Chapter 31 (WM) Flashcards
Define the following terms, namely “direct expenses” and “overhead costs”. [3]
Direct expenses – the expenses that depend on either the volume of NB or the level of IF business.✓✓
Overhead expenses – these are the balance of the expenses✓✓,
ie those that relate to general management✓ and service departments✓ which are not directly involved in NB✓ or policy maintenance activities✓ and
which are insensitive both to the volume of NB and the level of IF business.✓✓
In practice, there is not a clear dividing line between these two categories and some judgements will have to be made.✓✓
Outline the main type of expenses. [3.75]
- Commission✓ - amount is known✓. So usually excluded, but added later via formula.✓✓
For the purpose of an expense analysis, the non-commission expenses can then be split into✓:
- initial expenses, which arise at the start of the policy term ✓✓
- renewal expenses, which arise regularly during the policy term ✓✓
- termination expenses, which arise when the policy terminates ✓✓
- claims expenses, which are incurred in the paying of benefits ✓✓
- investment expenses, which relate to the management of the company’s assets ✓✓
List the main expense drivers. [2]
- the number of contracts written or in-force ✓✓
- the amount of benefit written or in-force ✓✓
- the amount of premium written or in-force ✓✓
It is found in practice that most of the first three type of expenses, IE, RE and TE, are proportional to the number of contracts written or in force.✓✓
State the exceptions to the main expense drivers. [1.5]
- marketing expenses – typically related to the amount of initial commission paid ✓✓
- underwriting expenses – mainly related to the size of benefit ✓✓
- long-term care claim costs – typically related to the size of benefit ✓✓
List the main items of expense. [1.25]
- commission
- salaries and salary-related expenses
- property costs
- computer costs
- investment costs
Describe Salaries and salary-related expenses of a health and care insurance company, and the process to split these during the expense investigation process. [4]
These will be the major expense of a health and care insurance company.✓✓
A large part of the expenses are staff-related, owing to the labour-intensive nature of admin the business. In the ST much of this may remain fixed in real terms. (0.75)
In the LT, staff costs will vary to meet changing levels of new and existing business and changes in services provided.✓✓ The degree of automation used to provide those services will also have an effect.✓ Staff can be split into various groups✓:
Staff whose work comes entirely within a single cell✓ The costs for this group can be directly allocated to the appropriate cell.✓ Staff whose work comes within more than one cell✓ Time-sheets can be used to split the costs of this group between the appropriate cells.✓ Some staff will be wholly overheads.✓ Some staff will straddle both overheads and direct expenses in which case the split between the two is likely to be made pragmatically.✓✓
The direct part can be split further in proportion to the overall split of the other two groups. ✓✓
Explain how the following expenses will be treated as part of an expense experience analysis.
(a) Property costs
(b) Computer costs [2.25]
(a) If the company owns the buildings it occupies as an asset of its LT fund, notional rent needs to be charged to the relevant departments.✓✓ This rent, plus property taxes, heating costs etc, can be split by floor-space and allocated in accordance to salaries.✓✓✓
(b) The cost of purchasing a new computer could be amortised over its useful lifetime and then added to the ongoing computer costs. These can then be allocated according to computer usage (or other sensible allocation method) (1)
Explain how the following expenses will be treated as part of an expense experience analysis.
(a) Investment costs
(b) One-off capital costs [2.75]
(a) These would be directly allocated to investment expenses and hence allowed for in assessing the investment return to be used.✓✓
(b) Expenses analysed exclude large one-off capital costs and computer costs✓✓. Costs to be amortised over the expected useful lifetime of the item purchased.✓✓ The amortised cost may then simply be treated as part of the overheads.✓ If the item can be treated as an asset of the LT fund, a notional charge would usually be made.✓✓ Exceptional items, which are not likely to recur, would be excluded completely from the analysis.✓✓
Describe the process of investigating the expense experience of a health and care insurer. [7]
Expenses will need to be split down and analysed into the required “cells”. Typically the cells may be the whole business of the insurer; each business fund; each main product line of the insurer. (1)
These may be further subdivided between regular and SP business.✓✓
The choice of cells will vary across offices depending upon the types and volumes of business written and the purposes of the analysis [1] The cells chosen should not be so small that the analysis becomes unreliable.✓✓
Also need to split by direct costs v overheads✓, and initial/renewal/claim/termination/investment. [1] expense drivers
And whether proportionate to premium/sum assured/number of policies.✓✓ There may be exceptions.✓
The investigation should exclude commission.✓
Record the costs of medical reports & tests as external UW expenses.✓✓
One possible approach to split these costs is as follows:
Salaries and salary-related expenses ✓
Property costs✓
Computer costs✓
Investment costs✓
One-off capital costs✓
State some of the actions an CI insurer can implement to improve the competitiveness of its premium rates. [3]
- Removing costly diseases ✓
- Removing costly guarantees ✓ e.g. introducing reviewable premiums✓
- Obtaining assistance from reinsurers✓
- Differential pricing for large and small sum assured policies✓✓
- Reduction in expense loading through improved operational efficiency✓✓
- Reduction in reserve and capital requirement through de-risking exercises✓✓
- Reduction in the Risk Discount Rate / Required Rate of Return / Profit Margin ✓✓
- More stringent underwriting (so better risk classification and lower margins being required in premiums) ✓✓
- Including lower pricing / profit margins in assumptions ✓✓
