 |
|
The Problem of Equitable Distribution of Expenses
The above method of establishing a relationship between each group of expenses and some other factor, such as premiums, face of policy or total assets, furnishes a means of estimating the effect of age or kind of policy on the actual cost of writing and caring for any policy; for with two groups of expenses dependent on the size of the premium and two on the face amount of the policy, it is necessary only to know the premium charged and the face amount of the policy in order to ascertain approximately the expenses incurred in handling any particular contract. The two tables shown on the following page are based on policies for $1,000, the premiums used being the office premiums charged by a well-known company. As the premiums increase with age and for the more expensive policies, it will be noticed that the expense of writing the policy becomes greater (column 1 either table) since this expense varies with the amount of the premium; on the ordinary life policy this cost is $14.72 at age 21 as compared with $76.11 at age 65. The same variations are found by comparing ten-year term and twenty-year endowment policies. Collection costs likewise vary with the increase in premium due to advancing age or kind of policy. Settlement expenses and general expenses, however, remain the same on every policy and for every age irrespective of changes in premiums. Since investment expenses are incidental to the handling of investments they are usually deducted from the gross earnings on total assets and no attempt is made to charge them in any way against particular policies. They do not, therefore, enter into the problem of loading. The four groups of expenses that must be provided for by loading the net premium may thus be combined into two classes: those which vary with the amount of the premium and those which remain constant for each $1,000 of insurance, or vary with the face value of the policy. |
|