Following the earthquake and tsunami in Japan in 2011, there were various direct and indirect impacts on the UK economy.
Although there will be affects on activities such as tourism and imports and exports of goods, this note primarily focuses on the treatment of insurance claims in the UK National Accounts.
It explains how insurance output is measured in the national accounts and why insurance claims do not affect the nominal or volume measure of GDP.
The United Nations System of National Accounts (SNA) and European Commission European System of Accounts (ESA) set out the standards, conventions and definitions to be used in compiling national accounts.
The concept of measuring insurance output recommended for international comparability assumes that insurance policyholders pool their risk rather than insurance companies assuming that risk. Therefore, policyholders still own the risk.
The role of the insurance company in this model is primarily to provide administrative services for managing what is now essentially a cooperative business with members, that is, policyholders, implicitly paying an administrative fee to insurance companies for managing the business on their behalf.
It is this administrative fee that constitutes the output of insurance companies and contributes to GDP.
Claims, therefore, are not part of administrative fees to affect output, but they are to cover risks arising from losses incurred by policyholders.
Claims are, therefore, payments or transfers from insurance companies to policyholders.
In this sense, they can be treated as financial assets belonging to policyholders and financial liabilities of insurance companies. For this reason, they are treated as reserves by insurance companies for this purpose.
Insurance companies are continuously providing a service (that is, producing) and not simply when the risk occurs.
As such, the measurement of insurance output should not be affected by the volatility of the occurrence of the risk. Hence, neither the volume nor the price of insurance services is directly affected by the volatility of claims.
However, the company may increase the number of employees to help process the increase in the number of claims. This does contribute to GDP but would be small in comparison.
It, therefore, follows that claims arising out of exceptional catastrophic events will have no effect on insurance output and GDP in a manner similar to the treatment of non-exceptional claims.
This explains why claims arising from catastrophic events such as the recent Japanese earthquake and tsunami or any other such event are no exception. The only difference is the size of the amount likely to be settled.
However, despite their size, the amounts do not impact directly on the output of the insurance industry as defined and explained above and, therefore, GDP. As a consequence of this, claims in the national accounts are treated as redistribution of income and, in the case of catastrophic events, a redistribution of wealth.
And accordingly, these are recorded either in the income distribution accounts or the balance sheets of the national accounts respectively and not in the production account.
It is also worth mentioning the underwriters and the re-insurance activity. It will be underwriters who will assess and pay out the claims to the policyholders on a cash basis, and this payment will need to be recorded on an accrual basis in the national accounts.
Further more, if the event is deemed to be a catastrophe, then the impact of the valuation of the assets will be shown in the Other Changes in Volume account and, this would be reflected in Japan’s national accounts.