In determining the applicability of Number of Premium Entries as a basis of allocation, consideration shall be given to the number of premiums on original policies plus additional premiums, return premiums, reinsurance premiums, and return premiums on reinsurance. Where more than one card is punched or more than one entry is made covering only one amount, consideration shall be given procedural differences in connection with types of entries.
In determining the applicability of Number of Policies as a basis of allocation, consideration shall be given to policies underlying another policy, to policies covering more than one line of business, to policies for various terms, and to the effect on cost of procedural differences in connection with types of policies.
In determining the applicability of Number of Loss Entries as a basis of allocation, consideration shall be given to the number of gross entries plus salvage entries and reinsurance entries, for paid or outstanding losses, or both, and to the effect on cost of procedural differences in connection with types of loss entries.
In determining the applicability of Number of Accidents as a basis of allocation, consideration shall be given to accidents on which specific estimates are set up, those on which no specific estimate is made, and those for which no claim is made, and to the effect on cost of procedural differences in connection with types of accidents.
The basis Number of Employees is of limited application and shall be used only where the cost logically follows the number of employees. It may be of use, where properly weighted, in allocating such units as cafeteria, personnel department, and payroll department.
Time studies are actual measurements of time required to make motions, to complete a routine of regularly occurring procedure. In contemplating the use of a time study as a basis of allocation, consideration shall be given to the number of motions which must be studied to obtain a valid average and to possible distortions in the average caused by exceptional conditions during the study.
Salaries of supervisors and executives may be distributed as an overhead on the salaries of employees whom they supervise. Salaries of departments such as mail and general stenographic may be distributed as an overhead on the salaries of people whose work is handled. However, no salaries shall be distributed as an overhead on other allocations if any other basis is more appropriate.
Premiums shall not be used as a basis of allocation except when specifically noted as a permissible basis or when the expense is incurred as a percentage of premiums (subject to instructions under Commission and Allowances in s. Ins 6.30 (3) (a) 2. c.), or when the expenses are logically allocable on the basis of premiums. In no event shall premiums be used as a basis of allocation in connection with clerical, technical, secretarial, office maintenance, supervisory and executive activities unless such basis is clearly appropriate and until all other reasonable bases of allocation have been considered and found less appropriate than premiums. In determining the applicability of premiums as a basis of allocation, consideration shall be given to the applicability of direct and reinsurance premiums, and written, earned and unearned premiums, as well as to subdivisions thereof.
Dollar Volume of Losses shall be used as a basis of allocation only when the activities resulting in expense are influenced by the dollar amounts of losses, and only when all other reasonable bases of allocation have been considered and found less appropriate than Dollar Volume of Losses.
In determining the applicability of Dollar Volume of Losses as a basis of allocation, consideration shall be given to the applicability of direct and reinsurance losses, and paid, incurred and outstanding losses as well as to subdivisions thereof.
Salaries may be allocated on the basis of other special studies, provided demonstrably more accurate results are thereby produced than through the use of the bases heretofore discussed, but not otherwise.
Weightings may be applied in using any bases of allocation but the justification for such weightings shall be stated in the Detail of Allocation Bases (see s. Ins 6.30 (5) (a) 3. c.). Weightings shall not be used as a means for giving effect to a basis which is prohibited by these instructions. The bases of allocation used shall be appropriate and applicable to the expenses to which such bases are applied. All bases shall be limited and subdivided in such manner that the expenses to which the bases are applied have a reasonable relationship to each component of the bases. For example, an allocation basis which includes a particular line of business shall not be applied to expenses incurred for activities which do not include that line.
Any basis of allocation which is found to be inappropriate shall be discontinued.
Where an individual or a group of employees work on totals, the allocation of the expenses involved may be based on the information entering into the totals.
All bases of allocation shall be compiled or calculated from the transactions or procedures for the period applicable to the expenses to be allocated, unless the use of any other period is justified by investigation made during the applicable period. Such justification shall be set forth on the Detail of Allocation Bases (see s. Ins 6.30 (5) (a) 3. c.). The following types of records shall be prepared by each company or fleet in allocating salaries to companies, expense groups and lines of business: Allocation of Salaries, Recapitulation of Salaries, and Detail of Allocation Bases.
The Allocation of Salaries and the Recapitulation of Salaries shall be prepared either for the twelve months of the current calendar year, or for twelve months ending not earlier than September 30th of the current year, in which case the ratios established shall be applied to the total salaries for the twelve months of the current calendar year. The second method herein referred to shall not be followed if operations during the period used were materially different from operations during the period to which the ratios are to be applied. All amounts included in the operating expense classification Salaries, for the period used in preparing the Allocation of Salaries and the Recapitulation of Salaries shall be accounted for on such records.
