Part 13 - Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005) - Allocation of Expenses | Zoe
Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005)
13Allocation of Expenses
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Turn the raw legal text into a practical explanation grounded in Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005).
Allocation of the expenses of the company is integral to the principles of this standard for the determination of the emergence of profit. The methodologies of this standard require the expenses of the company to be allocated both into the expense categories (e.g. acquisition, maintenance and investment management) and into related product groups covering both Life Insurance Contracts and Life Investment Contracts.
For those expenses not able to be directly allocated, a process of apportionment between the expense categories and between product groups is necessary. This section provides a set of principles within which the allocation is undertaken, and against which the mechanics of the apportionment process are assessed. It is not the objective of this section to be prescriptive either in terms of the mechanics of the apportionment process or in the specifics of the allocation of particular types of expenses.
It is acknowledged that the allocation of certain expenses to expense categories or particular products will require greater judgement than others. Allocation of such expenses must be based on a considered analysis of the particular circumstances of the company – the objective in incurring that expense and the outcome achieved. If at the end of this process there remains doubt as to the appropriate expense category, the expense must be allocated to maintenance expenses.
There will be circumstances in which an expense derives from an activity outside the normal business activities of the company and is not recurrent in nature. It is appropriate to recognise the one-off nature of such expenses in undertaking the allocation for the purposes of this standard.
The principles described in this section are equally applicable to the circumstances of allocation of the actual expenses and the expected expenses of the company.
In respect of Life Investment Contracts, Acquisition Expenses will need to be further split between those that may be deferred in accordance with relevant accounting standards, and those that are to be treated as overheads. However, for the purposes of the Solvency Standard, the Capital Adequacy Standard and the Management Capital Standard, Acquisition Expenses in respect of Life Investment Contracts as determined by this expense allocation are to include acquisition overheads.
13.1 Expenses for each Related Product Group are to be allocated to the following Expense Categories:
Acquisition Expenses;
Maintenance Expenses;
Investment Expenses; and
One-Off Expenses.
13.2 Each Expense Category must include all relevant expenses whether direct or indirect and in aggregate the Expense Categories must include the total expenses of the company (including acquisition overheads in respect of Life Investment Contracts) other than one-off expenses determined in accordance with paragraph 13.10. Total expenses for this purpose are total operating expenses as disclosed in the financial statements.
13.3 Each Related Product Group must include all relevant expenses whether direct or indirect and in aggregate the Related Product Groups must include the total expenses of the company. It is considered appropriate for this purpose to treat the shareholders’ retained profits and capital as if it were a notional Related Product Group.
13.4 To the extent that an expense is directly attributable to a particular Expense Category or a particular Related Product Group, it must be so allocated.
13.5 It is recognised that there are circumstances where arrangements (internal or external) provide for the limitation of the expenses borne by a particular product group. Such arrangements, to the extent substantiated as bona fide by the Actuary, may be reflected in the final allocation of expenses provided transparency of the allocation process is retained.
13.6 An expense which is not directly attributable to a particular Expense Category or Related Product Group must be appropriately allocated. That allocation must reflect:
the Functional Activities to which the expense relates; and
an appropriate relationship between those Functional Activities and both the Expense Categories and the Related Product Groups.
13.7 In undertaking the allocation described in paragraph 13.6 regard must be had for a diligent assessment of:
the purpose of the company in incurring a particular expense; and
the contribution of that expense to the business of the company;
while retaining the integrity of the principles of section 3 of this Standard.
Apportionment Process
13.8 Processes of apportionment will be required, to a greater or lesser extent, in undertaking the allocation of expenses. These processes must be based on recent analyses of the operations of the life business and the identification of appropriate Expense Drivers and related expense apportionment ratios.
13.9 Service Agreements
13.9.1 Where activities of the company are being provided externally, through a service agreement or other contractual arrangement, the allocation of the company’s expenses relating to those activities must be reasonably consistent with the principles of this section. Where the service company fees are unreasonable as a basis for the allocation, the Actuary must determine an alternative allocation applying the principles of this section on a ‘look through’ basis.
13.9.2 The information required to undertake this allocation should be sought from the service provider. Where practical difficulties arise in accessing the required information other methods, such as reference to appropriate industry benchmarks, may be employed.
13.10 One-Off Expenses
13.10.1 It is appropriate, in the context of expense allocation undertaken for the purposes of this Standard, to recognise one-off expenses. To achieve such recognition an expense must be, of itself:
material in accordance with the provisions of section 14; and
not incurred as part of the normal ongoing operations of the company; and
not regularly recurring in nature.
13.10.2 One-off expenses, while allocated to Expense Categories for financial reporting purposes, need not be explicitly allocated (to Expense Categories or Related Product Groups) for the purposes of this Standard.
13.11 Friendly Societies
13.11.1 For expense allocation purposes a friendly society is to be regarded as two separate companies, namely:
the Management Fund in isolation; and
the sum of all the Benefit Funds.
13.11.2 All the expenses of the society are to be allocated to the Management Fund, except in certain cases when some direct costs are allocated to a Benefit Fund where that Benefit Fund rules allow this.
13.11.3 The expenses of the Benefit Funds (other than certain direct costs) are represented by the fees payable to the Management Fund under the Benefit Fund rules. For the purpose of allocating those expenses to the relevant Expense Categories in accordance with paragraph 13.1, the provisions under paragraph 13.9 in relation to Service Agreements are applicable.
13.11.4 Where an allocation of the expenses of the Management Fund relating to life insurance activities into Expense Categories is not undertaken, acquisition expenses must be taken as 50% of the total expenses related to the life insurance business.