Netherlands, and Germany, for example) the companies make a clear distinction between “the funds of insured persons” (an identified set of investments that is the counterpart to life insurance technical reserves: this is known as “splitting assets”) and shareholders' funds, thus making it easy to calculate separately the capital gains or losses on both.16 In other countries (in particular, France) the assets are fungible, and only overall calculations are possible; companies have certain statutory obligations but are given some room for maneuver.17 On the other hand, assets are regularly revalued in some countries but not in others. Finally, when the revaluation takes place (notably at the point where assets are sold, which by that fact leads to a partial revaluation of assets), the companies do not always immediately allocate the corresponding gains or losses to the policy holders, to the value of the share due to them. It takes time for the gains or losses to filter through other reserves.

It may be imagined that national accountants do what the insurance companies cannot do: not only do compilers systematically revalue their assets (which it is vital for them to do, in any case, in order to draw up balance sheets), but they also revalue the reserves representing the insured persons' equity.18 One then would be back at square one. Although it would not be unrealistic, if certain conventions are forgone, this method would no doubt appear to be too daring for national accountants en masse, and would possibly involve them in conflicts of interest between companies and insured persons. Assume, therefore, that company assets are revalued by national accountants when balance-sheet accounts showing assets and liabilities are drawn up, but that the reserves that represent the insured persons' equity are revalued not by those officials but by the companies alone, in line with their statutory obligations (if any) and their marketing policies. The effect of revaluation may be—initially, at any rate—to increase the insurance companies' net assets.

When these gains or losses, whether realized or not, are transferred in the companies' books, in whole or in part, to the policy holders, there are two possibilities:

  • This may be taken to be a transfer from the companies' assets to the insured persons' assets and, hence, entered under capital transfers. In this case, in the financial accounts, the change in the equity of insured persons on the companies should include this amount, which will actually be covered by the book change in the reserves allocated to policy holders.

  • Alternatively, it may be considered that there is merely a time lag in recording the effects of the revaluation, and the amount may be entered in the reconciliation account. In this case, in the financial accounts, the change in the insured persons' equity on the companies should exclude this amount. The book change in the reserves, recorded on the liabilities side of the company balance sheets, will therefore have to be corrected by the appropriate amount.

So far, there is no compelling reason to prefer one solution over the other. Whichever solution is decided upon should, in any case, be applied to all of the capital gains or losses allocated to policy holders, whether these gains or losses are realized and whether they are actually paid.

VII. Problems Arising When the Previous Conclusions Are Applied to Casualty Insurance

When casualty insurance includes actuarial reserves and reserves for with-profits insurance (we have seen that this may be the case when compensation for losses takes the form of annuities), there are no problems applying what has been said above. But reserves for casualty insurance are in essence prepayment of premiums and reserves against unsettled claims, which are in effect short-term or relatively short-term debts. Policies are annual. In general, there is no formula governing the insured persons' share in profits.19 The ESA (paragraph 453), however, includes under casualty insurance claims “the additional sums paid to the insured in the form of redistributed profits.” The mechanics of what the ESA means here are not clear.

Casualty insurance technical reserves give rise to capital gains or losses. Do these explain, in part, as is the case with life insurance, the amount of technical charges for the financial year—that is (since we have dealt with actuarial reserves separately in the preceding paragraph), claims in respect of losses? The reply is not obvious because, in the absence of any explicit mechanism governing the insured persons' share in the profits, claims appear to be determined by procedures (valuations, legal decisions, and so forth) that take no account of the existence of capital gains or losses.

To understand more clearly what happens, examine the way in which claims due are broken down:

Claims due = claims paid during the year

  • — reduction in the reserves for claims due at the end of the previous financial year and settled during the year

  • + increase in the reserves for re-estimate of claims due at the end of the previous financial year and not settled during the year

  • + reserves built up for claims reported during the year and not settled at the end of that financial year.

The last three terms are the change in reserves against unsettled claims.