Forms of the records are shown as Forms A through C at the close of s. Ins 6.30 (5). The forms may be of any convenient size, and may be entered in ink, type, or by other mechanical means, provided the entries are legible. If the organization or method of operation of any company is such as to make desirable changes in the forms such as a rearrangement of the columns, or a separation of the forms into two or more parts, such changes may be made, provided the substituted forms do not, in any respect, show less information than called for on the forms shown herein, and do not result in confusing the presentation of salary allocation. Such records shall be maintained in good order and shall at all times be readily available for examination.
First: The form, Allocation of Salaries, is shown as Form A. To aid in the understanding of the form, specimen entries have been made thereon and, as further aids to understanding, each column is explained in the following paragraphs:
Column 1: List each similarly employed unit within each departmental or other division in the organization. By “similarly employed” is meant employed in essentially the same or similar activities in or for the same department or other division.
The personnel shall be divided into as many units as necessary to show each type of work done by each departmental or other division in the organization. Employees whose duties are not solely related to the work performed by one unit, such as some in supervisory positions, shall be listed separately by title or job classification.
Column 2: Gross salaries applicable to each unit shown in Column 1.
Columns 3, 4 and 5: These columns are for use when the Salaries classification is affected by allocations made to other companies.
A separate line is to be used for the allocation to each company or group of companies. When intercompany allocations are not made, or when quota share percentages can be applied to fleet totals, Columns 3, 4 and 5 need not be used.
Designating numbers shall be entered in Column 4 for the methods used in intercompany allocations.
Column 6: Designating numbers shall be entered in this column for the methods used in allocating salaries to expense groups.
Columns 7 to 10: The amounts assigned to each expense group shall be in accordance with the method shown in Column 6. At the side of each expense group column (except the column Investment Expenses) is shown a narrower column captioned “Line Dist.”, wherein shall be entered designating numbers for the methods to be followed in distributing salaries to lines of business.
Second: Pool and Quota Share Reinsurance. When quota share reinsurance is in effect and when salaries may be allocated in strict accordance with the quota share percentages, the amounts shown in the Allocation of Salaries Form may be those subject to quota share. Quota share percentages may, in such cases, be applied to the totals either on the Allocation of Salaries or the Recapitulation of Salaries.
Third: Branch and Field. Branch office salaries shall be shown separately in the Allocation of Salaries and in the Recapitulation of Salaries. In combining branch employees into similarly employed units, it shall be permissible to consider as a unit all similarly employed personnel in all branch offices having similar functions, and handling approximately the same relative volume of each line of business.
Fourth: Salary Reimbursements to Other Companies. Due to expense sharing with another company, outside of the company or fleet, debits may appear in the salary accounts for reimbursements to outside companies. Such payments are to payments amount to less than 10% of gross salaries paid by the company to its own employees, the amounts shown on the Allocation of Salaries may be distributed as an overhead on all other salary distributions. If more than 10%, the distribution shall be obtained from the other company.
Fifth: Salaries Not Specifically Reimbursable. When the employees of a company devote time to the affairs of another company, and the reimbursements therefor are handled in accordance with the instructions, Expenses for Account of Another or Income from Special Services (see s. Ins 6.30 (1) (b) 22. b. and c.) the salaries for each similarly employed unit applicable to work done for such other company shall be shown separately on the Allocation of Salaries (in Columns 3 to 10 incl.). When all distributions called for on the Allocation of Salaries Form have been completed, the Recapitulation of Salaries shall be made.
For each company to which salaries have been allocated on the Allocation of Salaries Form, the amounts shown in each expense group column shall be combined by the line distribution codes shown in the “Line Dist.” columns. The totals thus obtained shall be entered on the Recapitulation of Salaries Form and allocated to lines of business in accordance with the line distribution codes.
The form, Recapitulation of Salaries, is shown in three parts, B-1, B-2, and B-3. B-1 is for Loss Adjustment Expenses, B-2 is for Acquisition, Field Supervision and Collection Expenses, and B-3 is for General Expenses. For purposes of illustration, the specimen entries, applicable to Company A, made on the Allocation of Salaries Form have been continued on the Recapitulation of Salaries Form. Note that, for Company A, the figures in the expense group columns on the Allocation of Salaries Form have been combined by “Line Dist.” codes, entered on the Recapitulation of Salaries Form, and then spread to lines of business based on the “Line Dist.” codes.
The bases of allocation used on the Allocation of Salaries Form shall be fully described on the Detail of Allocation Bases Form. There shall be a separate sheet for each basis and the sheets shall be kept in consecutive numerical order, available at all times for examination.
When the basis of allocation cannot be fully described on the form, subsidiary worksheets, compilations and data shall be either attached to the form or filed separately and readily available.
The Detail of Allocation Bases Form and all subsidiary worksheets, compilations and data shall be clear and legible; shall show the sources, detail and dates of all figures used; shall disclose the names of persons or groups responsible for all compilations, data, calculations, studies, estimates, judgment factors, weightings, etc., and the dates thereof; and, in general shall include complete explanations of all figures used and decisions made.
