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Expenses (Ways of loading premiums for expenses (Fixed amount per contract…
Expenses
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Allocating expenses
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Not only must expenses be allocated to class but also to function, i.e. securing new business, maintaining existing business (renewal and investment) and terminating business (claims).
Finally, an appropriate loading type must be determined, e.g. a fixed amount per contract/ claim, a percentage of premium/ sum assured/ funds under management or a combination of these approaches.
Types
Fixed
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Examples of expenses fixed in short term, variable in the long term
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Variable
Vary directly according to the level of business being handled at that time and are linked to the number of policies or claims or the amounts of premiums or claims.
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Indirect
Do not have a direct relationshop to any one class and need to be apportioned between the appropriate classes in performing an analysis
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Function
The function determines whether the cost is a new business expense, a maintenance (renewal administration or investment) expense, or a termination (or claim) expense.
The division may then be further subdivided. For example, new business costs may be split into marketing, sales and commission, administration and underwriting.