United Nations Economic Commission for Africa
African Centre for
Statistics
Chapter 3.3: Insurance companies’ accounts to
national accounts (1/2)
EN/ADM/2014/Pres/11
Ramesh KOLLI
Senior Advisor on National Accounts,
African Centre for Statistics
At Expert Group Meeting on Use of Administrative Data in National Accounts
23-27 June 2014, Umubano Hotel, Kigali, Rwanda
Outline of the presentation
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Introduction
Concepts and definitions
Terms peculiar to insurance
Sources of data
Structure of insurance company accounts
Few conceptual issues specific to insurance
Bridge tables
African Centre for
Statistics
Introduction (1/2)
• Insurance schemes provide individual institutional units with financial
protection against the consequences of the occurrence of specified events.
• This financial protection is through an insurance policy, which is an agreement
between an insurance corporation and another institutional unit, called
policyholder.
• Under the agreement, policyholder makes a payment (a premium) to insurance
corporation and, if or when the specified event occurs, insurance corporation
makes a payment (claim/benefit) to policyholder.
• In this way, policyholder protects itself against certain forms of risk. On the
other hand, by pooling the risks of the policy holders, the insurance corporation
aims to receive more from the receipt of premiums than it has to pay out as
claims.
• In addition, insurers often act as financial intermediaries who invest funds
collected from policyholders in financial or other assets to meet future claims.
African Centre for
Statistics
Introduction
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(2/2)
There are two types of insurance, namely, direct insurance and reinsurance.
Direct insurance is the most common form of insurance, in which a policy is issued by
an insurance corporation to another institutional unit. Life and non-life insurance fall
under this.
The other type of insurance called reinsurance in which insurance is provided by one
insurance corporation to another insurance corporation.
The institutional units involved in direct insurance and reinsurance are pre-eminently
insurance corporations. Though it is possible for other enterprises to carry out insurance
as a non-principal activity, but the legal regulations on insurance stipulate keeping a
separate set of accounts for insurance. This leads to identifying a separate institutional
unit in the SNA, classified to the insurance corporations.
In Africa, about two-thirds of countries have the necessary information for life insurance
and three-quarters for non-life insurance. On the other hand, eight countries have no
data available for life insurance and four countries have no data available for non-life
insurance.
African Centre for
Statistics
Concepts and definitions (1/5)
• Insurance corporations consist of incorporated, mutual and other
entities whose principal function is to provide life, accident,
sickness, fire or other forms of insurance to individual institutional
units or groups of units or reinsurance services to other insurance
corporations. Captive insurance is included, that is, an insurance
company that serves only its owners. Deposit insurers, issuers of
deposit guarantees and other issuers of standardized guarantees
that are separate entities and act like insurers by charging
premiums and have reserves, are classified as insurance
corporations.
African Centre for
Statistics
Concepts and definitions (2/5)
Life insurance
• 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.
• There is little conditionality involved in life insurance. Although the date and sum may
be variable, a claim is always paid in respect of a life policy..
• The sum payable under the policy (known as benefit) may be fixed or may vary to reflect
the income earned from the investment of premiums during the period for which the
policy operates.
• For policies with varying returns, the terms “with-profits” life insurance or endowment
policy are generally used.
• Essentially, life insurance premiums and benefits are financial transactions and not
current transactions, as it mainly redistributes premiums paid over a period of time as
benefits paid later to the same policyholder.
African Centre for
Statistics
Concepts and definitions (3/5)
Non-life insurance
• Non-life insurance is an activity similar to life insurance except that the it covers all
other risks, accidents, sickness, fire, etc.
• Non-life insurance provides cover to the policyholder against loss or damage suffered as
a result of an accident.
• A premium is paid to the insurance corporation and a claim is paid to the policyholder
only if the event insured against occurs.
• There is no uncertainty regarding the payments, as the maximum amount to be paid is
specified in the policy.
• Term insurance, which provides a benefit in the case of death within a given period but
in no other circumstances, is regarded as non-life insurance because a claim is payable
only if a specified contingency occurs and not otherwise. In practice, because of the way
in which insurance corporations keep their accounts, it may not always be possible to
separate term insurance from other life insurance. Therefore, term insurance may have to
be treated in the same way as life insurance for purely practical reasons.
