Part D - The treatment of insurance and standardised guarantees
An insurance policy is defined as an agreement between an insurer and another institutional unit (known as the policyholder). Paragraph A4.66 of the IMF GFSM 2014 states that under the insurance policy agreement, the policyholder makes payments (known as premiums) to the insurance corporation. If (or when) a specified event occurs for which the policyholder is covered by the insurance policy agreement, the insurance corporation makes a payment (known as a claim) to the policyholder. Under an insurance policy, the policyholder protects itself against certain forms of risk. By pooling these risks, the insurer aims to receive more from the receipt of premiums than it has to pay out as claims to the insured. Insurance liabilities are treated as actual liabilities rather than contingent liabilities in GFS - see Diagram 13.4 of this manual.
The most common form of insurance is called direct insurance whereby the policy is issued by an insurer to another type of institutional unit. Paragraph A4.68 of the IMF GFSM 2014 indicates that there are two types of direct insurance, known as life insurance and non-life insurance. Both types of insurance involve pooling risks. Under direct insurance, insurers receive many (relatively) small regular payments of premiums from policyholders and pay much larger sums to claimants when the contingencies covered by the policy occur. During the interval between the receipt of premiums and the payment of claims, the insurance corporation earns income from investing the premiums received. This investment income affects the levels of premiums and benefits set by the insurer. Paragraphs A4.69 and A4.70 of the IMF GFSM 2014 provide the following definitions:
- Life insurance - is an activity whereby a policyholder makes regular payments to an insurer in return for which the insurer guarantees to provide the policyholder (or in some cases another nominated person) with an agreed sum, or an annuity, at a given date or earlier if the policyholder dies beforehand. For life insurance, an important relationship exists between premiums and benefits during the policy period. For policyholders the benefits receivable are expected to be at least as great as the premiums payable, and this type of insurance can be seen as a form of saving. The insurer combines this aspect of a single policy with the actuarial calculations about the insured population concerning life expectancy (including the risks of fatal accidents) when determining the relationship between the levels of premiums and benefits. Life insurance mainly redistributes premiums payable over a period of time as benefits payable later to the policyholders or his/her beneficiaries. Essentially, life insurance premiums and benefits are transactions in financial assets and liabilities and not transactions in revenue and expense. Public sector units’ involvement in life insurance is most often provided in the form of employment-related superannuation schemes.
- Non-life insurance - is an activity similar to life insurance except that it covers all other risks such as accidents, damage from fire, etc. For non-life insurance, the risks are spread over all policyholders, and the number of claimants is typically much smaller than the number of policyholders. Non-life insurance includes policies that provide a benefit in the case of death within a given period but in no other circumstances, usually called term insurance. With non-life insurance, a claim is payable only if a specified contingency occurs and not otherwise. This type of insurance consists of redistribution in the current period between all policyholders and a few claimants. While public corporations may be involved in various types of insurance schemes, general government units are usually not involved in non-life insurance other than social insurance.
Standardised guarantees are defined as many guarantees that are similar in nature, and are issued in large numbers to many individuals or entities, often for smaller values. Paragraphs 7.201 and A4.71 of the IMF GFSM 2014 note that common types of standardised government guarantees include various types of insurance such as natural disaster insurance, student loans, and loans to small to medium enterprises. Standardised guarantees differ from one-off guarantees in that they are treated as actual liabilities rather than contingent liabilities in GFS, even though they contain an element of contingency by their very nature (see Diagram 13.4 of this manual).
Under a standardised guarantee there are three parties involved, the borrower (which is the debtor), the lender (which is the creditor), and the guarantor. Paragraph A4.71 of the IMF GFSM 2014 states that either the borrower or the lender may contract with the guarantor to repay the creditor if the debtor defaults. Similar to non-life insurance, it is not possible to determine the likelihood of any particular debtor defaulting. However, because the guarantees are very similar in nature and numerous in number, it is possible to estimate the general likelihood of defaults that the guarantor will have to cover. It is standard practice to estimate the default rate for a pool of similar guarantees. This default rate establishes an actual debt liability for an operator of a standardised guarantee scheme rather than a contingent liability, and is recorded through a transaction under provisions for calls under standardised guarantee schemes (ETF 3211, TALC 545).
