CHP 32 Flashcards

1
Q
  1. Types of expenses
A
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.
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2
Q

Insurance company expenses

A

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.

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3
Q

Staff-related expenses may be fixed in real terms in the short term. In the long-term, staff costs will vary to meet:

A

• 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.

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4
Q

Benefit scheme expenses

A

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.

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5
Q
  1. Expense allocation – principles
A

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.

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6
Q

Allocating direct expenses

A
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.
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7
Q

Allocating indirect expenses

A
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.
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8
Q

2.2. Allocating expenses by function

A

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.

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9
Q

For most types of business the high level division is into the costs of:

A

• 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.

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10
Q

e.g. new business costs may be divided into:

A
  • Marketing
  • Sales and commissions
  • Processing and policy issue
  • Underwriting
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11
Q

2.3. Determining appropriate expense loadings for premium rating

A

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.

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12
Q

2.4. Adjustments to expense loadings

A

Adjustment for cross-subsidies

Adjustment for past/future expense inflation

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13
Q
  1. Expense allocation – insurance company example
A
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
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14
Q

Insurance derivatives

A

e.g. catastrophe or weather options

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15
Q

Insurance Swaps

A

Organisations of similar but negatively correlated risks can swap packages of risk so they have greater risk diversification

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16
Q

What internal ways can you manage risk?

A

Underwriting, fair price paid for the risk
Claims control, reduces fraud
Management control to reduce exposure to risk

17
Q

Explain unregulated markets (why would we have them)?

A

Costs of regulated outweigh the benefits

For example a market where only professionals operate

18
Q

Explain voluntary codes of conduct and their weakness

A

They operate effectively in many circumstances

vulnerable to rogue traders and hence lack of public confidence

19
Q

Explain self regulation

A

A system organised and operated by the market participants without government intervention

20
Q

Explain statutory regulation

A

The government sets out the rules and polices them for the market participants

21
Q

Explain mixed regimes

A

These are a mixture of all the other regimes

regulations are developed by market-driven private institutions like the stock exchange, as well as governments

22
Q

Investment and risk characteristics of assets

A
SYSTEM T
Security (risk)
Yield (real/nom, running yield, expected return, compare to other assets)
Spread (diversification, volatility)
Term
Exchange rate/expenses/economic conditions/expertise required
Marketability
Tax
23
Q

Reasons to hold cash

A
POURS
Protect monetary values
Opportunities to take advantage of
Uncertain outgo
Recent cashflow
Short term commitments
24
Q

Economic situations where cash is attractive

A
GRID
General economic uncertainty
Recession
Interest rates rising
Depreciation of domestic currency
25
Q

Theories of the yield curve

A
LIME 
Liquidity preference
Inflation risk premium
Market segmentation
Expectations
26
Q

Characteristics of prime property

A
Comparables
Age/condition/use/flexibility
Location
Lease
Size
Tenant
27
Q

Difficulties in overseas investment/emerging markets

A

MTV
Mismatches domestic liabilities
Tax
Volatility of currency

28
Q

Other problems with overseas investment/emerging markets

A
CATERPILLAR
Custodian needed
Addation admin
Time delays
Expenses/expertise
Regulation poorer
Political problems
Information poorer
Language difficulties
Accounting differences
Restrictions on ownership of assets/repatriation problems
29
Q

External environment factors

A
CREATE GREAT LISTS
Commercial issues e.g. underwriting
Regulation/legislation
Environmental issues
Accounting standards
Tax
Economic issues 
Governance
Risk management
Experience from overseas
Adequacy of capital
Trends (demographic)
Lifestyle considerations
Institutional structure (mutual or proprietary)
Social trends 
Tech
State benefits
30
Q

Functions of a regulator?

A
SERVICE
Setting sanctions
Enforce regulations
Reviewing and influencing govt policy
Vetting and registering firms and individuals
Investigating breaches
Checking management and conduct of providers
Educating customers and public