If the precise amounts, in nominal values, to be paid in future and the exact dates on which they were to be settled were known when the claims arose, in principle the reserves to be built up would be the current value of the claims—that is, the amounts to be paid less income from the investment of the reserves and capital gains or losses expected by the time the payment was actually made. Every year, reserves against claims due at the end of the previous financial year and not settled during the year would be revalued, assuming accurate forecasts of returns on investments, by an amount equal to the income expected from investment of the reserves against claims due and the expected revaluation of the underlying assets. The claims paid during the year for losses during previous financial years would be greater than the reduction in the corresponding reserves by an amount equal to the income from investing those reserves and the revaluation of the underlying assets during that part of the year that preceded the payment.

From this hypothesis, it can be seen that there is an element of capital gain or loss affecting the amount of claims due and that this can be analyzed as part of the revaluation of the companies' debt to insured persons and victims (the other part coming from investment income). Thus, in the case of casualty insurance, capital gains or losses are implicitly allocated to those who are creditors of the claims. Because these are frequently accident victims and not the insured persons themselves, in principle the general formulation given above should be completed by a mention of “technical charges net of capital gains or losses allocated to insured persons or victims.” This element of capital gain or loss should not, strictly speaking, be included under claims due but should be entered either as a capital transfer or under a reconciliation heading. In practice, it appears to be virtually impossible to get hold of the appropriate information.

A further point is that other factors are involved in re-estimating the reserves against unsettled claims initially built up. Forecasts of returns on investments may be inaccurate; in particular, the exact amounts, in nominal values, to be paid in the future are not known. Valuations, amicable agreements, and court decisions may change them. Thus, in addition to the element of price variation examined above, a revision factor “in volume terms” exists in the change in reserves against unsettled claims and thus in claims due.20 The technical charges imputed to a financial year, by way of the claims paid and the change in reserves against unsettled claims, thus depend in part on claims relating to previous financial years. Because it is not possible to correct these retrospectively, one is forced to accept that claims due are incorrectly imputed as regards timing.

All things considered, in the case of casualty insurance, it would appear inevitable that the following formula will be retained, except for cases where there are actuarial provisions:

even though insurance services may thus be underestimated because of the capital gains wrongly imputed as regards time.

VIII. Simpler Solutions for Estimating Insurance Services?

It is true that the indirect method of calculating insurance services is relatively complex, and more complex than the 1968 SNA supposed. It is to be expected, therefore, that simpler solutions will be proposed.

As already indicated, it seems that the loading included by the insurance companies in premium calculations cannot provide any practicable, meaningful answer. Moreover, it is obviously out of the question to consider gross premiums as the payment of insurance services in the case of life insurance when it is apparent that there is a savings element involved. With other types of insurance,21 the result would mean that the value added and operating surplus of the insurance companies would include net premiums, which would make these figures totally meaningless.

Can calculations be made by means of the counterparts to production (intermediate consumption, compensation of employees, net indirect taxes, gross operating surplus)? They can, and it seems that this is to be recommended as a cross-check. Such an approach would require an in-depth analysis of the insurance companies' accounting documents as part of an “intermediate insurance system.” But determining the operating surplus to be taken into account would be just as complex as applying the indirect method, since it supposes that the same components are known (breakdown of net investment income and capital gains or losses between insured persons and companies).

IX. Where Should Claims for Capital Losses Be Recorded?

It has been suggested that claims for damage to capital goods should be recorded in the capital account of the economic units that receive the compensation.22 This treatment has been applied in the past in French national accounts. The rationale is that the corresponding losses are clearly capital losses reimbursed by claims (including those for damage to persons and consumer goods).

The SNA solution is based on a macroeconomic view. The economic lifetime used to calculate fixed capital consumption should “take account of the average (normally expected) amount of accidental damage to fixed assets which will not be made good by repair or replacement of parts” (paragraph 7.21). This component may be evaluated by reference to the net insurance premiums. For the economy as a whole, this “risk of accidental damage” component is equivalent on average, but not necessarily each year, to claims for damage to capital goods. The net value added and net operating surplus are thus calculated minus that risk component of fixed capital consumption. Claims for damage to capital goods appear as resources in the income and outlay accounts of producers, the net overall saving of those producers being influenced by the difference between the risk component of fixed capital consumption and claims for damages during the year. This difference, which fluctuates from one year to another, is normally negligible, all other things being equal, over a sufficient number of years (over the economy as a whole, of course).23 It is no longer necessary to record accidental losses on capital goods as such in the capital account, since these losses have been taken into account in the risk component of fixed capital consumption. The reconciliation account (compare M 60, Table 7.1) merely shows the difference between this component and the actual value of losses on fixed assets.

