Report on the GNI Information Visit to the United Kingdom of January 2013

Report on the GNI Information Visit to the United Kingdom of January 2013

/ EUROPEAN COMMISSION
EUROSTAT
Directorate C: National Accounts, Prices and Key Indicators
Unit C-3 :Statistics for Administrative Purposes

Eurostat/C3/GNIC/252 - EN
Orig: EN

26thMeeting of the GNI Committee
24-25 April 2013
Luxembourg, Bech Building
Room Quetelet

Report on the GNI Information visit to the United Kingdom of January 2013

Point V-3 on the agenda

Report on the GNI Information visit to the United Kingdom of January 2013

Participants:

Office for National Statistics:

Graeme Walker, Steve Drew, Daniel Wisniewski, Stephanie Duff, Abbe Williams, Helen Dinsdale, Jon Simpson and others

Eurostat – Unit C3:

Marcin Bujnowski, Ralf Hein (co-reader)

IObjective

  1. The first objective of the visit was to verify and document the application in practice of the method developed by the Office for National Statistics (ONS) to address the outstanding GNP and GNI reservations on insurance[1] and to check if the new estimates related to insurance were correctly incorporated in the 2012 GNI Questionnaire. To this end a direct verification exercise was to be carried out.
  2. The second objective was to discuss the way the ONS addressed the GNI reservation 10[2] on the alignment of the data provided in the GNI Questionnaire 2011 to the Blue Book 2011[3].
  3. The third objective was to discuss the work done so far and the next steps to be taken to address the remaining open reservations.

IIBackground

  1. At the time of the mission there was one outstanding GNP reservation (on insurance), ten GNI reservations (including one on insurance) and six transversal GNI reservations for the United Kingdom.
  2. In the GNIQuestionnaire 2012 and in the accompanying Quality Report the United Kingdom addressed the reservations on insurance (for both 1995-2001 and 2002-2010) and the reservation 10 on the alignment of the GNI own resource data transmitted in the GNIQuestionnaire 2011 with the Blue Book 2011. Some work has also been done on some of the other reservations, but they have not yet been officially addressed in the GNI Questionnaire.
  3. With regard to the reservations on insurance, before the visit Eurostat had collected the documentation of the new sources and the methoddeveloped by the ONS in response to the reservation. Some methodological notes and articles outlining the new method were already available in early 2011 when the previous GNI information visit on the outstanding GNP reservations was carried out. The method for calculation of insurance output and links to the GNPCommittees' recommendations on insurance measurement had been discussed during the abovementioned visit. Eurostat received clarifications on all methodological points raised at that time[4].
  4. Subsequently, as required by the guidelines on the communication of major revisions, the United Kingdom notified Eurostat, in June 2012, about the forthcoming revision of the GDP/GNI data due to the implementation of a new method for estimating insurance services and provided description of the method together with some indication of the impact of the changes. The revised national accounts data were then published in the Blue Book 2012 in July 2012.
  5. Finally, description and numerical illustration of the calculation of insurance output under the new method were provided in the 2012 GNI Quality Report. On the basis of that description it can be stated that the implemented method for estimating output of insurance was the same as previously announced and analysed. Following Eurostat's request the ONS also sent some explanations and numerical illustration on the calculation of intermediate consumption in insurance and allocation of insurance output before the reported mission.
  6. As concerns the reservation 10 the basis for the verification was the revision of the GNI own resource data in the 2012 GNI Questionnaire and the explanations in the accompanying Quality Report as well as clarifications provided by the ONS in response to Eurostat's queries in the course of the analysis of the 2012 GNI Questionnaire.

