Chapter 32: Expenses

Question 1

Fixed expenses

Answer 1

Remain relatively constant in the short term

Question 2

Variable expenses

Answer 2

Vary by the amount of business (new business written or existing business handled).

Question 3

Direct expenses

Answer 3

Can be identified as belonging to a particular class or classes of business.

Question 4

Expenses need to be allocated by (2)

Answer 4

• class of business

- function

Question 5

Allocation to class of business for direct expenses

Answer 5

Direct expenses are often allocated to class of business using staff timesheets.

Question 6

Allocation to class of business for INDIRECT expenses

Answer 6

Indirect expenses (or overheads) can be allocated to class of business in several different ways.  for example, premises' costs can be allocated by floor space occupied by staff and computing costs using a charge out basis. 
Other indirect expenses may be excluded until the end of the allocation and then allocated in proportion to all other expenses.

Question 7

Non-commission expenses can be split into (3)

Answer 7

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

Question 8

Premiums should be adequate to cover… (5)

Answer 8

• administration costs
• contribution to profit
• claims handling costs
• fixed expenses of the provider
• expected claims or benefits

Question 9

Expenses can be loaded into the premium as… (3)

Answer 9

• a percentage of premium
• fixed amount per contract
• combination of these methods

Question 10

6 Typical expenses for most financial services providers

Answer 10

• staff salaries, pensions contributions, national insurance contributions, etc
• commission payments
• office rent and related expenses
• office equipment (computers)
• office consumables
• investment costs

Question 11

3 Examples of variable expenses

Answer 11

• commission (related to the amount of premium income)
• postal costs for sending contract documents and claim forms (related to the number of contracts sold and the number of claims)
• legal expenses (related to the claim amount)

Question 12

Indirect costs relate to the support functions such as (3)

Answer 12

• computing
• human resources
• general management

Question 13

Reason for which expenses might be allocated by “function”

Answer 13

In order for them to be loaded onto premiums.

This will mean that each policy contributes and appropriate amount to the total level of expenses.

Question 14

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

Answer 14

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

Question 15

New business costs might be split into… (4)

Answer 15

• marketing
• sales and commissions
• processing and policy issue
• underwriting

Question 16

In the longer term, staff costs will vary due to (3)

Answer 16

• changing levels of new business
• changes in services provided
• the degree of automation used to provide those services

Question 17

High level division (by function) - 3

Answer 17

• securing new business
• maintaining existing business
• terminating business

Question 18

For what 7 purposes do expenses need to be allocated?

Answer 18

• Determining the expense loading for premiums
• determining the expense loading for calculating provisions
• understanding the profitability of a particular product
• analysing sources of surplus
• analysing areas of inefficiency within the organisation
• financial planning
• cashflow management

Question 19

High level purposes of expense allocation:

Answer 19

• Pricing
• Valuation
• Budgeting
• Funding of schemes
• Business case preparation