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5310.0.55.002 - Information Paper: Implementation of new international statistical standards in ABS National and International Accounts, September 2009  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 28/10/2009  First Issue
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CHAPTER 11 INSURANCE IN THE BALANCE OF PAYMENTS

Warning: The estimates in this publication are indicative. They are presented to give an indication of the magnitude of the impacts of proposed change to Australia's macro-economic accounts. All estimates are subject to refinement and revision in the compilation of the quarterly balance of payments to be published on 8 December 2009.


INTRODUCTION

This chapter will focus on Balance of Payments and International Investment Position sixth edition (BPM6) treatments and improved data sources and models for direct insurance, and reinsurance of one economy with entities of other economies. New data series have been developed and backcast to September quarter 1995 for insurance items, except freight insurance which have been backcast to September quarter 1988 and insurance technical reserves to June quarter 1988. These will be included in the September quarter 2009 issue of Balance of Payments (BoP) and International Investment Position (IIP) Australia (cat. no. 5302.0).

Insurance services cover the provision of various types of insurance to non-residents by resident insurance enterprises, and vice versa. Such services cover freight insurance (i.e. insurance on goods that are in the process of being exported or imported); other types of direct insurance (i.e. life - including pension and annuity services, other casualty or accident, health, general liability, fire, marine, aviation, etc. insurance); and reinsurance. Also recorded as insurance services are agent commissions related to insurance transactions.

Under Balance of Payments Manual fifth edition (BPM5), data from the Survey of International Trade in Services (SITS) was used to measure insurance and reinsurance services and related secondary income (current transfers) estimates. Insurance premiums and claims are included in the secondary income account. No identifiable estimates for technical reserves or primary income (premium supplement) was made in relation to insurance services. Freight insurance was only itemised for imports in accordance with BPM5 standards. Freight insurance is itemised for both imports and exports on a BPM6 basis.


Direct insurance and reinsurance

Under BPM6, direct insurance is between an insurance company and other entities. Reinsurance will be insurance where both parties to the policy are providers of insurance services. That is, reinsurance allows insurance risk to be transferred from one insurer to another. Many insurers act as both direct insurers and reinsurers. Reinsurance has a similar treatment to direct insurance.


CONCEPTUAL ISSUES

According to BPM5, international insurance services were estimated or valued by service charges included in total premiums earned rather than by total premiums paid or received during the period. In principle, the measurement of transactions in international insurance services is consistent with that described in the System of National Accounts 1993 (SNA93) for insurance services for resident sectors. However, in practice, both BPM5 and SNA93 excluded resident to non-resident flows associated with premium supplements, that is investment income on technical reserves, due to estimation problems, particularly for insurance imports.

Under BPM6 treatment, the total value of insurance services is derived as the margin between the amounts accruing to the companies (namely, premiums, and supplements) and the amounts accruing to the policyholders (namely, claims). The principles for measurement of reinsurance and direct insurance services will be the same. Premiums and claims will be shown as separate items in the Balance of Payments standard components on a supplementary basis.

Under BPM6, the freight insurance service charges on goods for resident issuers providing insurance services to non-residents (credit) is the difference between premiums earned and claims payable on goods lost or destroyed in transit. The service charges for non-resident issuers providing services to residents (debit) will be estimated by taking the ratio of estimated service charges to total premiums for exports of insurance services and applying the ratio to total premiums paid to non-resident issuers. The ratio will be based on a medium- to long-term period.


Expected claims

Estimating expected claims will use smoothed past figures of gross claims incurred or smoothed past ratios of gross claims incurred over premiums, applied to current premiums. It will replicate the ex-ante model used by insurers to price their premiums, on the basis of their expectations. When accepting risk and setting premiums, insurers consider both their expectation of loss and insurance costs.


Valuation

The BPM6 treatment of freight insurance is consistent with the Free On Board (FOB) valuation of merchandise exports and imports. Insurance cost up to the customs frontier of the exporting economy will be included in the FOB value of the goods exported. If that insurance is paid for by the importer (e.g. through an enterprise resident in the importer’s economy), the exporter will be deemed to purchase the insurance and simultaneously recover the cost from the FOB value recorded in the accounts. Insurance services provided for goods after the goods have crossed the customs frontier of the exporting economy will be recorded as imports of insurance services by the importer when the insurance is provided by an enterprise non-resident in the importing economy. If the insurance is provided by an enterprise resident in the importing economy, no entry will be made in balance of payments accounts. The service elements for freight insurance will be derived in the same way as other insurance.


