We now add expenses to our benefit premiums (P) and call them expense augmented premiums (G, for “gross premiums”). In practice, there are several additional layers before G is quoted to the public, for example, dividends for participating policies, profit loadings for nonparticipating policies, impact of nonforfeiture benefits, effects of competition, and so on.<\/p>\n
Expense rates vary significantly by company. Larger companies generally have lower expense rates but not as much as economies of scale would suggest. Expenses are usually broadly classified as insurance or investment expenditures. The latter are expressed as a percentage of return and thus, we use \\(i\\) = 6% in lieu of 6.5% in our calculations (1\/2% for expenses). The former are classified by line of business (for example, ordinary versus group, life versus annuity, and so forth).<\/p>\n
The units of expense enter our calculations as:<\/p>\n
* per policy
\n * percentage of premiums
\n * per $1,000 death benefit (policy size)
\n * per claim (may vary by lapse, surrender, maturity).<\/p>\n
\n\t\t\tTable (Actuarial Mathematics) Expense Classification Scheme<\/b>\n\t\t\t<\/td>\n<\/tr>\n| \n\t\t\tExpense | \n\t\t\tClassification<\/b>\n\t\t\t<\/td>\n \n\t\t\tComponents<\/b>\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\tInvestment<\/b>\n\t\t\t<\/td>\n | \n\t\t\tAnalysis\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tCosts of buying, selling and servicing\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\tInsurance<\/b>\n\t\t\t<\/td>\n | \n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\tAcquisition\n\t\t\t<\/td>\n | \n\t\t\tSelling expense, including agents’ commissions and advertising\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tRisk classification (underwriting), including health | \n\t\t\texaminations\n\t\t\t<\/td>\n<\/tr>\n \n\t\t\t<\/td>\n | \n\t\t\tPreparing new policies and records\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\tMaintenance\n\t\t\t<\/td>\n | \n\t\t\tPremium collection and accounting\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tBeneficiary change and settlement option preparation\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tPolicyholder correspondence\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\tSettlement\n\t\t\t<\/td>\n | \n\t\t\tClaim investigation and legal defense\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tCosts of disbursing benefit payments\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\tGeneral\n\t\t\t<\/td>\n | \n\t\t\tResearch\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tActuarial and general legal services\n\t\t\t<\/td>\n<\/tr>\n | \n | \n\t\t\tGeneral accounting and administration\n\t\t\t<\/td>\n<\/tr>\n | \n\t\t\t<\/td>\n | \n\t\t\tTaxes, licenses and fees\n\t\t\t<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n | |