Standardised guarantees are often provided by financial institutions, however, government units also take the role of guarantor in standardised guarantee schemes. Paragraph A4.72 of the IMF GFSM 2014 notes that the most common examples of government involvement in standardised guarantee schemes are in the cases of export credit guarantees, deposit insurance schemes, and student loan guarantees. When a government unit provides standardised guarantees without fees, or at such low rates that the fees are significantly less than the calls and administrative costs, the unit should be treated as a non-market producer within the general government sector. If a standardised guarantee scheme is operated by a general government unit, any transfers to cover recurrent losses are classified as revenue from current grants and subsidies (ETF 1141, SDC) for the recipient, and subsidies on products (ETF 1252, COFOG-A, SDC) or other subsidies on production (ETF 1253, COFOG-A, SDC) for the provider of the transfer. In addition, any transfers from the general government to cover large operating deficits of units accumulating over two or more years, or for exceptional losses due to factors outside the control of the unit are recorded as revenue from capital grants (ETF 1151, SDC) for the recipient, and capital grant expenses (ETF 1261, COFOG-A, SDC) for the provider of the transfer. Further information on subsidies and capital grants can be found in Chapter 6 and Chapter 7 of this manual.
The following flows and stock positions recorded by public sector units acting as either (i) non-life insurers or guarantors; or (ii) non-life insurance policy holders and holders of standardised guarantees appear in paragraph A4.79 of the IMF GFSM 2014. These flow and stock positions have been reproduced in Box 13.1 below:
Box 13.1 - Flows and stock positions recorded by public sector units acting as (i) non-life insurers or guarantors; or (ii) non-life insurance policy holders and holders of standardised guarantees
(i) For general government or public sector institutional units acting as an insurer or guarantor of standardised guarantees, recording these events would require recording the following entries in GFS:
- Actual premiums (fees) receivable: The amount of actual premiums (fees) receivable represents premiums earned and prepayment of premiums. The portion of actual premiums (fees) receivable representing premiums (fees) earned for the reporting period represents revenue and is recorded as premiums, fees and claims related to non-life insurance and standardised guarantee schemes (ETF 1143, SDC). Prepaid premiums (fees) represent transactions in financial assets (net), non-life insurance technical reserves (ETF 3111, TALC 441) with a counterpart entry as a transaction in liabilities for non-life insurance technical reserves -(ETF 3211, TALC 541).
- Property income earned on the investment of reserves: Usually, the reserves related to insurance or standardised guarantees are invested in financial assets and the revenue generated by these investments is generally in the form of interest income (ETF 1131, SDC) or dividend income (including tax equivalents) (ETF 1132, SDC). Sometimes, however, the reserves may be used to generate net operating surpluses either in a separate establishment or as a secondary activity.
- Property income attributed to policyholders: An additional set of transactions are needed where property income is generated by the investment of technical reserves as it is deemed to be an implicit premium supplement. Therefore, the insurer (guarantor) should attribute the property income to the policy holders by recording an expense, property expense for investment income disbursements (ETF 1286, COFOG-A, SDC). The counterpart to this expense is an increase in liabilities in non-life insurance technical reserves (ETF 3211, TALC 541, SDC). Further, when the liability is extinguished, the insurer (guarantor) should record the premium supplement. This supplement reduces the cash payment that would otherwise be required from the policy holder, and is recorded as revenue classified as premiums, fees and current claims related to non-life insurance and standardised guarantee schemes (ETF 1143, SDC). The counterpart to this revenue item is a decrease in either financial liabilities for non-life insurance technical reserves (ETF 3211, TALC 541, SDC) or provisions for calls under standardised guarantee schemes (ETF 3211, TALC 545, SDC).
