Measuring Banking and Insurance:

The U.S. Experience

Brian C. MoyerAssociate Director for Industry Accounts

12th OECD-NBS Workshop on National Accounts

Paris, FranceOctober 27-31, 2008

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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”

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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

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Depositors’ and borrowers’ services

Output of depositors’ services  

YiD = (r – average rate paid) * average liability balance

Output of borrowers’ services Yi

B = (average rate received – r) * average asset balance

Total implicit outputYi = Yi

D + YiB

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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

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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

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0.4

1.4

2.4

3.4

4.4

5.4

6.4

7.4

8.4

9.4

10.4

1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1

Average rates and the reference rate

perc

ent

average rate received

reference rate

average rate paid

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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

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Constant-price bank output

Steps in the calculationReference 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

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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

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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

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Consumption of household insurance

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Bill

ion

s o

f d

olla

rs,

SA

AR

premiums normal losses

consumption = premiums – normal losses

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In contrast to actual losses…

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Bill

ion

s o

f d

olla

rs,

SA

AR

Hurricane Andrew

Sept 11

consumption = premiums – actual losses

actual losses

premiums

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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

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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)]}

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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

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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