1. Issue Paper Non-Life Insurance ISIC 6512 Niall O’Hanlon CSO Ireland Voorburg Group 2012

2. Examination at Voorburg 2011 Turnover/Output Mini Presentations Antonio Chessa André Loranger Prices Mini Presentations David Friedman Jiri Sulc André Loranger Discussant Alain Gallais Niall O’Hanlon CSO Ireland Voorburg Group 2012

3. There are four core issues Definition of the service provided Measurement of output of the sector Problems associated with “net premiums” approach Inconsistency between output and price measures Niall O’Hanlon CSO Ireland Voorburg Group 2012

4. Definition of the service provided How do we characterise the service? As “risk assuming” or “risk pooling”? The “risk assuming” concept defines the service as the assumption of risk from policy holders The “risk pooling” concept defines the service provided by the insurer as the administration of the pool of funds that are available to cover claims that are made by policy holders. The SNA recommends that the “risk pooling” concept is followed. The choice of characterisation of service has implications for measurement of output of sector Niall O’Hanlon CSO Ireland Voorburg Group 2012

5. Measurement of the output of the sector If we follow the “risk assuming” concept then the output of insurers is the amount of risk they assume from policy holders. Total premiums + investment income =“Gross Premiums” If we follow the “risk pooling” concept then the output of insurers is measured as premiums and investment income less claims. Total premiums + investment income – claims = “Net Premiums” Net premiums assumed as the amount intended to pay for the administrative services Adjustment for claims can be made via expectation or accounting Niall O’Hanlon CSO Ireland Voorburg Group 2012

6. Problems associated with “net premiums” approach The rate of accidents and damages claimed for can fluctuate considerably, leading to large changes in nominal value. Negative nominal value (forbidden in the NA framework) could appear in a year where there are high levels of claims. If actual claims are used an inconsistency will arise between volume and value. If claim numbers increase, volume but output. The use of expected claims or averages of claims could circumvent these problems. Niall O’Hanlon CSO Ireland Voorburg Group 2012

7. Inconsistency between output and price measures Price of service provided could be measured with reference to gross premiums. This is a practical/pragmatic approach that could be enhanced with adjustments for return on investments and payment of dividends. However NA guidelines recommend against deflation of output by gross premiums. Changes in levels of provisions accruing from the returns from invested premiums and in the rate of accidents and damages claimed for, should be treated as price changes and excluded from volume measures. Ideally a deflator for the sector would incorporate each of the components of output as measured by the “net premiums” approach; premium and the return on the portion of the premium invested and also claims Divergence between SPPI and deflator of output? Niall O’Hanlon CSO Ireland Voorburg Group 2012

8. Alternative Approaches Direct Volume and Price Measurement (NL) Nominal value is modeled as premiums plus expected investment income minus expected loss (risk). Expected values for investment income and loss (claims) are estimated every year. Production volume indices are calculated by taking the year-on-year changes in numbers of insurance policies (both acquired and existing ones Direct Volume and Indirect Price Measurement (Alain Gallais) The volume of output for the sector is assumed proportional to the gross premium. Volume is estimated by deflating the value of premiums earned with the price of gross premiums. The price is then derived by comparison between the value and volume (value / volume). Niall O’Hanlon CSO Ireland Voorburg Group 2012

9. Discussion Niall O’Hanlon CSO Ireland Voorburg Group 2012