African Centre for
Statistics
Concepts and definitions (4/5)
Commonalities and differences between life and non-life insurance
• Both forms of insurance involve spreading risk. Insurers receive small regular payments of
premiums from policyholders and pay much larger sums to claimants when contingencies covered
by the policy occur.
• In both life and non-life insurance, during the interval between the receipt of premiums and the
payment of claims/benefits, the insurance corporation earns income from investing the premiums
received. This income also affects the levels of premiums.
• For non-life insurance, the risks are spread over the whole population that takes out the insurance
policies. For an individual non-life policyholder, there is no relationship between the premiums
paid and the claims received, even in the long run, but the insurance corporation establishes such a
relationship for every class of non-life insurance on an yearly basis.
• For life insurance, a relationship between premiums and claims over time is important both to the
policyholders and to the insurance corporation. For someone taking out a life policy, the benefits to
be received are expected to be at least as great as the premiums paid up until the benefit is due; and
can be seen as a form of saving. The insurance corporation must combine this aspect of a single
policy with the actuarial calculations about the insured population concerning life expectancy when
determining the relationship between the levels of premiums and benefits.
African Centre for
Statistics
Concepts and definitions (5/5)
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Non-life insurance policy holders may belong to all sectors of the economy whereas
life insurance policy holders are individuals. Even when enterprises take life
insurance cover, these always relate to their employees, who fall under the category
of individuals.
Life insurance includes a large saving component, whereas the objective of non-life
insurance is largely to pool risk.
The significant differences between life and non-life insurance lead to different
types of entries in the accounts of the SNA.
Non-life insurance consists of redistribution in the current period between all
policyholders and a few claimants. Life insurance mainly redistributes premiums
paid over a period of time as benefits paid later to the same policyholder.
Net premiums and claims/benefits are treated as current transfers in non-life
insurance and as financial transactions recorded under insurance technical reserves
in life insurance.
African Centre for
Statistics
Terms peculiar to insurance industry (1/6)
Premiums ‘Premiums’ is used for payment to the insurance corporation.
Premiums are defined in exactly the same way for both life and nonlife insurance.
Actual
The actual premium is the amount payable to the direct insurer or
premium reinsurer to secure insurance cover for a specific event over a stated
time period. Actual premiums are measured by the amounts payable
after all allowances, discounts or bonuses are taken into account.
Premium Premium earned is the part of the actual premium that relates to the
earned
cover provided in the accounting period. For example, if an annual
policy with a premium of 120 units comes into force on April 1 and
accounts are being prepared for a calendar year, the premium earned in
the calendar year is 90.
African Centre for
Statistics
Terms peculiar to insurance industry (2/6)
Unearned premium The unearned premium is the amount of the actual premium received that relates to the
period past the accounting point. In the example just given, at the end of the accounting
period there will be an unearned premium of 30, intended to provide cover for the first three
months of the next year.
For non-life insurance, even though a premium may be payable at the start of a period of
cover, the premiums are only earned on a continuous basis as the period passes. At any point
before the end of the cover, the insurance corporation holds an amount due to the
policyholder relating to services and possible claims to be provided in the future. This is a
form of credit extended by the policyholder to the insurance corporation described as
unearned premiums.
Premium
The insurance corporation has at its disposal reserves consisting of unearned premiums and
supplements
claims outstanding. These reserves are called technical reserves and are used by the
insurance company to generate investment income. Because the technical reserves are a
liability of the insurance corporation to the policyholders, the investment income they
generate also belongs to the policyholders. However, the amounts remain with the insurance
corporation and are in effect a hidden supplement to the apparent premium. This income is
therefore treated as a premium supplement paid by the policyholder to the insurance
corporation.
African Centre for
Statistics
Terms peculiar to insurance industry (3/6)
Net
premiums
Net non-life
insurance
premiums in
accounting
period
Net premiums are defined as actual premiums plus premium
supplements less the insurance service charge payable by the
policyholders
Net non-life insurance premiums comprise both the actual
premiums payable by policyholders to obtain insurance cover
during the accounting period (premiums earned) and the premium
supplements payable out of the investment income attributed to
insurance policyholders less the service charges payable to the
insurance corporation.
