Producer Price Index Manual: Theory and Practice ... - METAC

10. Treatment of Specific Products
tained from outside sources. In the United States,
there are third-party firms (Insurance Services Office)
that assemble and evaluate risk information
and provide risk ratings used industrywide.
Changes in this risk rating are used to explicitly adjust
the premium.
10.259 Although both frozen policy and the annual
resampling of policies approaches to repricing are
susceptible to new item bias, the problem is greater
when using a frozen policy. Over time, a frozen
policy may no longer be representative. Mandated
coverage may change, or new insurance products
may be introduced.
10.260 Although bias may be not be as prevalent
when following an actual policy, it can occur if the
general population has changed its preference for
the type of insurance product it purchases or if the
policy represents a smaller portion of the company’s
business.
10.261 The U.S. PPI program has developed a directed
substitution procedure to reduce new item
bias. This procedure captures evolutionary changes
to a current product or a service that did not exist
when the sample was selected. Periodically, each
company will be contacted in order to review the
insurance products included in the sample. Evolutionary
changes in the industry will be identified
and disaggregation will be performed to determine
whether a substitution should be made from the current
product to an evolutionary product or whether
to add the new feature to the description of the current
product. Producer cost-based quality adjustment
will then be attempted to adjust for these
changes.
10.262 The measure of insurance output in national
accounts (see for example 1993 SNA, Annex
II) is based on a premiums-less-claims concept. Accordingly,
some might view that the proper measure
of the price of insurance services should be based
on such a net premium concept. Others might argue
that because insurance services are a type of financial
services, the price of insurance services should
be analogous to the price of banking services described
above—that is, a user cost price approach
should be used.
10.263 Regardless of the measure of price, any
approach must address the issue of how to address
changes in the risk being assumed by the insurer.
There is both an identification dimension and a
measurement dimension to this issue. The first concerns
that ability of the price statistician to identify
the changes in risk that are properly assigned to the
insurance service, and the second concerns the ability
to measure the change in risk in a way that a
quality adjustment can be performed.
N. Software Consultancy and
Supply, ISIC 7220 11
10.264 The compilation of PPIs for the output of
the software consultancy and supply industry is
challenging because of the diversity of the output
and factors such as rapid obsolescence, frequent
quality improvements, and increasing productivity.
10.265 Software output includes custom software
produced on order from specific users, computer
programming services provided on a fee or contract
basis, and ready-made or prepackaged software sold
on license to a number of users. There also is interest
in developing price indices for deflation of expenditure
on own-account software.
10.266 The output of the industry is highly diverse.
Prepackaged software covers a large heterogeneous
range of software, including systems software,
applications software, and other types of
software such as games. Output also includes documentation,
maintenance, and training services. Custom
software and contract programming are client
specific and will vary depending on the requirements
of the client.
10.267 When compiling a price index for prepackaged
software one must take account of the fact that
products change fairly frequently and then make adjustments
for changes in quality. Matched model
methods (see Chapters 7 and 8) have been used for
this output; however, they do not capture quality
improvements such as enhanced power and performance,
and as a result they "understate qualityadjusted
price declines” Bureau of Economic
Analysis (BEA), 2000. The difficulties of making
adjustments for changes in quality are identifying
the quality change and then estimating its monetary
value. Hedonic analysis is seen as the most promising
method for producing a constant quality price
index for prepackaged software (see Chapters 7 and
21.)
11 See O'Rourke and McKenzie (2002).
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