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

INCORPORATION OF FIXED EXPENSES 695the overall indication is not materially impacted by moderateswings in the categorization of expenses.Second, the proposed procedure essentially allocates countrywidefixed expenses to each state based on the by-state exposuredistribution (as it assumes fixed expenses do not vary by exposure).In reality, average fixed expense levels may vary bylocation (e.g., advertising costs may be higher in some locationsthan others). If a regional or national carrier feels the variationis material, the company should collect data at a finer level andmake the appropriate adjustments. Once again, the cost of thedata collection should be balanced against the additional accuracygained.Third, some expenses considered fixed probably vary slightlywith premium. For example, policies for coastal homes may bemore costly to service than other homes. Further studies may uncovera more accurate quantification of this relationship. However,assuming the expenses are “nearly” fixed, the resulting inequityis not material.Fourth, some expenses considered fixed vary by other characteristics.For example, fixed expenses may vary between newand renewal business. This only affects the overall statewide indicationif the distribution of risks for a given characteristic ischanging dramatically or varies significantly by state. Even ifthere is no impact on the overall indication, any material fixedexpense cost difference not reflected in the rates will have animpact on the equity of the two groups. To make rates equitablefor the example of new versus renewal business, material differencesin new and renewal provisions should be reflected withconsideration given to varying persistency levels as described byFeldblum [3].Finally, the existence of economies of scale in a changingbook will lead to increasing or decreasing figures for projectedaverage expense per exposure. Further studies may revealtechniques for better approximating the relationship between