2009 April Q3 part (i) - Expense Apportionment

[Jian_901]

Hi Mark

Thanks for responding to the posts on this forum. It was very helpful and very much appreciated.

This is a straight-forward book work question. However, is it possible to provide one (perhaps two) brief numerical examples of how this is done in practice?

Overhead Expense
How do overhead expenses get allocated to the 'drivers' (for example, premiums, sums insured) in practice?

Direct Expense
It is said that Direct Expenses can be split into initial, renewal, claims, termination and investment expenses, and further split into salary-related, property, computer usage and investments. I am confused by this sort of layering, is it simply saying, for example, salaries of underwriters are categorised as initial expenses and can be allocated to the number of new policies written?

Some (simple) examples could be helpful.

Thanks Mark.
Jian

 

[Mark Willder]

Hi Mark

Thanks for responding to the posts on this forum. It was very helpful and very much appreciated.

This is a straight-forward book work question. However, is it possible to provide one (perhaps two) brief numerical examples of how this is done in practice?

Overhead Expense
How do overhead expenses get allocated to the 'drivers' (for example, premiums, sums insured) in practice?

Direct Expense
It is said that Direct Expenses can be split into initial, renewal, claims, termination and investment expenses, and further split into salary-related, property, computer usage and investments. I am confused by this sort of layering, is it simply saying, for example, salaries of underwriters are categorised as initial expenses and can be allocated to the number of new policies written?

Some (simple) examples could be helpful.

Thanks Mark.
Jian

Hi Jian

Here's a simple numerical example. The insurer has CI premiums of 100, IP premiums of 100 and LTCI premiums of 200. The overheads are 40. If we use premiums as a driver to split this then we allocate overheads of 10 to CI, 10 to IP and 20 to LTCI.

Yes, you are right. The salaries of underwriters are allocated to initial expenses and could be allocated in proportion to the number of policies written. The cost of the computers used to calculate reserves is a renewal expense and could be allocated in proportion to the number of policies in force. The salaries of the claims team are claim expenses and can be allocated in proportion to the number of claims (or perhaps the claim amounts).

Best wishes

Mark