CHP 32 Flashcards
- Types of expenses
Expenses incurred by an organization providing benefits on future financial events can be divided into: • Fixed and variable expenses – fixed in real terms, e.g. building, others vary by level of business. • Direct and indirect expenses – some expenses can be directly linked to a class of business, others not.
Insurance company expenses
Third category of expenses that is essentially fixed – senior management, this will change if the structure or business is changed significantly.
Similarly, a declining operation may be able to sublet a floor.
Staff-related expenses may be fixed in real terms in the short term. In the long-term, staff costs will vary to meet:
• Changing levels of new and existing business
• Changes in services provided
• Degree of automation used to provide those services
Isolating variable expenses is particularly important in assessing the contributions needed to provide benefits on future financial events.
Staff-related expenses may be fixed in real terms in the short term. In the long-term, staff costs will vary to meet:
• Changing levels of new and existing business
• Changes in services provided
• Degree of automation used to provide those services
Isolating variable expenses is particularly important in assessing the contributions needed to provide benefits on future financial events.
Benefit scheme expenses
Benefit schemes may not have any of the fixed costs mentioned above. Some might contract out essential services such as admin, actuarial, legal or investment management. In some instances, these functions will be covered by the sponsor’s employees and will form part of the overheads of the sponsor.
- Expense allocation – principles
Expenses form an important component of the total outgo analysed in internal management accounts and financial plans. Thus expenses need to be allocated to different types of business in as realistic a manner as possible.
Allocating direct expenses
Could arise from a department dealing with one class of business – this can be allocated directly. If a department deals with more than one class of business, time sheets can be kept to split the cost.
Allocating indirect expenses
By definition, these departments will not be related directly to any class of business but will form part of the support function. In this case, find a sensible apportionment across direct activities. e.g. computer costs could be charged out at an hourly rate, property cost could be divided by floor space.
2.2. Allocating expenses by function
As well as apportioning expenses to line of business, costs need to be apportioned by function. This is so that they can be allowed for in determining product pricing or provisions for future liabilities.
For most types of business the high level division is into the costs of:
• Securing new business
• Maintaining existing business (renewal and investment)
• Terminating business (including claims)
Depending on the purpose of the analysis, these items may be sub-divided.
e.g. new business costs may be divided into:
- Marketing
- Sales and commissions
- Processing and policy issue
- Underwriting
2.3. Determining appropriate expense loadings for premium rating
This is an important part of pricing.
The loading for expenses could be allowed for as follows:
• As a fixed amount per contract
• As a percentage of premium
• As a percentage of sum assured
• A combination of the above
Premium loadings for expenses must cover expected claim costs, expenses for admin and claim handling and make a contribution to the general fixed costs.
2.4. Adjustments to expense loadings
Adjustment for cross-subsidies
Adjustment for past/future expense inflation
- Expense allocation – insurance company example
To analyse the expense experience, the data needs to be subdivided into type of expense. The main items of expense for a provider are: • Commission • Salaries and salary-related expenses • Property costs • Computer costs • Investment costs • On-off costs
Insurance derivatives
e.g. catastrophe or weather options
Insurance Swaps
Organisations of similar but negatively correlated risks can swap packages of risk so they have greater risk diversification