- Claims (calls) payable: An expense for expected claims (calls, ie. the event has occurred) should be recognised in premiums, fees and current claims related to non-life insurance and standardised guarantees (ETF 1256, COFOG-A, SDC), and with a counterpart entry as an increase in the liability related to non-life insurance technical reserves (ETF 3211, TALC 541, SDC) or provisions for calls under standardised guarantee schemes (ETF 3211, TALC 545, SDC). For standardised guarantee schemes, the expense recorded is the expected level of calls (less any expected asset recoveries) on the standardised guarantees provided in the recording period. When claims (calls) are paid, transactions are recorded reducing liabilities related to non-life insurance technical reserves or provisions for calls under standardised guarantees with a corresponding reduction in assets or an increase in other liabilities.
- Holdings gains and losses: In some exceptions, if an amount for a claim outstanding has been agreed upon and it has been agreed that it will be indexed pending payment, there may be a holding gain or loss recorded for it.
- Other changes in volume of assets and liabilities: Changes to provisions for calls under standardised guarantee schemes not resulting from transactions and holding gains and losses, are shown as other changes in volume of assets; for example, whenever a significant change to the expected level of calls is recognised, beyond any asset recovery.
(ii) For general government or public sector institutional units acting as non-life insurance policyholders and holders of standardised guarantees, recording these events would require recording the following entries in GFS
- Actual premiums (fees) payable: The amount of actual premiums payable represents premiums incurred, prepayment of premiums, and an implicit services charge payable. Because the implicit service charge can only be calculated in the context of an analysis of the whole of the economy, it is not recognised in GFS as an expense. The portion of actual premiums payable representing premiums incurred for the reporting period is an expense, classified as premiums, fees and current claims related to non-life insurance and standardised guarantees (ETF 1256, COFOG-A, SDC). Prepaid premiums represent a transaction in financial assets in GFS, and is recorded as an increase in financial assets in the form of accounts receivable (ETF 3111, TALC 452, SDC).
- Property income attributed to policyholders: An additional set of transactions are needed where property income is generated by insurers (guarantors) on the investment of technical reserves as it is deemed to be an implicit premium supplement, attributed to the policyholders. Conceptually, general government or public sector institutional units as policyholders might record property income revenue, classified as revenue from investment funds (ETF 1136, SDC). The counterpart to this revenue item an increase in non-life insurance technical reserves (ETF 3111, TALC 441, SDC). Further, when premiums are due the government unit / policy holder should record an expense to recognise the application of the premium supplement which is classified as premiums, fees and current claims related to non-life insurance and standardised guarantee schemes (ETF 1256, SDC). The counterpart to this expense is a reduction in non-life insurance technical reserves (ETF 3111, TALC 441, SDC).
- In practice no money exchanges between the insurer and the government unit / policy holder and the revenue related to this item is not always known to GFS compilers. Therefore, this revenue and expense may not be recorded in GFS and may require and an adjustment to GFS.
- Claims receivable: Claims become due when the event that gives rise to a valid claim occurs, whether or not paid, settled, or reported during the reporting period. The policyholder recognises revenue for the claim at the time an event giving rise to a claim occurred, or in the case of a standardised guarantee at the time a call can be made in terms of the contract. These claims receivable should be recognised as revenue classified as premiums, fees and claims related to non-life insurance and standardised guarantees (ETF 1143, SDC) and with a counterpart entry as an increase in a financial asset in the form of provisions for calls under standardised guarantees (ETF 3111, TALC 445, SDC) or technical reserves for non-life insurance. Upon actual payment of the claims, a decrease is recorded in the relevant insurance reserve with a corresponding increase in other financial assets not elsewhere classified (ETF 3111, TALC 459, SDC).
Source: Based on paragraphs A4.79 and A4.80 of the International Monetary Fund Government Finance Statistics Manual, 2014