It has been argued that this plan was not suitable at the disaggregated levels of sectors and subsectors or individual producers. The net saving of each sector or unit is always affected by the difference between claims for damages and the risk component of fixed capital consumption, but this difference—whether negative or positive and very small in the case of units that have not entered any claims or only minor claims—is positive and considerable for units that have made large claims. In this case, the adjustment to be entered in the reconciliation account is also considerable.

If the SNA procedure is followed, gross saving, which appears in the national accounts of many countries in preference to net saving, is influenced on the positive side by the actual value of claims for accidental damage received, at both the macroeconomic and the detailed levels.

Another way of analyzing things from the macroeconomic point of view would be to consider that, overall, gross saving is correct because the net premiums on the uses side of the producers' income and outlay accounts are the component that is to be used for the risk coverage that claims for accidental damage redistribute between producers. With this approach, the difference between claims and net premiums continues to affect gross saving at the disaggregated levels.

With this reasoning, it may perhaps be considered that the SNA is wrong to include the risk component in fixed capital consumption. By so doing, both net premiums (offset by claims for accidental damage) and an amount equivalent to the risk component of fixed capital consumption are deducted in order to obtain overall net saving. It can also be maintained that the net value added and the net operating surplus should not be affected by accidental damage and destruction, which are exceptional transactions normally covered by an insurance mechanism and not by a reduction in the value created during the production process.24

Let us now suppose that claims for damage to capital goods are entered under receipts in the capital account of the sectors that receive the compensation. At the microeconomic level, this would indeed be a better reflection of the phenomena concerned, since an important element distorting savings (gross or net) would be eliminated. The proposal that this procedure should be used is generally accompanied by a suggestion that the allowance for accidental damage (risk component) be excluded from the calculation of fixed capital consumption (which amounts to extending the lifetimes taken into account).25 If this procedure is used, the accounts of the producer units or sectors (in T-account format) are as follows:

Production account
Intermediate consumption of insurance services
Fixed capital consumption (excluding risk component)
Net value added
Income and outlay account
Net insurance premiums
Net saving
Capital account
Gross fixed capital formationNet saving
Fixed capital consumption
Claims for accidental damage to
capital goods
Net lending/borrowing
requirement
Change in the balance sheet account (fixed assets)

Opening assets

  • + Gross fixed capital formation

  • − Fixed capital consumption (excluding risk component)

  • − Actual accidental losses on fixed assets (national accounts residual value)26 and so on

  • = Closing assets

If this plan is followed, the unit, sector, or subsector under consideration pays the total gross premiums under current flows. It then receives, in the capital account, claims for losses that serve to finance the equivalent gross fixed capital formation in the normal way, possibly with a time lag that is reflected in a change in the lending or borrowing requirement. Actual accidental losses on fixed assets that are normally insurable are recorded in the change in balance sheet account (at present, in the reconciliation account).

This solution would appear to be ideal for the insured sectors but would pose a serious problem for the insurance companies' account. If claims for losses on capital goods are entered under disbursements in the insurance companies' income and outlay account, a snag arises in that there is then no symmetrical treatment for a flow that is current in the paying sector and capital in the receiving sector, a solution that is in principle rejected by the SNA.27 Furthermore, at the macro-economic level total savings, gross or net, are reduced by the value of claims for losses on capital goods, whereas the net premiums constitute, as already indicated, the risk component included in insurance premiums, which the claims for losses then redistribute among the producers. In contrast, if claims for losses on capital goods are entered under disbursements in the insurance companies' capital account, the disadvantages mentioned disappear, but the insurance companies' saving is increased by the value of claims for losses, a solution that is clearly unacceptable.

