1. Determine percentage of premium attributable to expenses for each of the expense categories
- 2. Divide ratio into fixed and variable ratios:
- Ideally split based on detailed company data;
- Without needed data, make reasonable assumptions
3. Sum expense ratios across categories to determine fixed and variable provisions
Note: this gives you the fixed expense ratio, which is a ratio to premium - this is used with the loss ratio approach (Ch. 8)
If using the pure premium approach, convert to fixed expense per exposure: Fixed per Exposure = Fixed Expense Ratio * Projected Average Premium