Would anyone be able to explain to me why in this question we weren't able to refer to salaries, rent etc.. In the examiners report they said: "need loadings-level points, not expenses-level points." I am not sure i know the difference between loadings and expense level? I thought we allocated different expenses into product and function and then applied a loading? If anyone could point me out to the relevant core reading for this aswell that would be greatly appreciated. Many Thanks in advance!
Hi 'Expense loadings' are the assumed expenses that we load into pricing calculations, the objective being to recover sufficient expense loadings from new and existing business premiums in order to cover the actual costs incurred. The latter would include salaries, property costs etc. Expense loadings are required in order to recover the costs involved in selling, setting up and continuing to adminster each policy up to and including the point of claim, plus may also contribute to the overheads of the company. We can therefore think of expense loadings as needing to cover the specific processes undertaken throughout the policy's lifetime: marketing, selling (including commission), underwriting, initial administration, premium collection, other renewal administration, investment, claims underwriting and claims processing. Examples of expense loadings for setting the premium rate for a particular contract might be, say, 50% of the first premium + £200 initially, then 5% of each premium + 0.1% of funds under management + £50 (increasing with inflation) annually thereafter. These loadings need to be sufficient to cover the cost of the processes mentioned above and/or whatever else is relevant to looking after that particular contract. In order to determine what these processes are actually costing the company, it would have to perform an expense analysis to break down its total actual costs by product and by function etc. This is where splitting down salaries say by timesheets and rental costs say by floorspace comes in. But those are the earlier stages of an expense analysis. The question here is asking only about the loadings. Expense loadings (different types and the sorts of things they are designed to meet) are covered in Section 2.3 of Chapter 21. There is not as much detail in the Core Reading as in the solution to this question, as this is an example of a question requiring you to apply the principles beyond the bookwork. Hope that helps.
