CP1 - Chapter 21 Expenses

[Darragh Kelly]

Hi,

Just have a quick question in relation to the section below from chapter 21.

Section 2.4 - Adjustments to expense loadings for pricing purposes (page 11)
Cross-Subsidies
The paragraph mentions how if the expense loadings are weighted more towards a percentage of premium (or SA) rather then fixed per policy amount, the smaller policies benefit from a cross-subsidy benefits? I don't quite get how this is working?

Thanks,

Darragh

 

[Aman Sehra]

Hi Darragh,

This is saying that if expenses are set as a % of premium (or sum assured), then the expense loading on the bigger premium/SA business will be higher than the smaller premium/SA business. As such, the bigger policies will be paying more towards the fixed costs than the smaller policies. Given the actual expenses may be the same for the all policies (ie it doesn't cost more to administer a bigger policy over a smaller one), the bigger policies are subsidising the smaller policies.

I recommend reviewing the whole four chapters in this section, as there is also a general insurance example here too.

Thanks
Aman
ActEd Tutor

 

[Darragh Kelly]

Hi Aman,

Thanks a million for that explanation. All clear now.

Yes I will review all sections again in this chapter.

Thanks,

Darragh