MEASUREMENT CHALLENGES

The Australian Prudential Regulatory Authority (APRA) has primary responsibility for collecting insurance data in Australia. It releases quarterly and half yearly data on many of the data items required in National and International Accounts. Generally concepts used by APRA are consistent with the SNA08 and BPM6. APRA report offshore data for direct insurance and reinsurance annually only and a proportion derived from this is applied to the quarterly data series. 'Offshore' refers to where the items of income and expense are on risk, assets are invested, and liabilities are located outside Australia. Lloyds Australia data will be used in estimates for insurance and reinsurance imports, but is also only reported annually.

Australian government policy introduced in 2008 requires that any offshore insurance company wishing to carry out business in Australia must be approved by APRA by satisfying certain criteria e.g. setting up an office in Australia. The amount of business carried out by these direct offshore foreign insurers (DOFIs) is unknown, but they will soon be reporting to APRA like any other foreign owned branch. There are some insurance companies that will be able to carry business that are exempt from APRA regulations, again satisfying certain criteria. The main example for exemption is that the insurer is insuring something that no other insurer will take on. i.e. high risk insurance. Companies are required to go through an insurance broker to insure with these DOFIs.

At present APRA does not collect information regarding insurance from brokers. They are currently in negotiations with the Insurance Council of Australia to collect this information, which should be available at the end of 2009.

APRA quarterly data can be volatile especially for reinsurance, and the ABS model will aim to derive a relatively smooth series for insurance and reinsurance services imports and exports while maintaining consistency in relevant ratios e.g. insurance service charge to gross premiums.

Freight insurance will be compiled from merchandise trade data. The trade estimates that will be used are cost, insurance and freight (CIF) and free on board (FOB) data. The freight and insurance charge is embedded in the difference between CIF and FOB - the formula used separates the insurance charge from the freight charge. Investigation has shown that insurance is 6% of total freight and insurance costs for petroleum products and 4% for other trade goods. An underlying assumption will be that there is only freight insurance service charge, premiums and claims for a non-resident to resident transaction. That is, if an Australian company provides an import service on goods, then freight insurance is in scope. If an non-resident company provides an import service into Australia then this is a non-resident to non-resident transaction and not measured. Similarly the conditions apply for exports. Freight insurance for these out of scope transactions will be deducted in principle from the calculations below.


IMPLEMENTATION

Direct Insurance and Reinsurance (excluding freight)

The same methodology will be used for direct insurance and reinsurance. Quarterly APRA data will be used from table 4 (insurance) and table 7 (reinsurance) of the quarterly publication. The annual offshore proportions compiled from Table 4 in the annual publication will be applied to the various quarterly data items to calculate the quarterly offshore data for these items, formulas will be as follows:

Gross premiums earned = expected claims * average domestic loss ratio (gross claims incurred / gross premiums received)

Expected claims = Gross premiums * 5 year average of incurred claims / gross premiums

Insurance service charge = Gross premiums earned - expected claims + premium supplement

Technical Reserve stocks = Outstanding claims + premium liabilities

Premium supplement = investment income * (technical reserves / assets)

Auxiliary Services = (domestic underwriting expenses / domestic insurance charge) * offshore insurance service charge

where:
  • technical reserves or provisions will include the amounts identified by insurance companies to account for prepayment of premiums and claims incurred but not yet paid, also called reserves. These are always reported as liabilities of insurance companies and assets of policyholders and other beneficiaries.
  • premium supplement will be the investment income earned on the assets invested to meet insurance companies' provision liabilities is attributable to insurance policy holders.
  • auxiliary services will include agents’ commissions, insurance brokering and agency services, insurance and pension consultancy services, actuarial services, salvage administration services and regulatory and monitoring services on indemnities and recovery services.

