• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

March 2006 - Paper 2 - Q3

R

RedCoat

Member
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'.
 
You must log in or register to reply here.
Back
Top