IIIMain outcomes

  1. For the reasons mentioned above the purpose of the direct verification of the new insurance estimates was not to re-discuss the method for calculation of insurance but to verify and document the application in practice of the new method and to check if the new estimates related to insurance were correctly incorporated in the 2012 GNI Questionnaire.
  2. The basis for the checks was the description and numerical information provided in the 2012 GNI Quality Report. Figures were checked for the year 2005. The verification consisted in three parts.
  3. In the first part a direct verification of the data for output and intermediate consumption of non-life business was made. All elements of the output algorithm and intermediate consumption for non-life insurance were checked. This involved checking of the consistency between the figures in the 2012 Quality Report and the ONS' compilation tables as well as (for selected items) tracing of the figures back to the source data (the Financial Services Authority's returns).
  4. In the course of the checks for the individual elements of the output algorithm the ONS was also asked to demonstrate how the relevant recommendations of the GNP Task Force on insurance were reflected in the compilation. All checked data found reflection in the ONS compilation tables. The correct application of all the Task Force recommendations (but the recommendation 1 – see below) was confirmed.
  5. Further clarifications wererequested as concerns the application of the recommendation 1. Eurostat asked the ONS to clarify why the reinsurance commissions received by the UK direct insurers were added again to intermediate consumption of non-life insurance business under the item "Net reinsurance commissions" (they are first deducted from intermediate consumption item "Reinsurance ceded output"). The ONS provided the requested clarifications on 26.02.2013. They are being analysed.
  6. It was also noticed that output figures for life insurance provided by the ONS directly before the mission were different from figures in the 2012 Quality Report. Wrong vintage of these data was used for the Quality Report. The ONS confirmed that the output data provided directly before the mission include correct life insurance figures.
  7. In the second part of the exercise an attempt was undertaken to verify the link between the revised insurance estimates and the revision of the 2005 figures in the 2012 GNI Questionnaire. From the provided data on the allocation of insurance in the Blue Book 2011 and in the 2012 GNI Questionnaire[5] it was evident that the insurance data are internally consistent as their supply equalled use. However, it was noticed that insurance output allocated as intermediate consumption of non-market sector does not feed through to final consumption expenditure of general government and NPISH. The ONS was asked to explain this inconsistency. In the emails of 29.01.2013 and 6.02.2013 the ONS explained that this was due to a mistake in the tables prepared for Eurostat before the mission while the actual treatment is that the non-market sector's intermediate consumption of the insurance product does correctly feed through into estimates of non-market final demand.
  8. Furthermore, and more importantly, the changes to the GDP components that are directly attributable to the new output of insurance, its allocation and intermediate consumption of the insurance industry turned out to be different from the overall changes of these components reported in the GNIQuestionnaire 2012 (as compared with the Blue Book 2011).
  9. In facta big part of the revisions in the GNI Questionnaire 2012 for the closed years appears to be due to rebalancing of the GDP after inclusion of the new insurance estimates. For the checked year 2005 the changes to value added that may be directly attributed to the new insurance figures are three times bigger than the revision in the GNIQuestionnaire 2012 (the difference being explained as a result of the subsequent balancing). This difference amounts to around 1.2% of GDP for that year. On the expenditure side the discrepancies are much smaller(equivalent to around 0.1% of GDP).
  10. The ONS explained that removing of the old insurance estimates and their replacement by the newly estimated insurance data caused an imbalance of the system due to lower new intermediate consumption of the insurance industry. This triggered balancing adjustments that were mainly made to the output of other industries.
  11. This piece of information had not been available to Eurostat before. In principle it should have been included in the 2012 Quality Report. The ONS was asked to provide a detailed explanation on how the changes to insurance resulted in the revisions in the GNIQuestionnaire 2012 (against the Blue Book 2011, for the year 2005) with particular emphasis on the description of the balancing process, including a numerical illustration of the consecutive stages of compilation. This illustration and description should provide clear evidence that all the changes between the Blue Book 2011 and the GNIQuestionnaire2012 for the closed years (on the example of 2005) are directly (initial change due to new output of insurance, its allocation, imports and intermediate consumption of insurance) or indirectly (balancing triggered exclusively by the initial change) attributable to new insurance estimates.
  12. On 1.03.2013 the ONS provided the requested documentation to Eurostat. It is currently being analysed.
  13. The third part of the verification concerned the ESA79/95 transition item for the period 1995-2001 covered by the GNP reservation 2.
  14. Some errors and deficiencies were identified in the calculation of the insurance transition item as incorporated in the GNI Questionnaire 2012 and described in the 2012 Quality Report. They are elaborated on in more detail below.
  15. It was concluded that in accordance with the Commission Decision 97/178 the overall impact of this transition item should be equal to the sum of changes tohousehold final consumption expenditure, final consumption expenditure of general government and final consumption expenditure of NPISH due to the broader scope of the premium supplements under ESA95. According to the Commission Decision "any effect on GDP from the impact of premium supplements on the balance of exports and imports is neutralized by the effect on property income in the passage from GDP to GNP, making the sign of the impact (from ESA79 to ESA95) on GNP unambiguously positive".
  16. The calculation of the transition item (from ESA79 to ESA95) as presented in the United Kingdom's GNI Quality Report 2012 resulted in negative figures for most of the years covered by the reservation (1995-2001). To rectify this errorthe ONS should remove the items: "Exports of goods and services income attributed to insurance policy holders Less Rest of the World’s proportion on an ESA79 basis" and "Property entrepreneurial income paid to the RoW" from their calculations.
  17. Furthermore, the calculation of individual changes to HFCE, FCE of general government and FCE of NPISH due to the broader scope of the premium supplements under ESA95 is for the moment based on figures for premium supplements attributable to these sectors that stem from two different sources. Whereas the premium supplements under ESA95 are based on the figures from the FSA returns, the premium supplements under ESA79 are based on the previously used figures from the ONS surveys. As the latter source was questioned by means of the reservation those figures should not be used anymore. It is preferable to use the information on the share of interest in the income from the investment of technical reserves (or a suitable proxy) under the new method to calculate the transition item (transition item should be equal to the sum of premium supplements for the aforementioned sectors in the form other than interest).
  18. It was agreed that the United Kingdom will provide corrected estimates for the ESA79/95 transition item in the GNI Questionnaire and Quality Report 2013. In the meantime, with the emails of 21.02.2013 and 5.03.2013, the ONS provided preliminary estimates of the corrected transition item. They are currently being analysed. The initial analysis revealed a sizeable potential impact of the correction on GNPof a magnitude of around -1.5% to -2% of GNP.
  19. As concerns the reservation 10,the way the reconciled data requested by means of this reservation were incorporated in the GNI Questionnaire 2012 was the following: the data for the years 2002-2007 were aligned to the Blue Book 2011 in the first step (for all components) and then the effect of changes in insurance was added for the items affected by insurance. Thus the revisions to 2002-2007 data in the GNI Questionnaire 2012 were a sum of the revisions due to reservation 5 (insurance) and reservation 10.
  20. During the mission Eurostat sought confirmation that its understanding of the way the reservation 10 had been addressed was correct. This was confirmed in the discussion with the ONS.
  21. Finally, as concerns the other reservations, the United Kingdom is working on the methods to address them. The ONS has set up a team that coordinates this work. During the mission the scope of the individual reservations and steps to be taken to address them were discussed in detail. A summary document on the state of play and the way forward for each of the reservations was provided after the mission. A timetable for addressing the reservations was also agreed.
  22. The work is advanced on the GNI reservations 1 (minor repairs by owner occupiers), 6 (film originals) and 7 (own-account software). Eurostat is in touch with the ONS as concerns the methods developed for these reservations. Some small corrections or clarifications are still pending, but it is planned to address those three reservations in the GNIQuestionnaire 2013. The remaining reservations will be addressed in 2014 (reservation 2 on NPISH may be fully addressed in 2015 only).