African Centre for
Statistics
Terms peculiar to insurance industry (4/6)
Claims
Payments by the insurance corporation are called claims in the case of nonlife policies
Benefits
Payments by the insurance corporation are called benefits in the case of life
policies
Claims
Claims that become due are described as claims incurred, even when the
incurred
settlement of the claim takes several years. Claims generally become due
when the event covered by the policy occurs in the period for which the
policy is valid, even if the payment is made some time later.
Claims incurred=claims paid+changes in reserves against outstanding claims
Adjusted
Claims incurred plus the changes in equalization provisions and, if
claims incurred necessary, changes to own funds
Claims due
Same as claims incurred
Claims
outstanding
Claims outstanding cover claims that have not been reported, have been reported
but are not yet settled or have been both reported and settled but not yet paid.
African Centre for
Statistics
Terms peculiar to insurance industry (5/6)
Reserves
Reserves are the amounts available (during the time between the premium being
paid and the claim being payable) at the disposal of insurance corporations for them
to invest and earn income from it.
Reserves against
claims outstanding
Similar to the unearned premiums, although claims become due for payment by the
insurance corporation when the contingency specified in the policy eventuates, they
may not be actually payable until sometime later, often because of negotiation about
the amounts due. This is another similar form of credit, described as reserves against
claims outstanding.
The insurance corporation has at its disposal reserves consisting of unearned
premiums and claims outstanding. These reserves are called technical reserves and
are used by the insurance company to generate investment income.
These reserves for life insurance consist, (i) actuarial reserves against outstanding
risks in respect of life insurance policies; (ii) reserves for with- profit policies which
add to the value on maturity of with-profit endowments or similar policies; (iii)
reserves towards prepayments of premiums; and (iv) reserves against outstanding
claims.
Technical reserves
African Centre for
Statistics
Terms peculiar to insurance industry (6/6)
With-profit
endowments
or similar
policies
Bonuses
Term
insurance
These policies on maturity provide, basic sum assured, bonuses
promised and part of the profits of life insurance company.
It is common with life insurance policies for amounts to be
explicitly attributed by the insurance corporation to the
policyholders in each year. These sums are often described as
bonuses.
A policy that provides a benefit in the case of death within a
given period but in no other circumstances, is usually called
term insurance.
African Centre for
Statistics
Sources of data
• The financial statements of insurance companies provide the basic information
for compiling national accounts for the financial corporations in respect of
insurance companies.
• In most countries, it is mandatory for the insurance companies to submit annual
financial statements to the insurance regulatory agencies.
• These regulatory agencies maintain individual insurance companies’ accounts
as also the consolidated financial statements of all insurance companies in the
country.
• The national accountants should access these individual or consolidated
financial accounts of both life and non-life insurance companies and those of
reinsurers, for use in the compilation of national accounts. If such information
is not available, the compiling agency may need to conduct surveys to collect
the necessary information
African Centre for
Statistics
Structure of accounts
• The structure of financial statements of insurance companies are regulated by
international standards, such as IAS 1. These statements contain information on
assets, liabilities, equity, income and expenses (including gains and losses),
contributions by and distributions to owners and cash flows.
• The financial statements of insurance companies provide details on gross and
net premium contributions, premiums earned, commissions received and paid,
gross and net claims/benefits paid, movement in reserves, increase in insurance
fund, investment income, other income, commission paid, interest expenses,
establishment and other expenses, provisions and allowances, taxes and profits.
• These details available in the financial statements of insurance companies
provide required information to compile national accounts.
African Centre for
Statistics
United Nations Economic Commission for Africa
African Centre for
Statistics
Continued in next PPT
Ramesh KOLLI
Senior Advisor on National Accounts, African Centre for Statistics
At Expert Group Meeting on Use of Administrative Data in National Accounts
23-27 June 2014, Umubano Hotel, Kigali, Rwanda