Hello, The specific part of the question I am referring to is: "An insurance company has made the following purchases during the year:... (b) a new computer system for the payment of annuities... Describe how each of these items might be dealt with in the annual analysis and allocation of expenses." And the answer given is "The capital cost would be amortised over the expected useful lifetime of the system purchased. The amortised cost would be allocated to renewal expenses, and it would be specifically allocated to annuity business." I understand the amortisation point and the allocation to annuity business, however I am struggling to understand why it would be allocated to renewal expenses, please could anybody explain? Obviously it can't be allocated to policies already in force, but I'd have assumed it would be added as an initial expense to new business. In any case, I wasn't aware that annuity business often was renewed? Any help much appreciated!
Hi, My understanding would be: The expenses of purchasing the computer system should be amortised over the useful working lifetime of the computer system. Since the computer system is for the payment of annuities, the expenses should be allocated to annuity contracts. The expense should be allocated to maintenance expenses. The loading is likely to be a fixed amount per policy, which may be expected to increase over time with expense inflation. By renewal expenses, i assume the report was referring to each payment, for example, yearly payment of the annuity to the annuitant.
Hi - yes, agree with the post above. The phrase 'renewal expenses' is used interchangeably with the phrase 'maintenance expenses' and basically just refers to the ongoing regular expenses incurred under an in-force policy. Here, the system is described as relating to the payment of the annuity benefits - so the cost of that system should be allocated likewise. This is a regular ongoing expense throughout the lifetime of the policy, so would best be allocated to 'renewal expenses' / 'maintenance expenses'.
