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

682 INCORPORATION OF FIXED EXPENSESothers using countrywide figures. The treatment should be basedon the variation of the company’s commission plans by location.Taxes, licenses, and fees vary by state, therefore they are typicallybased on state data from the applicable Statutory Page 14.Ideally, the company can break the category into taxes, whichare a variable expense, and licenses and fees, which are typicallytreated as fixed expenses. 2The following chart summarizes these expense characteristics:Type of Expense Data Used Divided ByGeneral Expense Countrywide Earned PremiumOther Acquisition Countrywide Written PremiumCommission and Brokerage Countrywide/State Written PremiumTaxes State Written PremiumLicenses and Fees State Written PremiumOnce the historical ratios are calculated, the actuary chooses aselected provision for each expense type. Generally, the selectionis based on either the latest year or a multiyear average; however,there are several things that may affect the selection:² If the actuary is aware of a future change in the expenses,the new figure should be used. For example, if the commissionstructure is changing, the actuary should use the expectedcommission percentage, not the historical percentage.² If there was a one-time shift in expense levels during the experienceperiod, the expected future expense level should beused. For example, if productivity gains led to a significantreduction in necessary staffing levels during the historical experienceperiod, then the selected ratios should be based onthe ratios after the reduction rather than the all-year average.2 Licenses and fees tend to be a smaller portion of the overall taxes, licenses, and feescategory. Thus, if a company is unable to separate them, the inclusion of these withvariable expenses will not have a material effect.