chapter 31- expenses

[acrobat1]

Hello.

On page 13 of chapter 31, it is stated that "..direct expenses fall into all three groups".

What is unclear to me is the way that direct expenses can be allocated in order to get expense assumptions.

If for example we have allocated a specific amount of direct expenses to a specific product, how can we decide how to split this amount into amount to be split according to no of policies (in order to get fixed per policy loading) and how to split the remaining amount according to premium volume (in order to get variable loading eg % of premium)?

Many thanks in advance for your help

 

[Lynn Birchall]

Hello

Good question. Doing this is certainly not an exact science!

Essentially the company has to ask whether there is any reason a particular type of expense might vary between policies of different sizes.

Most expenses don't, eg the cost of setting up a new customer on your IT system, the cost of sending the policy documents. So, for these policies, a company may decide to split according to number of policies.

However, for some expenses there may be a link between the size of the policy and the size of the expenses incurred. If it's believed that the expenses are higher on bigger policies (eg maybe do more underwriting of larger policies and so maybe underwriting expenses should fall more on big policies than small ones) then these expenses may be split in a way that reflects this, eg as a % of benefit.

Hopefully this helps a little? Do post again though if anything's not clear!
Lynn