Expenses Analysis 0 Chap 30

[dimitris13]

Hi,

the textbook makes reference to Cells about where to assign the expenses. any examples ?
thanks

 

[Lindsay Smitherman]

Hi

A 'cell' in this context would be something like {characteristic A, characteristic B, characteristic C, characteristic D} (including as many characteristics as the company chooses to use), where we could have, say:
A = product type
B = regular premium or single premium
C = initial, renewal, termination or investment expense
D = proportional to number of contracts, amount of benefit or amount of premium (etc)

Towards the bottom of page 18 of Chapter 30 the following example of a single cell is given: 'the initial expenses of product X which are proportionate to the sum assured'. So, in that particular case, the company is using the above characteristics A, C and D to form the cells (but not B).

In the example used in the Question on page 19 of that chapter, we see expense amounts being split into cells that are defined by just the characteristics A (2 choices) and C (3 choices), giving a total of 6 (=2x3) possible cells for expense allocation.

Hope that helps.

 

[dimitris13]

Hi,

many thanks about this. the book mentions that expenses can be divided into Direct and Overheads.
Then it breaks the expenses into categories.; Inti, Reg Term and Inv expenses.
After this it says that "having separated by type the expenses need to be further split." the type it refers to the 4 categories? or the 2 ? and these 2 how can we refer to (types or broad categories sth else )?

thanks

 

[Lynn Birchall]

Hi

It's probably worth me saying that this isn't a very scientific / rigorous process, in that different companies will adopt different processes, orders, categorisations, choice of 'cells' etc. So, I wouldn't get too bogged down in precise ordering etc.

I'd read the 'type' you mention as referring to the 4 categories (initial, renewal etc). In the subsequent further splitting, it suggests one split could be my product line. In performing this, any direct expenses would go directly into the cell for the product that gave rise to them. The overheads would however need to be allocated between the different product cells in some way rather than having an immediately obvious home.

Best wishes
Lynn

 

[dimitris13]

thanks Lynn.
so in a hypothetical question what are the types of expenses ?
I start with Direct and overheads and then i am talking about the categories (init, reg etc)?

 

[Lynn Birchall]

I start with Direct and overheads and then i am talking about the categories (init, reg etc)?

Yes, that sounds good to me. And would likely be mentioning how the overheads could be allocated to different product lines.