Chapter 22: Expenses Flashcards
Fixed expenses
Remain relatively constant in the short term
Variable expenses
Vary by the amount of business (new business written or existing business handled).
Direct expenses
Can be identified as belonging to a particular class or classes of business.
Expenses need to be allocated by (2)
- class of business
- function
Allocation to class of business for direct expenses
Direct expenses are often allocated to class of business using staff timesheets.
Allocation to class of business for INDIRECT expenses
Indirect expenses (or overheads) can be allocated to class of business in several different ways. for example, premises' costs can be allocated by floor space occupied by staff and computing costs using a charge out basis. Other indirect expenses may be excluded until the end of the allocation and then allocated in proportion to all other expenses.
Non-commission expenses can be split into (3)
- initial expenses
- maintenance expenses, including renewal & investment expenses
- termination expenses
Premiums should be adequate to cover… (5)
- administration costs
- contribution to profit
- claims handling costs
- fixed expenses of the provider
- expected claims or benefits
Expenses can be loaded into the premium as… (3)
- a percentage of premium
- fixed amount per contract
- combination of these methods
6 Typical expenses for most financial services providers
- staff salaries, pensions contributions, national insurance contributions, etc
- commission payments
- office rent and related expenses
- office equipment (computers)
- office consumables
- investment costs
3 Examples of variable expenses
- commission (related to the amount of premium income)
- postal costs for sending contract documents and claim forms (related to the number of contracts sold and the number of claims)
- legal expenses (related to the claim amount)
Indirect costs relate to the support functions such as (3)
- computing
- human resources
- general management
Reason for which expenses might be allocated by “function”
In order for them to be loaded onto premiums.
This will mean that each policy contributes and appropriate amount to the total level of expenses.
3 “functions” of costs (by which they’re divided)
- securing new business
- maintaining existing business (renewal and investment)
- terminating business (including claims)
New business costs might be split into… (4)
- marketing
- sales and commissions
- processing and policy issue
- underwriting
In the longer term, staff costs will vary due to (3)
- changing levels of new business
- changes in services provided
- the degree of automation used to provide those services
High level division (by function) - 3
- securing new business
- maintaining existing business
- terminating business
For what purposes do expenses need to be allocated?
- Determining the expense loading for premiums
- determining the expense loading for calculating provisions
- understanding the profitability of a particular product
- analysing sources of surplus
- analysing areas of inefficiency within the organisation
- financial planning
- cashflow management
