Chapter 22: Expenses

Question 1

Examples of expenses of financial services providers

Answer 1

• Consumables (Office)
• C ommission payments
• E quipment
• R ent and related expenses
• S taff salaries, pension contributions, national insurance contributions
• I nvestment cost

Question 2

Classes of expenses

Answer 2

• Fixd and variable
• Direct and indirect

Question 3

In the long-term what do staff expenses need to meet

Answer 3

• Changing levels of new and existing businesses
• Changes in the services provided
• Automation

Question 4

Examples of indirect expenses

What are their general categories

Answer 4

• Central functions
• IT
• Treasury
• Marketing
• Distribution costs

Computing, HR, general management

Question 5

Why is expense allocation important ?

Answer 5

Book level
* So that expenses can be loaded correctly into premiums
* Calculating provisions
* Understanding profitability
* Analysing sources of surplus

Business level
* Analysing areas of inefficeincy within the business
* Financial planning
* Cashflow management

Question 6

Significance of expense loading

Answer 6

Ensure that sufficient premiums are charged or adequate provisions are established to cover not only the expected claims cost , but also the costs of expenses related to administration and claims handling for the business written, including a contibution to the general fixed cost of the provider

Question 7

Ways that expense loading can be xpressed

Think finmaths or conties s

Give examples

Answer 7

• % of premium or sum assured - commission and sales staff
• % of funds under management - investment expenses
• fixed amount per cntract - office admin (fixed expense)
• fixed amount per claim or % of claim amount - differentiating between death and life claims (per business)
• Combination of the above

Question 8

Some reasons tht adjustments might be needed to intial expense lodings

Be sure to include examples

Answer 8

• To reflect cross subsidies - between existing business and renewals, larger policies subsidies subsiding smaller policies.
• For past and future expense inflation
• Due to competition considerations

Question 9

Match fixed and variable expenses to direct and indirect expenses

There may be more than one match for each

Answer 9

Variable - direct
Fixed - direct or indirect

Question 10

What does seperating expenses by function mean

Answer 10

It relates to the timing of the expenses.

Question 11

How are expenses seperated by function

Answer 11

• Securing new bsuiness
• Maintaining existing business
• Terminating business