Chapter 22: Expenses

Question 1

Give examples of expenses that are essentially fixed but can vary in large amounts from time to time

Answer 1

Staff related costs and accommodation costs can vary in the long term to meet changes in:
1. The structure of the organization
2. New and existing business levels
3. The services provided
4. The degree of aotomation used

Question 2

How do the expenses relaing to a benefit scheme differ from insurance company expenses?

Answer 2

1. No commission
2. No fixed overheads such as buildings maintenance
3. Admin, legal advice, actuarial adivice or investment management may be charged for on a fee basis or, if done “in-house” will from part of the sponsor’s total overheads.

Question 3

Explain briefly the process of allocating expenses to individual contracts

Answer 3

All expenses of the organization must be identified and categorized as direct / indirect.

Direct expenses can be immediately allocated to a particular class of business.

Indirect expenses must be pragmatically apportioned between classes of business.

Not only must expenses be allocated to class but also to function, i.e. securing new business, maintaining existing business and terminating business.

Finally, an appropriate loading type must be determined, e.g. a fixed amount per contract / claim, a percentage of premium / sum assured / funds under management or a combination of these approaches.