Chapter 22 - Expenses

Question 1

Fixed expenses

Answer 1

Remain broadly fixed in real terms

Question 2

Variable expenses

Answer 2

Vary directly according to the level of business being handled at that time and are linked to the number of policies or claims or the amounts of premiums or claims.

Question 3

Direct expenses

Answer 3

Can be identified as belonging to a particular class of business

Question 4

Indirect expeses

Answer 4

Do not have a direct relationship to any one class and need to be apportioned between the appropriate classes in performing an analysis.

Question 5

For what purposes is an expense allocation carried out other than determining the expense loading for premium?

Answer 5

SPACE F

• analysing SOURCES of surplus (deviations of actual from expected expenses)
• understanding the PROFITABILITY of a product
• analysing AREAS of inefficiencies within an organisation
• CASHFLOW management ( to ensure there is liquid funds to pay the expenses)
• determining the EXPENSE loading for calculating provisions
• FINANCIAL planning (expense budgeting)

Question 6

Expenses need to be allocated by (2)

Answer 6

• class of business
• function

Question 7

3 “functions” of costs (by which they’re divided)

Answer 7

• securing new business
• maintaining existing business (renewal and investment)
• terminating business (including claims)

Question 8

What is meant by the term ‘function’ in relation to expense allocation?

Answer 8

The function determines whether the cost is a new business expense, a maintenance (renewal administration or investment) expense, or a termination (or claim) expense.

This division may then be further subdivided.

For example, new business costs may be split into:
- marketing
- sales and commission
- administration
- underwriting

Question 9

Different ways of loading premiums for expenses

Answer 9

1. Fixed amount per contract - administration expenses
2. Fixed amount per claim - death benefit processing expenses
3. % of SA - underwriting expenses
4. % of funds under management - investment expenses
5. % of premium - commission
6. % of claim amount - general insurance claims administration expense
7. A combination of the above

Question 10

Non-commission expenses can be split into (3)

Answer 10

• initial expenses
• maintenance expenses, including renewal & investment expenses
• termination expenses