IVConclusions

  1. Eurostat would like to thank the ONS for the very good cooperation during the visit to Newport. The visit was very informative and held in a friendly and constructive atmosphere.
  2. As concerns the follow-up on the addressed reservations, Eurostat will prepare a technical opinion in which it will propose to DG Budget to lift the reservation 10. Reservations on insurance are kept open pending the analysis of the documentation provided by the ONS after the mission. Notwithstanding the results of that analysis the GNP reservation 2 covering the period 1995-2001 will have to be addressed again in the GNI Questionnaire 2013 due to the detected errors in the calculation of the ESA79/95 transition item.
  3. With regard to the other reservations, it is appreciated that the ONS provided information on their work on them prior to the planned official transmission of the revised estimates in the GNI Questionnaire. Eurostat considers it a good practice to be followed in the course of the work on the outstanding reservations.

1

[1]The GNP reservation nr 2 on insurance reads: "A new methodology for estimates related to insurance has to be devised (applicable to years 1995 to 2001)". The GNI reservation nr 5 on insurance reads: "A new method of estimating insurance output, intermediate consumption and value added, that is in line with the ESA95 provisions and with the recommendations of the GNI Committee on insurance measurement, has to be implemented (applicable to years from 2002 to 2010)".

[2]The GNI reservation 10 reads: "The GNI data for the period from 2002 onwards (transmitted with the 2011 GNI Questionnaire) need to be reconciled with the nationally published national accounts data (applicable to years from 2002 to 2010)".

[3]Blue Book is an annual national accounts data publication of the Office for National Statistics.

[4]See document GNIC/213.

[5]Data in the GNI Questionnaire 2012 had to be compared to data in the Blue Book 2011 rather than to the GNI Questionnaire 2011 because of the fact that the latter contained preliminary data not consistent with the nationally published national accounts figures (i.e. Blue Book 2011) – a deficiency that resulted in the reservation 10 discussed below.

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