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

700 INCORPORATION OF FIXED EXPENSESAPPENDIX BDOES THE PERCENTAGE THAT FIXED EXPENSES REPRESENT OFTOTAL EXPENSES VARY OVER TIME?In both the current and proposed procedures, the actuary mustseparate the expenses into fixed and variable expenses. Sincedetailed expense data may not be available, the actuary may haveto use a judgmentally selected percentage to split the expensesinto these two categories.Generally, that same percentage is applied to the expenses foreach of the years in the historical period. If the change in theaverage premium does not equal the fixed expense trend, thenfixed and variable expenses will grow at different rates. Thus, thepercentages that fixed expenses and variable expenses representof total expenses will change over time.A sensitivity analysis was performed to determine the impacton the indications of a change in the distribution of fixed andvariable expenses. For the sensitivity analysis, the same exampleas given in the text of the paper was used with the assumptionthe percentage was accurately determined in year 1. Evenwith the very unlikely assumption that average premiums subsequentlychanged at a rate in excess of +10 percentage pointsdifferently than expenses, the indicated rate change increasedby only about +0:2 percentage points. In reality, premiums andexpenses would likely be changing at a more equivalent rate.Thus, it is reasonable to assume that fixed expenses will remaina constant percentage of total expenses throughout a three-yearperiod.