Insurance Payments to Affect Trade Deficit

On Tuesday, the Commerce Department will issue figures for September’s U.S. trade in goods and services with the rest of the world, and most analysts are predicting that the number will be similar to the $27.1-billion deficit reported for August. They are likely to be wrong by a wide margin.

Instead, there probably will be an eye-popping drop in the deficit, to about $15 billion to $17 billion, because of the way officials at the Commerce Department’s Bureau of Economic Analysis are accounting for the surge in insurance payments by foreign companies after the Sept. 11 terrorist attacks.

Insurance companies like to spread their risks around, a process called “reinsurance,” and some of the biggest providers of reinsurance are based abroad. When foreign companies provide reinsurance, trade accountants treat that as an “import” of insurance services.

Usually, the bureau has calculated the value of insurance services--including such imports--by subtracting the amount of benefits paid out from the amount paid in premiums. Normally, the premiums substantially exceed the benefits, but that was not the case in September or the third quarter because the attacks left insurance companies owing billions of dollars to holders of life, property and casualty policies.

Because of the extraordinary amount of money involved, the usual accounting method would have severely distorted other government statistics, such as gross domestic product. So the bureau, which is responsible for estimating the gross domestic product, used a different method, which had the effect of reducing the value of insurance service imports.

The trade deficit reflects the amount by which imports exceed exports. So a decline in the value of imports reduces the deficit.

The bureau explained, in a “technical note” released Oct. 31 along with the third-quarter GDP estimates, how it was handling the unprecedented jump in foreign insurance payments. The note did not point out that the September trade figures also would be affected significantly, though that was implicit because they are an important component of GDP.