[[Actuarial Notes Wiki|Wiki]] / [[Exam 5 (CAS)]] / **Variable Expenses** ## Definition ==Variable Expenses== are costs that vary directly with premium volume, changing proportionally as premium increases or decreases. ## Examples - Agent commissions - Premium taxes - Acquisition costs - Policy issuance costs - Billing and collection - Some underwriting expenses ## In Ratemaking ``` Variable expenses expressed as % of premium: Variable Expense Ratio = Variable Expenses / Premium Example: Commissions: 15% Premium taxes: 2% Other acquisition: 3% Total variable: 20% Rate = Pure Premium / (1 - 0.20 - Fixed% - Profit%) ``` ## Calculation Example ``` Premium: $1,000 Commission rate: 15% Premium tax: 2% Variable expenses: Commission: $1,000 × 0.15 = $150 Tax: $1,000 × 0.02 = $20 Total: $170 (17% of premium) ``` ## Related Concepts - [[Fixed Expenses#Definition]] - [[Profit and Contingency Provision#Definition]] - [[Pure Premium Method#Definition]] ## References - Werner & Modlin, Chapter 5