It would therefore seem to be difficult to find a solution acceptable to all points of view—macroeconomic, sectoral, and microeconomic. One possibility deserves to be investigated and discussed: to enter in the capital account as well net premiums relating to insurance on capital goods. For the insured sectors, the accounts would be as follows:

Production account
(No change)
Income and outlay account
Net saving (plus the amount of net premiums)
Capital account
Net premiums on capital goodsNet saving (plus etc.)
Fixed capital consumption
Gross fixed capital formationClaims for losses on capital goods
Net lending/borrowing
Change in balance sheet account
(No change)

Net premiums on capital goods would thus be analyzed as a collective savings mechanism intended to cover the risk of accidental damage to or destruction of capital goods,28 a saving that would be subsequently redistributed in the form of claims for losses. This solution may be surprising, but its effect on net saving, at all levels of aggregation, is equal to the corresponding net premiums without the distortions brought about by the SNA's inclusion of claims for losses on capital goods on the receipts side of the income and outlay account of insured persons.

This effect on net saving could be entirely or largely eliminated by reintroducing the risk component in fixed capital consumption, as the SNA does. In effect, for each unit or subsector or for the national economy as a whole, any allowance for damage to or destruction of fixed capital goods would have virtually no effect on net saving because this risk component should be equal or very close to the net premiums for fixed capital goods. The proposal examined here is thus in line with the logic behind the solution decided in the SNA for fixed capital consumption. The accounts of the insured sectors would then become

Production account
Intermediate consumption of insurance services
Fixed capital consumption (including risk component)
Net value added (reduced, as in the present SNA)
Income and outlay account
Net saving (plus net premiums and minus claims, unlike the
present SNA)
Capital account
Net premiums on capital goodsNet saving
Gross fixed capital formationFixed capital consumption
Changes in stocks (excluding(including risk component)
accidental damage orClaims for losses on capital
destruction)goods
Net lending/borrowing
Change in balance sheet account

Opening assets

  • + Gross fixed capital formation

  • + Changes in stocks (excluding accidental damage or destruction)

  • − Fixed capital consumption (including risk component)

  • − Difference between the actual value of accidental losses on fixed assets and the risk component in fixed capital consumption

  • − Accidental damage or destruction to stocks, and so forth

  • = Closing assets

This solution would seem to have numerous advantages, providing that net premiums on capital goods can be calculated. However, it would seem to fit in better with the current SNA equation (for each type of casualty insurance, net premiums = claims due) than with the solution proposed above (net premiums = claims due − net income from the investment of technical reserves). In effect, the equivalent of the net investment income would appear as a deduction from the net saving of insured sectors and as an addition to the net saving of insurance companies, a result that does not seem desirable.

We therefore have to see if it is possible to keep to the equation net premiums = claims due, and at the same time ensure that insurance services are properly assessed.

X. Should the Equation “Net Premiums = Claims Due” Be Reintroduced for Casualty Insurance?

As noted in Section III, the SECN, in its new treatment of insurance, by convention allocated the net income from investments primarily to coverage of technical charges, in this case claims.29 Another solution would be to agree that this income can cover part of the service of insurance as well as some of the claims.

The basic equation can be written with the hypothetical values shown below:

The SECN solution states that

The disadvantage in the SECN version is that the net premiums no longer represent the equivalent of the risk as measured by claims. To avoid this, it is necessary to make the insurance companies pay to the insured persons, in the form of imputed interest, the net income from the investment of technical reserves. The insured persons then repay this to the insurance companies at the same time as the balance of gross premiums less service.30

In this example, the result would therefore be:

The “net premiums = claims” relationship is kept, but these “net premiums” are no longer the difference between gross premiums and insurance services, a result that is entirely normal because here it is assumed that the net investment income could finance claims as well as services. This procedure shows clearly that the overall cost of casualty insurance measured by adding together claims due and insurance services is 1,300, the sum of gross premiums and the net income from the investment of technical reserves, and not 1,000, as would be expected if only gross premiums were taken into account in the insured persons' accounts.

