Types of expenses

Question 1

Types and definition of expenses:

Answer 1

▪ Expenses an be divided into : direct vs indirect, variable or fixed
▪ Definition of these expenses :
▪ Variable – those that vary directly according to the level of business being
handled and may be linked to the
- Measures of amount of business:
1. Number of policies or contracts sold – contracts postal costs
2. Number of claims – claims forms postal costs
3. Amount of premiums – affect commission
4. Amount of claims – legal expenses
▪ Fixed – these are the ones that do not vary according to the level of business
,in the short or medium term. Remain broadly fixed in real terms
▪ Direct – these expenses are those that have a direct relationship to a
particular class of business
▪ Indirect expense – these do not have a direct relationship to any class of
business so they need to be apportioned between appropriate classes using
some appropriate method

Question 2

Expenses of most financial service providers

Answer 2

Staff salaries , pension contributions and national insurance contribution
▪ Commission payments
▪ Office rent and related expenses
▪ Office equipment
▪ Investment costs ( costs of brokerage and management of investment funds )
▪ Office consumables ( stationary )

Question 3

Example of variable expenses of an insurance company

Answer 3

Commission ( depends on the amount of premium income )
▪ Postal costs for sending contract documents ( depends on number of policies )
▪ Legal expenses (dependent on the claim amount)

Question 4

Reasons fixed expenses can vary over time

Answer 4

▪ Change in the services provided
▪ Degree of automation used to provide services
▪ Change in levels of existing business

Question 5

Examples of direct costs (term assurance)

Answer 5

▪ Underwriting costs
▪ Commission costs
▪ Contract administration
▪ Claims settlement costs ( may include legal costs)
▪ Salaries of the above functions (normally fixed)
▪ Product development costs

Question 6

Examples of indirect costs

Answer 6

▪ These are not attributable to one class of business
▪ These relate to the support functions
▪ Examples :
o computing( IT and maintenance) ,
o human resources,
o treasury department,
o general management,
o some marketing ( how product is marketed) and
o distribution costs ( how product is sold