Insurance and Guarantee Programs
The federal government insures individuals and firms against a variety of risks, such as loss of deposits from bank failures, crop failures, property damages from flood, and loss of pension benefits. Budget reporting for insurance programs focuses on annual cash flows. Outlays are recorded when claims are paid and collections for insurance programs (such as premiums) are recorded in the budget when received.
In contrast, the Financial Report records expenses or losses for estimated insurance claims when events have occurred and the probable effects can be reasonably estimated. Accordingly, losses are recognized as a liability on the balance sheet when claims have not been paid. The change in the liability generally represents a difference between the cash and accrual deficits. The losses reflect expected future spending that will affect the future cash deficits—some of the fiscal exposure associated with insurance programs.
The table below shows the reported liabilities for 2009 through 2013. The Pension Benefit Guaranty Corporation (PBGC) and the Federal Deposit Insurance Corporation (FDIC) account for most of the differences between the cash and accrual deficits in recent years. Other insurance programs include crop insurance and credit union insurance programs.
Insurance and Guarantee Program Liabilities (By Fiscal Year, Dollars in Billions)
|Pension Benefit Guaranty Corporation
|Federal Deposit Insurance Corporation
|All other insurance and guarantee programs||12.6||13.0||21.3||24.3||8.1|
|Change in liability from previous year||81.1||9.4||-13.9||-5.3||-26.4|
|All other insurance and guarantee programs||-0.4||0.4||8.3||3.0||-16.2|
For FDIC, the difference between the accrual and cash deficit is the change in contingent liabilities, liabilities due to resolution of failed or failing institutions and pending depositor claims and debt guarantees.
For PBGC, the difference in the cash and accrual deficits relates to the change in liability for retiree benefits of terminated pension plans, which is composed primarily of
- losses (i.e., the difference between the present value of estimated future benefits and plan assets) for pension plan terminations occurring or incurred during the year (both completed and probable),
- net changes in the value of assets and the present value of estimated future benefits for pension plans that terminated in prior years due to factors such as returns in the stock and bond markets, changes in interest rates, and changes in other actuarial assumptions used to measure the value of future benefits, and
- cash benefit payments that are recognized in the budget.
The loss included in the accrual deficit represents the changes in the amount for which PBGC estimates it will ultimately be responsible. As such, the losses reflect expected future spending that will affect the future cash deficits.
What drives changes in insurance and guarantee programs?
Catastrophic events in the economy (e.g., the financial crisis and subsequent economic downturn) and in the environment (e.g., natural disasters) can lead to changes in insurance liabilities from year to year. In 2009 and 2010, FDIC's insurance liabilities increased (in comparison to pre-banking crisis levels), primarily due to actual and anticipated bank failures. From 2011 through 2013, the FDIC liability has decreased due to the resolution of failed banks and a decline in the estimated number and losses of future bank failures. For example, in 2013, the budget recorded net cash outlays (claims paid less any receipts) for FDIC of $748 million. FDIC’s liabilities declined substantially from 2011 through 2013.
The key drivers of accrued losses recognized by PBGC are the economic health and benefit obligations of companies that sponsor defined-benefit pension plans. PBGC estimates the loss for pension plans that are probable to be terminated in the near future by assessing macroeconomic conditions that can influence firms and investments and the specific performance of particular companies. In 2009 PBGC recognized an increase in liability of $23.1 billion. This increase was largely due to the economic downturn. The amount of the liability related to PBGC continued to increase at a more modest rate through 2012 and decreased slightly in 2013 primarily due to a change in interest factors.