If this solution is decided upon, it would be preferable to find an expression other than “net premiums” to designate the amount representing the risk coverage, thus to avoid confusion with the present SNA. It could be called, for example, “casualty insurance risk coverage.”31 The expression “net premiums” should be avoided because the difference between the gross premiums and insurance services is not significant.

XI. External Relations

This paper cannot cover all aspects of the problem of insurance in national accounts. In particular reinsurance, either domestic or as regards international relations, has not been studied. Neither have transactions involving direct insurance with other countries been covered. These points should be the subject of further study. Here only the matter of insurance on external trade goods will be discussed.

As regards the changeover from f.o.b. (free on board) to c.i.f. (cost, insurance, freight) for imports, the SNA merely mentions the cost of transport and insurance services, with no other indication. The ESA (paragraphs 382 and 383) is more specific, which may appear contradictory insofar as paragraph 382 adds transport cost and gross premiums to the f.o.b. values of goods to obtain the c.i.f. values, whereas paragraph 383 leaves only the price of insurance services in this latter value. Without saying so explicitly, paragraph 382 refers to goods that have actually been brought into the importing country, and in that case the definition given in paragraph 382 is correct (at least for goods not damaged in transport). Paragraph 383 takes into account goods that have actually been exported from the supplier countries, part of which may not have reached the frontiers of the importing country because they have been destroyed in transit and part of which may also have been damaged.

If the convention used in the ESA (that net insurance premiums on imported goods are equal, for the economy as a whole, to the value of losses in transit) is retained, the rule in paragraph 383 of the ESA is relevant. This introduces the following equation:

or, if gross premiums and the value of losses (the equivalent of the value of claims, with no time lag) are replaced by their balance:

But it has been seen that, for the economy as a whole, any assessment of insurance services must take account of investment income. In order not to complicate the c.i.f./f.o.b. changeover (which is actually an f.o.b./c.i.f. changeover), the convention that, in the case of insurance on external trade, income from the investment of reserves is negligible should be adopted.32

Note: The author thanks Pierre Muller and Jean-Pierre Dupuis for their helpful contributions to this study.

EUROSTAT, European System of Integrated Economic AccountsESA, 2d ed. (Luxembourg, 1979).

The ESA solution is very similar, except that it admits the existence of actuarial reserves for casualty insurance (establishment of annuities) and thus gives a single definition for both casualty and life insurance.

The ESA goes a little farther. On the one hand, it takes into account the change in actuarial reserves for outstanding risks and the change in reserves for with-profits insurance, whereas the SNA mentions only the change in technical reserves (actuarial reserves). The intention is probably to cover the same things, but this point should be clarified. On the other hand, in addition to the imputed interest accruing to insurance policy holders, the ESA mentions realized capital gains that are distributed (paragraph 315.k). There seems to be a difference between the two systems here.

Institut National de la Statistique et des Etudes Economiques, Systeme Elargi de Comptabilite National (SECN), INSEE collection C44–45 (Paris, 1976).

Another convention, which shall be discussed below, would have been to agree that the net investment income could cover part of both the technical charges and the service charge.

If one considers, as the ESA does and as happens in practice, that there are (and this is the case in France for relatively small amounts) actuarial reserves and reserves for with-profits insurance in casualty insurance, it is preferable for the SNA to keep to a single, generally applicable definition, even though this may suggest that the reserves in question play a much smaller part in casualty insurance.

There is another possible solution (see footnote 5).

Lutgart van den Berghe, “Kritisch Onderzoek naar de Validiteit van de Nationale Bockhouding Voor de Evaluatie van de Dienstverlening door de Verzekeringssector” (doctoral dissertation; Ghent, Belgium: University of Ghent, 1980–81). The English abstract of the dissertation was published by the International Association for the Study of Insurance Economics (Association Internationale pour l'Etude de l'Economie de l'Assurance; Geneva Association) in October 1981 (“Critical Analysis into the Validity of the National Accounting for the Evaluation of the Services Performed by the Insurance Sector,” Etudes et Dossiers, No. 51).

Richard Stone, “Definition and Measurement of National Income and Associated Totals,” in United Nations, Measurement of National Income and the Construction of Social Accounts, Studies and Reports on Statistical Methods, No. 7 (Geneva, 1947).

