# Complete information on the Classification of Expenses On The Basis Of Variation

There are three classifications on the basis:

1. Those expenses that vary with the size of the premium, for example, first year or renewal commissions.

2. Those expenses that vary with the amount of policy, for example, stamp fee, and medical examiner’s fee.

3. Those expenses that are independent of both, being either the same per policy or the expenses are incurred for the business as a whole for example, salaries, and establishment charges. These expenses would be equitably distributed only the relationship between the premium, policies or fixed is determined. For example,

+ A fixed amount per 1,000 of sum assured

+ A fixed amount per policy.

The insurer will have to establish what expenses are varying at what degree with premium, policy or policy amount. Therefore, he has to analyses the expenses and to determine the percentage.

(i) Analysis of Expenses

All the expenses incurred during a particular period are classified into (i) those expenses which are related to the premium, (ii) those expenses which are related with the policy, and (iii) those expenses which are independent of these two.

(ii) Determination of Percentage:

After classifying the expenses it is essential to determine the percentage according to the premium or policy or with other factor. The percentage is determined on the basis of past, experience.

If it has been known that Rs. 10,000 will be expended in connection with premium of Rs. 10, 00,000, it can be established that the expenses varying with the premium will be 1 per cent of the premium collected.

Similar percentage in relation to policy amount and to policy number can be easily established. Thus the net premium can be easily loaded with these percentage or fixed amount per policy.

The expenses should be allocated according to policies amount, premium amount and per policy although various methods have been derived for allocation of expenses.

The expenses can be allocated by any of the following methods:

Under this method a fixed amount per thousand of sum assured is loaded to the net premium. This method is not scientific because it assumes that all expenses vary according to the amount of the policy which is not correct. Some expenses vary according to variation in the rate of premium.

According to this method a fixed percentage of net premiums is added to the net premium. It assumes that all expenses vary according to the premium amount. But there are certain expenses which vary according to the policy amount or per policy.

3. Modified Percentage Method :

Under the method, the loading is divided into two parts: (i) expenses varying according to net level premium of the given, policies and (ii) expenses varying according to net level premium, of the whole life policy issued at the given age. This method is modification of the above two methods; but it does not relate the expenses according to their variations.

4. Constant and Percentage Addition Method:

Under this method, the loading is done less than two parts (a) a constant amount per thousand of the sum assured and (b) a fixed percentage related to the net premium of the policy. The percentages are determined on the basis of past experience.

This method assumes that the expenses vary either with the net premium or the sum assured, but the expenses also vary with the amount per policy which is not taken into account. However, this method is more scientific than the methods discussed above. 