Chapter 22: Expenses

Question 1

Name 4 categories of expenses

Answer 1

1. Fixed expenses: Expenses remain relatively fixed in real terms regardless of the volume of business
2. Variable expenses: Increase in line with the volume of business
3. Direct expenses: Can be identified as belonging to a specific class of business
4. Indirect expenses: Do not have a direct relationship with any class of business

Direct, variable: Commission, policy administration, claim management

Direct fixed: Product development, marketing cost

Indirect, variable: Do not exist

Indirect, fixed: Property cost, support functions, senior manager salaries

Question 2

What does business volume mean?

Answer 2

1. Number of policies
2. Premium income
3. Number of claims
4. Claim outgo

Question 3

Name two ways expenses can be allocated in a premium loading

Answer 3

1. Class (timesheets, floor space)

2. Function (initial expenses, renewal, termination, investment expenses)

Question 4

How can expenses be loaded to premiums

Answer 4

% of premium or sum assured (commission, underwriting)

% of funds undermanage

Fixed amount per contract (office admin)

Fixed amount per claim (life/death claims)

% of claims (GI claims where underwriting is needed)

Question 5

Name 3 ways expenses can be adjusted

Answer 5

1. Adjust to reflect cross-subsidy agreement
2. Inflation
3. Competition