PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

INCORPORATION OF FIXED EXPENSES 681the expense categories. To accomplish this, actuaries generallyrelate historical expenses to either written or earned premiumfor that same historical experience period. The choice of premiumdepends on whether the actuary believes the expenses aregenerally incurred at the onset of the policy or throughout thepolicy. Written premium is used in the former case and earnedpremium is used in the latter case. Once the appropriate ratiosare determined for each type of expense, the ratios are then splitinto a fixed expense ratio and a variable expense ratio based onall available expense data, regulations, and judgment.Exhibit 1 demonstrates this using homeowners data adjustedso that the three-year historical expense ratios (expenses dividedby premiums) are approximately equal to the three-year industryhistorical expense ratios.Exhibit 1-A displays three years of historical expense ratios.The underlying data can be obtained from the Insurance ExpenseExhibit (IEE) and Statutory Page 14, although they may not havethe finest level of detail desired. For example, the homeownersdata include data on renters and mobile homes. Ideally, the actuarycan access and use the source expense data to get the datacorresponding to the product being priced. Of course, the actuaryshould always balance the additional cost of obtaining suchdata against the additional accuracy gained.In this case, the company assumes that all expenses, exceptgeneral expenses, are incurred at the onset of the policy anddivides them by the written premium. General expenses are assumedto be incurred throughout the policy period and thus aredivided by the earned premium.Typically, the data used (countrywide or state) also vary bytype of expense. Other acquisition and general expenses are usuallyassumed to be uniform across all locations and hence can behandled using countrywide figures that can be found in the IEE.Handling of commission and brokerage expenses varies fromcarrier to carrier, with some carriers using state-specific data and