GDP Methodology
How catastrophic insurance losses are recorded in GDP
This note explains the treatment of disasters such as Hurricane Katrina in the estimation of the output of the UK insurance industry used in the calculation of GDP. In particular, it explains why the volume measure of insurance output will not be affected by Hurricane Katrina. This is consistent with the treatment of insurance claims that arose from the attack on the World Trade Centre in September 2001.
Existing international conventions on national accounting point out that the service provided by insurance and reinsurance companies is the pooling or transfer of risk, and this is the concept that should be reflected in the volume (real) measure of insurance output. Since the volume of risk accepted is not considered to be directly affected by a catastrophic loss, the volume of service output should not be affected. In the UK, the volume of risk is estimated using indicators based on deflated gross premiums, in line with the methods used in other countries.
On the current price (nominal) side, however, existing international conventions (1993 SNA and ESA95) state that non-life insurance output should be based on premiums earned less claims due. This is why exports of services in current prices showed a fall in August. Although this treatment works well for the majority of non-life business, it does not deal adequately with catastrophe business due to its medium to long-term nature, i.e. insurers and re-insurers build up reserves over several years in preparation for major catastrophes.
So, whereas the volume measure of insurance output will not be affected by Hurricane Katrina, any current price measures will show a fall in output and expenditure. There will therefore be a corresponding fall in the implied price index for insurance services.
The direct effect of Hurricane Katrina on GDP, in the third quarter of 2005, will be seen in the exports of services current price data, reflecting the insurance and reinsurance services provided by UK companies but there will be no effect on volume measures of output or expenditure.
It is recognised that the existing international conventions for treating non-life insurance do not deal adequately with major catastrophes, as was highlighted following the losses of 11 September 2001, and are currently under review. It is likely that changes will be made in the revised SNA, due for publication in 2009.
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