Stone, “Definition and Measurement of National Income,” Tables 49 and 50 in the English edition.

Marie-Thérèse Schiltz, “A New Method of Assessment of the Insurance Service Production,” Review of Income and Wealth, Series 33 (December 1987), pp. 431–37.

The phrase “and included in technical charges for the financial year” is always understood, of course.

Note that, for pension funds, the SNA (paragraph 7.97) allocates to members all of the net property income earned by the funds. The ESA (paragraph 433) allocates to them all of the property income derived from the investment of the technical reserves.

United Nations, Provisional International Guidelines on the National and Sectoral Balance-Sheet and Reconciliation Accounts of the System of National Accounts, Statistical Papers, Series M, No. 60 (New York, 1977).

This seems also to apply to the ESA (compare the wording of ESA paragraph 433).

It also makes it easy to calculate the net income from the investment of technical reserves as opposed to investment of the companies' equity capital.

Thus, in France insured persons are considered to have equity on a minimum of 85 percent of that part of capital gains corresponding pro rata to the technical reserves in life insurance investments.

The amount of the reserves representing the insured persons' equity on the liabilities side of the company balance sheets does not represent the exact value of that equity when there are considerable unrealized capital gains or losses. In France, at the end of 1985 the difference between the realized value and the net value on the investments balance was 49,000 million francs (as against 280 million francs net value) in the case of life insurance. This is not to say—the October 1987 stock market crash was sufficient demonstration—that these capital gains were all stable and could thus be allocated to the insured in proportion to their share in the investments. What is suggested is that, even in the case of strictly commercial types of insurance, all of these potential gains could not, in view of their size, be considered as the property of the shareholders alone. Subsequent discussions in France, when preparations were being made for the privatization of nationalized insurance companies, confirmed this point because the discussions concentrated particularly on the sharing out of the real value of company assets between policy holders and shareholders (in this case, the state). A further point is that part of the unrealized capital gains is also attributable to previously insured persons who, when their contracts expired, did not receive all the gains from the capital they had invested in the form of life insurance.

In France (and probably in other countries: some Swiss life insurance companies do so), however, mutual companies return premiums. These returns are deducted when the gross premiums received are calculated. If “gross” gross figures were required, the first part of the general technical insurance equation would consist of

There would be no effect on the calculation of insurance services.

It may be surprising that the inaccuracy of forecasts of returns on investments is considered as a factor giving rise to revision in volume terms. But if one reasons consistently, this inaccuracy leads to the building up of reserves against unsettled claims that are either too large or too small “at the prices pertaining on the date when a loss occurs. “

See Nancy D. Ruggles and Richard Ruggles, “The Treatment of Pensions and Insurance in National Accounts,” Review of Income and Wealth, Series 29 (December 1983), p. 396, for a discussion of property damage insurance.

Ibid., pp. 393–96.

Of course, if every year a country explicitly adds net insurance premiums on capital goods as a risk component to fixed capital consumption calculated using lifetimes that take no account of accidental damage, and if this country retains the equation that sets net premiums equal to claims, then the difference will be nil every year.

This reasoning, although sound at the microeconomic level, may of course be debatable at the macroeconomic level, where the exceptional becomes a statistically regular occurrence.

See Ruggles and Ruggles, “Treatment of Pensions and Insurance,”

That is, initial value revalued less revalued accumulated consumption of fixed capital.

Fixed capital consumption is not an exception. It is both a breakdown of gross value added (rather than an autonomous flow) and a movement internal to the unit or sector concerned.

The emphasis thus far has been on fixed assets, but such damage or destruction can also be to stocks. In this case, the damage should not be shown under changes in stocks in the capital account but should be entered in the change in balance sheet account.

In this section the existence of actuarial reserves is ignored.

This solution is very close to that proposed by Stone in 1947 (Stone, “Definition and Measurement of National Income”).

This amount should approximate to the risk component in fixed capital consumption.

Without this convention, the first equation above would read “value of losses in transit (that is, claims), net of investment income,” and the second would read “insurance service net of investment income.”

    Other Resources Citing This Publication