7.20. Insurance services cover the provision of various types of insurance to non-residents by resident insurance companies, and vice versa. It includes freight insurance (on goods being exported or imported); other types of direct insurance (i.e. life, accident, health, general liability, fire, marine, aviation etc.); and reinsurance. Also included are agents’ commissions related to insurance transactions. As the concept and measurement of insurance services are complex, box 7.5 provides a technical note on insurance and related transactions and box 7.6 describes the treatment.
|7.5 TECHNICAL NOTE ON TREATMENT OF INSURANCE |
|Insurance services cover the service charge component included in premiums earned, rather than taking the whole of the premium, together with any commission or fee income earned by agents and brokers in placing cross-border premiums. The insurance enterprise performs a service in pooling the risks of policy holders and managing claims and, after deducting its fee from premiums paid, it redistributes the bulk of premiums back to policy holders by way of claims. Therefore the bulk of premiums paid represents income transfers into the risk pool, and claims paid are income transfers from that pool. The service charge, following the accrual concept, is measured using premiums earned (over the period covered by the premium) and, ideally, an actuarial assessment of the claims to be incurred on that level of premium rather than the cash payments made. However, an actuarial assessment of the likely claims from any policy is not readily accessible to statistical compilers. It is approximated from the average claims experience over a long period. In Australian international accounts statistics, claims are generally averaged over a five year period and, in the case of Australian catastrophes (e.g. the Darwin Cyclone and Newcastle Earthquake), over twenty years. The difference between premium payments and premiums earned (prepayments of insurance) is a financial item; similarly the difference between claims incurred and claims paid is a financial item - financial liabilities of the insurance enterprise and assets of policy holders. Because many insurance policies involve prepayment of premiums for a future period, the insurance enterprise has the use of those funds until called upon to meet claims. In economic statistics, income earned on investing these prepayment funds is attributable to policy holders and its effect is to reduce premiums actually paid. Therefore a truer measure of premiums earned includes this income earned - this is referred to as a premium supplement. The premium supplement is offset by an entry in other investment income attributable to the policy holders, and the stock of and transactions in prepaid premiums and unpaid claims are included in the international investment position and financial account, respectively. |
|In the services classification (table 7.3), the insurance service charge component of insurance services is estimated as premiums earned (adjusted for premium supplements) less claims incurred (averaged over five or twenty years). (Premiums are calculated before deduction of agents’ fees, commissions etc.) The components, namely premiums (payable before the inclusion of premium supplements) and (unaveraged) claims incurred (receivable), are shown as memorandum items. The offsets to premium supplements are included in other investment income. Total premiums (adjusted for premium supplements), minus the estimated service charge, are included as current transfers to the economy of the insurance enterprise, and (unaveraged) claims payable are included as current transfers to the economy of the policy holders. Data on insurance financial transactions and levels are included in other investment in the financial accounts and international investment position accounts. |
|The treatment of freight insurance is consistent with the f.o.b. valuation of merchandise exports and imports, i.e. insurance cost up to the customs frontier of the exporting economy is included in the f.o.b. value of the goods exported and, if that insurance is paid for by the importer (e.g. through an enterprise resident in the importer’s economy), the exporter is deemed to purchase the insurance and simultaneously recover the cost from the f.o.b. value recorded in the accounts. Insurance services provided for goods after the goods have crossed the customs frontier of the exporting economy are 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 is made in balance of payments accounts.) |
|To compile freight insurance, data are largely estimated using various assumptions about the ratios of insurance premiums to total freight (freight data come from international trade statistics) and claims incurred to premiums earned. Data on other non-life insurance come from:|
the Australian Prudential Regulation Authority’s (APRA) Survey of Insurance Enterprises and Agents which collects relevant data in respect of insurance business received from abroad and placed abroad by resident insurance companies and agents;
the Survey of International Trade in Services (insurance) which collects data from insurance brokers placing insurance business abroad; and
the Survey of International Trade in Services (selected services) which collects data on own asset risk insurance placed directly abroad by Australian companies.
In some cases where claims may be missed or understated (e.g. sometimes insurance agents and brokers may be bypassed in the claims process and therefore not be aware of them), reported claims data may be replaced by estimates from industry averages. While data on international life insurance have been collected separately up until 1995-96, the service amounts involved are insignificant in Australia’s case, and not separately releasable.