Chapter 32: Expenses Flashcards
Expenses can be split into (4)
- fixed or variable
- direct or indirect
Fixed expenses
Remain relatively fixed in real terms
eg building expenses
Variable expenses
Vary directly according to the level of business being handled at that time.
(eg commission)
Direct expenses
Expenses that can be directly identified as belonging to a particular class of business.
Indirect expenses
Expenses that need to be apportioned between the classes in performing an analysis.
The actuary must decide on expense loadings for each contract. The expenses will tend to be recorded as (5)
- commission
- staff costs
- property costs
- computer costs
- investment costs
To convert the categories of expenses into expense loadings, the actuary must (3)
- firstly allocate costs to a product
- secondly to a function
- finally, to an individual contract
What is meant by the term “function”
Whether the cost is:
- a new business expense
- a termination or claim expense
- a renewal expense
This division may then be further subdivided.
E.g. New business cost may be split into:
- marketing
- sales and commission
- administration
- underwriting
What are the different ways of loading an expense into a premium basis for an individual contract?
- fixed amount per contract
- as a percent of the premium charged
- as a combination of these
How do you allocate expenses to products?
Direct expenses can be allocated straight to a product class / classes.
Where a department deals with more than one product, staff timesheets can be used to determine the split between products.
Allocating indirect expenses is harder, pragmatic methods must be used to apportion the expenses across products.
How might you allocate indirect staff costs?
Indirect staff costs can be split in proportion to the overall split of the direct staff costs already allocated.
How might you allocate property costs?
If the provider owns - as an investment - any of the buildings it occupies, a notional rent needs to be charged to the relevant departments.
This rent plus:
- property taxes
- lighting costs
- heating costs
can be split by department by floor space occupied and then allocated in accordance to salaries.
How might you allocate computer costs?
The cost of purchasing a computer could be amortised over its useful lifetime and then added to the ongoing computer costs.
These can then be allocated to the departments, using a charging out basis, or according to computer usage.
Another way of allowing for some overheads such as statutory fees or senior management fees,
simply add a percentage loading to all of the other attributed costs at the end of the analysis.
