Measuring Banking and Insurance: The U.S. Experience

Measuring Banking and Insurance: The U.S. Experience Brian C. Moyer Associate Director for Industry Accounts 12th OECD-NBS Workshop on National Accounts Paris, France October 27-31, 2008

Output of the financial sector • Financial sector includes: • commercial banks • credit unions • savings and loans • regulated investment companies • insurance companies • Output can be either priced or “implicit”

I. Output of commercial banks • Based on the 1993 System of National Accounts— Financial intermediation services indirectly measured (FISIM) • FISIM of commercial banks recognized for both depositors and borrowers

Depositors’ and borrowers’ services • Output of depositors’ services YiD = (r – average rate paid) * average liability balance • Output of borrowers’ services YiB = (average rate received – r) * average asset balance • Total implicit output Yi = YiD +YiB

Calculation of average rates • Based on “book value” calculations • average rate paid = (interest expense / average liability balance) • average rate received = (interest income / average asset balance) • Data available from commercial banks’ balance sheet and income statements

Calculation of the reference rate • Pure cost of borrowing funds; does not include risk premiums or intermediation services • Ratio of interest income on U.S. Government Treasury and Agency securities (excluding mortgage- backed securities) to their value on balance sheets of commercial banks

Average rates and the reference rate average rate received percent reference rate average rate paid

Sector allocations of output • Consumption of implicit output allocated to persons, government, rest of world, and businesses • Allocations estimated by asset and liability • Assets allocated based on sector distribution of loan/lease balances • Liabilities allocated based on sector ownership of deposit balances • Data available from the U.S. flow of funds accounts

Constant-price bank output • Steps in the calculation Reference year total output (both priced and implicit) extrapolated with: volume index of banking output equals: constant-price total output less: constant-price output of priced services equals: constant-price implicit output • Sector shares of constant-price implicit output same as current-price sector shares

II. Output of insurance companies • Output of property and casualty (P&C) insurance companies includes: • transfer of risk • financial intermediation • administrative services, such as handling claims • Consistent with treatment recommended in the revised 1993 System of National Accounts

P&C insurance output • Output = direct premiums earned + premium supplements – dividends paid to policy holders – normal (expected) losses incurred • Consistent with the behavior of insurance companies

Consumption of household insurance premiums normal losses consumption=premiums –normal losses

In contrast to actual losses… premiums actual losses Sept 11 consumption=premiums– actual losses Hurricane Andrew

P&C insurance output • Direct premiums earned include transactions related to reinsurance • Premium supplements • Expected income earned by insurance companies from investing policyholder reserves • Used to supplement revenue from premiums to pay claims or purchase reinsurance services

P&C insurance output • Normal losses • Represent claims that insurance companies expect to pay in a period • Insurance companies determine premiums for a future period based on the claims they expect to pay; that is— Normal lossest = direct premiums earnedt * {0.3 * (direct losses incurredt-1 / direct premiums earnedt-1) + 0.7 * E[(direct losses incurredt-1 / direct premiums earnedt-1)]}

Adjusting for disasters • Effect of disasters on normal losses is “smoothed”; a portion of the disaster is added to normal losses for a 20-year period following the disaster • “Net insurance settlements” is the difference between actual and expected losses; it is recorded as a current transfer payment to policyholders from insurance companies

Constant-price P&C insurance output • Based on a “single-deflation” technique using consumer price indexes and producer price indexes • Research underway to consider constant-price estimates based on “double-deflation” techniques

Measuring Banking and Insurance: The U.S. Experience