Note

For imports:

Premiums = offshore ‘outward reinsurance’

Claims = offshore ‘reinsurance revenue’

Technical reserves = the average ratio of technical reserves / gross premiums from exports * import premiums

Premiums supplements = the average ratio of premium supplement / gross premiums from exports * import premiums


FREIGHT INSURANCE

Petroleum imports

The following formulas will be used to derive freight insurance premiums, claims, and insurance service charge for petroleum imports:

Petroleum freight insurance premiums = [Customs Insurance Freight (CIF) (petroleum) - FOB (petroleum) - Domestic petroleum freight] x 6%

Petroleum freight insurance claims = petroleum freight insurance premiums x loss ratio (usually 69% based on domestic insurance loss ratio)

Petroleum freight insurance service charge (SITS) = Petroleum freight insurance premiums - Petroleum freight insurance claims


Other imports

The following formulas will be used to derive freight insurance premiums, claims, and insurance service charge for other imports:

Other Freight insurance premiums = [CIF (non-petroleum) - FOB (non-petroleum) - Domestic non-petroleum freight] x 4%

Other Freight insurance claims = Other freight insurance premiums x loss ratio (usually 69% based on domestic insurance loss ratio)

Other Freight insurance service charge (SITS) = Other freight insurance premiums - Other freight insurance claims


Exports

As there is no readily available information for total freight and insurance for exports from trade figures the calculation of insurance will be based on equivalent ratios from imports and applied to export FOB merchandise trade data. There are freight data for exporting businesses used from the SITS which can be used to compare with modelled data.

The ratios used in the calculation of freight insurance services are:

Export freight insurance premiums = import freight insurance premiums / imports FOB x exports FOB

A standard loss ratio of 69% will be used to calculate claims based on domestic insurance loss ratios and service charge is calculated by:

Export freight service charge = export freight insurance premiums - export freight insurance claims.

As there is no information available on investment income from freight insurance technical reserves, this will not be included in the calculation of a service charge.


IMPACT ON THE BALANCE OF PAYMENTS

Insurance services exports will be revised down by a total of about $430 million for the 2007-08 year (table 1 and figure 1). Direct insurance will contribute to an increase of about $50 million, freight exports will be revised up by about $90 million and auxiliary services exports down $40 million. However it was the decline of the export reinsurance industry that will contribute to a decrease of about $530 million.

Insurance services imports will be revised down by a total of about $608 million for the 2007-08 year (table 1 and figure 2). Direct insurance will contribute to a decrease of about $190 million. Freight imports will be revised up by about $106 million and auxiliary services imports down by about $148 million. However, it was the decline of the import reinsurance industry that will contribute to a revision decrease of about $374 million. Therefore there will be a net revision increase in trade in services of about $178 million in 2007-08 where imports will be revised down more than exports.

Technical reserve stock estimates will be derived for June quarter 1988 to June quarter 2009. In the five years to June quarter 2008, liabilities will decrease from $1,812 million to about $741 million, while assets will increase from $714 million to about $1,404 million (table 2). The decline in the technical reserves for liabilities will be representative of the running down of stocks and more generally, the decline of reinsurance exports in Australia.

1 Insurance service charges - 1997-98 to 2007-08

1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m

BPM5
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
Insurance service charge - Exports
556
672
772
840
859
766
709
673
673
686
684
704
704
724
Insurance service charge - Imports
1 064
1 068
1 012
915
922
902
878
856
856
874
872
900
900
932
BPM6
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
Insurance service charge - Exports
595
718
820
894
878
604
500
435
443
403
370
301
276
293
Insurance service charge - Imports
1 110
1 112
1 062
974
822
722
478
382
335
312
313
258
280
324


2 Insurance technical reserve stocks - 1997-98 to 2007-08

1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m

Foreign liabilities
1 001
1 192
1 335
1 484
1 534
1 480
1 555
1 740
1 812
1 735
1 580
1 090
740
741
Foreign assets
383
456
510
567
587
566
595
665
714
900
1 049
1 135
1 240
1 404
Net IIP
618
736
825
917
947
914
960
1 075
1 141
835
531
-45
-500
-638

Figure 1 - Total exports, of insurance services
Graph: Figure 1 - Total exports, of insurance services


Figure 2 - Total imports, of insurance services
Graph: Figure 2 - Total imports, of insurance services


Figure 3 - Insurance technical reserve stock assets and liabilities
Graph: Figure 3 - Insurance technical reserve stock assets and liabilities



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