22. Expenses

Question 1

What are fixed expenses?

Answer 1

• Remain broadly fixed in real terms
• E.g. Building maintenance

Question 2

What are variable expenses?

Answer 2

• Vary directly according to the level of business being handled at that time
• Linked to the number of policies or claims or
• Amount of premiums or claims
• Commission

Question 3

What are direct expenses?

Answer 3

• Expenses identified to belonging to a particular class of business

Question 4

What are indirect expenses?

Answer 4

• Do not have a direct relationship to any one class
• Needs to be apportioned between the appropriate classes
• When performing an analysis

Question 5

What are examples of expenses that are fixed but can vary in large amounts from time to time?

Answer 5

• Staff related costs
• Accommodation related costs
  These can vary in the long term to meet changes in:
• The structure of the organisation
• New and existing business levels
• Services provided
• Degree of automation used

Question 6

How do expenses relating to benefit schemes vary from insurance company expenses?

Answer 6

• No commission
• No fixed overheads such as building maintenance or rent
• Admin+ legal advice+ actuarial advice+ investment management=> charged for on a fee basis or if done in house will form part of the sponsors total overheads

Question 7

What is the process of allocating expenses to individual contracts?

Answer 7

• All expenses of an organisation identified and categorised as direct or indirect
• Direct expenses immediately allocated to a particular class of business
• Indirect expenses pragmatically apportioned between classes of business
• Expenses must also be appointed to function in each business class, for example

* Securing new business
* Maintaining existing business
* Terminating business

• Lastly an an appropriate loading type must be determined
• Fixed amount per contract/claim
• A % of premium/SI/Funds under management or a combination

Question 8

What are allocation methods that could be used for indirect expenses and give example of a cost that could be allocated by each method

Answer 8

• Charging out basis e.g. Computer time and related staff costs could charged to the direct function departments based on actual use
• Floor space taken up by the department, eg premise costs
• Arbitrary basis, e.g. statutory fees or senior management costs=> could be added at the end of analysis as a percentage loading to all other attributed costs

Question 9

What is meant by the term function in relation to expense allocation? Give examples

Answer 9

Function determines whether a cost is:
* A new business expenses (marketing, sales, commision, adminstration, underwiritng)
* Maintenance (renewal adminstration or investment) expense
* A termination (or claim) expense

Question 10

What are the different ways of loading for an expense in a premium basis for an individual contract? Give example for each

7

Answer 10

• Fixed amount per contract=> admin expenses
• % of premium=> commission
• %of sum assured=>underwriting expenses
• % of funds under management=> investment expenses
• Fixed amount per claim=> death benefit processing expenses
• % of claim amount=> GI claims admin expenses
• A combination of the above