22. Expenses TODO

Question 1

What are fixed expenses?

Answer 1

• Remain broadly fixed in real terms
• 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=> 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=> 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
• Securing new business
• Maintaining existing business
• Terminating business
• Lastly an an appropriate loading type must be determined o Fixed amount per contract/claim
• o A % of premium/SI/Funds under management or a combination

Question 8

What are allocation methods that could be used for indirect expenses?

Answer 8

• Charging out basis=> Computer time and related functions=> charged to the direct function departments based on actuarial use
• Floor space taken up by the department, eg premise costs
• Arbitrary basis, e.g. stat fees or senior management costs=> 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?

Answer 9

• Function determines whether a cost is:
• A new business expenses
• Marketing
• Sales
• Commission
• Admin
• underwriting ii. A maintenance expenses- renewal admin or investment iii. Termination expenses-claims

Question 10

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

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
• Chapter 23-Contract design