The Influence of Expenses and Selection on Reserves for recently-effected Policies

Extract

In a paper read before the Actuarial Society of Edinburgh more than thirty years ago, the late Mr. D. Deuchar discussed the question of expenses and its relation to new business, and advocated the subdivision between new and renewal premiums of the items Premiums received, Expenses, and Commission in the revenue account. From a table compiled by him, relating to fifteen Scottish offices, it appeared that commission and expenses amounted to 13¼ per cent of the premium income; or that, if 7¼ per cent be allowed for renewal expenses, initial expenditure absorbed about 80 per cent of the (estimated) new premiums. The question subsequently received much attention from Dr. Sprague, who stated (J. I. A., xix, 313) that about 7½ per cent of renewal premiums was “generally amply sufficient for the purpose of administering the existing business of a company that pays commission and employs agencies; and that any expenditure beyond this must be considered as incurred exclusively on account of the new business”; while more recently (Transactions of the First International Congress of Actuaries, p. 190) he has expressed the opinion that “the average expenditure of prosperous and well-managed offices may be taken as 80 per cent of the new premiums and 7½ per cent of the renewal premiums”.