Expenses

Question 1

Reasons for analysis of expense

Answer 1

Measure the past performance of each insurance class
Determine the expense loadings for premium rating
Determine the expense loadings for provisioning
Spot any inefficient areas of the business to implement cost-cutting exercises
Conduct a financial planning exercise
Analyse its sources of surplus
Manage its cashflow position to ensure that liquid funds are available to pay the expenses

Question 2

Reasons for high expense ratio

Answer 2

Volumes of business likely to be much lower than the average insurer selling the same type of business
per policy fixed expenses are therefore likely to be higher than the market average
not yet seeing economies of scale
Marketing budget might be high
Offer lower than average premium rates to capture market shares
Sales methods may be more expensive than that of the market
Products may be more expense intensive than those of the average insurer
Commission level for the company may be higher than the market average
May pay higher salaries
Location may be such that the staff salaries and rental costs are higher
May have expense cost per unit of premium income reduced
Once off costs

Question 3

why actual expenses incurred might differ from the expenses allowed in the premium calculation?

Answer 3

expense inflation may be different
unforeseen expenses such as new regulation
Allowed once-off expenses incurred earlier or later than expected
different volumes of business from expected - higher expense per policy
expenses may be smoothed
cross subsidisations
product may be sold as a loss leader
facing a recession and higher expenses for the market
large initial expenses
take competitors’ shares