Classification of Expenses

Many classifications of life-insurance expenses have been made, often in a more or less formal way or with no other purpose than to abbreviate a long and complex list of items. But classifications of any sort can be justified only on the ground that they serve to clear up points at issue, and the purpose of a classification of life-insurance expenses should be a clear statement of the problems of loading. The following division of expenses into five groups was made by an actuary and based on a scrutiny of companies' statements:

1. New business expenses.
Examination fees, medical expenses, Agents first year commissions, Advertising, printing and salaries incurred in getting new business

= 80% of first year's premiums.

2. Collection expenses
Agents' renewal commissions, Collection fees, Exchange, Taxes on premiums.

= 10% of renewal premiums.

3. Settlement of claims
Investigation of death claims, Resisting unjust claims

= 1½% of face value of death claims.

4. Investment expenses
Cost of making, handling and protecting investments, Bad debts, Losses over gains, Taxes and repairs on assets.

= ½% per annum on assets.

5. General expenses
General supervision, Actuarial, Clerical, Salaries

=$1.00 per $1,000 insurance per year.

The estimated amounts of each group of expenses, as shown at the right-hand side of the page, is intended to be approximate only and will vary with different companies. The value of these estimates lies in the fact that each group of expenditures is thus related to, and its amount dependent upon, some other factor, such as premium, assets, etc. New business expenses fall heavily on the first premium and vary in direct ratio to the amount of the premium, due largely to the necessity of paying agents' commissions as a percentage of the premium. Collection expenses likewise vary with the amount of the premium but are incurred in approximately equal amounts over a series of years. The cost of settling claims falls at the close of the policy term, and bears a close relation to the amount of the claim. Investment expenses vary with the amount of the total assets and can with fairness be deducted from the gross income on investments. General expenditures are for the benefit of all and probably bear as close a relation to the amount of insurance as to any other single item.

In summarizing these different factors of expense it is found that some vary with the size of the premium charged, some with the amount of insurance carried, some have no relation to either. One group of expenses is incurred wholly within the first year of insurance, other groups annually during the policy term and still others only at the time when the claim is finally satisfied. This statement sets in relief the factors that determine expenses attributable to any policy and makes possible a statement of the two great problems of loading, aside from the mere matter of collecting sufficient money to pay all expenses. These problems are respectively (1) the equitable distribution of expenses between different classes of policies and between policyholders at different ages the problem of making each policy pay its own cost; and (2) the incidence of expense, or the problem of meeting the expense when it is incurred. The solution of these problems is complicated by the necessity of maintaining a level office premium, of living up to statutory requirements as to reserves, of maintaining a consistent policy regarding surrender values and dividends, and finally of meeting the competition of other companies.