Chapter 22 - Expenses Flashcards
Expense Categories
Fixed and Variable expenses – some expenses (such as building maintenance) may remain broadly fixed in real terms. Other expenses will vary directly according to the level of business being handled at that time. These may be linked to the number of policies or claims or the amount of premiums or claims.
Direct and Indirect expenses – some expenses can be identified directly as belonging to a particular class or classes of business. Others do not have a direct relationship to any one or more classes of business. These need to be apportioned between the appropriate classes.
Benefit Scheme Expenses
The expenses incurred by a benefit scheme may differ from those described above, as the scheme may have none of the fixed overheads such as building maintenance or rent.
It is possible that much of the work of the scheme, such as administration, legal advice, actuarial advice or investment management is delegated to third parties who charge a fee for the service. Where such services are provided in-house, this may be done by the sponsor’s employees and so the costs will form part of the sponsor’s total overheads.
Expenses can be allocated by :
- Classes of Business
- Function
- Allocating direct expenses
Direct expenses may arise from a department dealing purely with one class of business, in which case the expenses relating to that department can immediately be allocated to the relevant class
If direct expenses arise from areas dealing with more than one class of business, then timesheets can be kept (either for a period or permanently) to help split costs between classes - Allocating indirect expenses
The departments concerned are not related directly to any particular class of business, but form a support function for the provider. In this case, it is necessary to find a sensible apportionment of the expenses across direct business activities
For most types of business the high level division is into the costs of:
- securing new business
- maintaining existing business (policy renewal administration and investment expenses)
- terminating business (including claims)
Depending on the purpose of the expense analysis, these items may be subdivided. For example, new business costs might be split into:
- marketing
- sales and commissions
- processing and policy issue
- underwriting.
The functional analysis of expenses is important in determining which expenses are charged to which contracts. For example, in a life insurance company the costs of regular premium collection would not be charged to single premium or paid-up policies.
Expense Loadings
- Percentage of premium or sum assured (commissions and sales expenses)
In most cases, commissions paid to third parties and to employed sales staff for securing business will be proportional to the size of the contract and will usually be expressed as a percentage of premium.
These costs can be allowed for by incorporating the commission rates directly into a formula calculation or a cashflow model - Percentage of funds under management (investment expenses)
Investment expenses would normally be expressed as a percentage of funds under management and these can be allowed for directly by a deduction from the investment return assumed. - Fixed amount per contract(collection expenses , admin expenses)
In most cases, office administration expenses relate to activities that are independent of the size of the contract. For example, the cost of collecting a contribution is largely the same no matter the size of the contribution.
These expenses would normally be expressed as a monetary amount (with an allowance for future expense inflation) per new contract issued or per contract in force, as appropriate. - Fixed amount per claim or percentage of claim amount
The treatment of claims expenses differs by the type of business.
In general, for claims that depend on death or survival of lives, the claim expense is often likely to be independent of claim size and expressed as an amount per claim.
For general insurance business, the expenditure on claims administration will be proportionate to the size of claim, with small claims being accepted (especially if there is the loss of a no-claims discount) with minimal evidence, larger claims requiring assessment of multiple estimates, and the largest claims involving appointment of firms of loss adjusters.
