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

INCORPORATION OF FIXED EXPENSES 691dividing the projected average fixed expense per exposure by thestatewide projected average premium at present rates. This figurecan then be used within the same formula to indicate loss ratioprovided earlier:SW Indicated Rate Change=Projected Loss Ratio + Projected Fixed Expense Provision1:00 ¡ Variable Expense Provision ¡ Profit & Contingency Provision¡ 1:00:Calculation of Expense FeesSome insurers may have expense fees or minimum premiums.If that is the case, this procedure directly lends itself to thedetermination of such values.Exhibit 2-D displays the necessary calculations for an expensefee. The projected average fixed expense per exposurehas already been calculated. To calculate an expense fee, thatfigure needs to be increased to cover the variable items (variableexpenses and profit) associated with the fixed portion ofthe premium. This is accomplished simply by dividing the fixedexpense per exposure by the variable permissible loss ratio (i.e.,1.00 minus variable expense provision minus profit provision).To determine a minimum premium, the expense fee should becombined with a minimum provision for losses.5. CURRENT METHODOLOGY VERSUS PROPOSEDMETHODOLOGYThis section algebraically shows the difference in the projectedfixed expense dollars calculated under the two differentmethodologies. The formula for calculating the total dollars ofprojected statewide fixed expenses using the current method-