Ins 6.30 NoteNote: The Detail of Allocation Bases Form need not be prepared each year, but with appropriate changes in supporting worksheets, etc., may remain current as long as the bases are in effect.
Ins 6.30 NoteThe Detail of Allocation Bases Form is identified as Form C and four illustrations of the form are shown. The allocation bases No. 1, 101, 105 and 501 shown on the Allocation of Salaries Form have been carried into the forms and specimen explanations given.
Ins 6.30
FORM A
ALLOCATION OF SALARIES
Note: Totals in Col. 5 for each similarly employed unit must equal amount in Col. 2.
Ins 6.30 HistoryHistory: Cr. Register, July, 1959, No. 43, eff. 8-1-59. Ins 6.31Ins 6.31 Interpretations of the instructions for uniform classifications of expenses of fire and marine and casualty and surety insurers. Ins 6.31(1)(a)(a) This rule is intended to implement and interpret uniform accounting instructions in s. Ins 6.30. Ins 6.31(1)(a)1.1. The following kinds of expense shall be allocated to indicated operating expense classifications. Ins 6.31(1)(a)2.a.a. When contingent commission payments are large in number and small in average amount, a method of allocation based on the over-all profit in each line of business should yield reasonably correct allocations. Ins 6.31(1)(a)2.b.b. Company-owned automobiles and equipment may be depreciated on a 100% basis. Ins 6.31(1)(a)2.c.c. A company may carry company-owned automobiles and equipment as an asset (non-admitted) and deduct depreciation each year. Ins 6.31(1)(a)2.d.d. Handling of certain filing charges: Where a company sells a policy to a long haul firm and that firm requests that the insuring company make a “filing” with a State Commerce Commission in a state in which it is not licensed and another insurance company on behalf of the first insurance company actually issues the policy and makes the required filing, charging a nominal fee for the transaction, the company receiving the fee should credit it to “Direct Premiums” and the company paying the fee should charge it to “Direct Premiums.” Ins 6.31(1)(a)3.3. The following kind of expense shall be allocated to the indicated expense group: Ins 6.31(1)(a)4.4. When commission on reinsurance is on a “sliding scale” or “guaranteed profit” basis both the tentative commission and any adjustments brought about by the “sliding scale” or “guaranteed profit” provisions should be allocated to Commission and Brokerage-Reinsurance Assumed or Commission and Brokerage-Reinsurance Ceded. Ins 6.31 NoteNote: To make clear the meaning of “sliding scale” and “guaranteed profits” the following is submitted:
SLIDING SCALE CONTRACTS
Ins 6.31 NoteMost of these contracts provide for a flat commission ranging from about 30% to 37 1/2%, paid on a written basis. Additional profit commissions are paid at a later date on an earned basis as specified by a formula embodied in the contract. These profit commissions are paid as the result of savings in the loss ratio. A common provision is that 1/2% profit commission shall be paid for each 1% saving in the loss ratio. Sometimes a portion of the scale may provide for a “1 for 1” profit commission, i.e., a full 1% profit commission for each 1% saving in the loss ratio.
Ins 6.31 NoteFor example, a contract may provide for a flat commission of 35%, with a “1/2 for 1” profit commission to be paid the ceding company for any saving in the loss ratio under 55%, until the profit commission reaches 10%, or a total commission of 45%.
Ins 6.31 NoteSome contracts provide for a possible “return commission.” In the preceding example, if the loss ratio should exceed the breaking point of 55%, then the ceding company might have to pay a return commission to the reinsurer on a “1/2 for 1” basis until return commissions of, say, 5% have been returned, thus reducing the ultimate net commission from 35% to 30%. If the loss ratio should run under 35% or exceed 65%, then such saving or loss would ordinarily be carried forward to the computation for the following year.
GUARANTEED PROFIT CONTRACTS
Ins 6.31 NoteThe most common form of “surplus aid” is the “guaranteed profit”contract. Its principal characteristic is that it transfers unearned premium reserve from the ceding company to the reinsurer and results in an immediate increase in the ceding company’s surplus by the amount of the tentative commissions received, but because all such tentative commissions are subject to return to the reinsurer, does not actually relieve the ceding company of risk. The ceding company still remains exposed to the same risk as before. It is in the position of paying 2% to 5% of the ceded premiums to induce a reinsurer to sign a contract which has no ultimate effect other than to reduce its surplus by 2% to 5% of these premiums.
Ins 6.31 NoteGuaranteed profit contracts are often written in a form similar to a quota share or portfolio of reinsurance contract, or a combination of both. The tentative commission is ordinarily 45% or 50%. The reinsurer’s fee is generally 2%, 3%, or 5% of the amount ceded. Most quota-share type contracts are subject to monthly reporting and settlements. The contract usually provides for additional commissions to be increased by 1% for each 1% decrease in the loss ratio, and return commissions on the basis of 1% for each 1% increase in the loss ratio. An example follows:
Ins 6.31 NoteIn a situation similar to the one illustrated, the ceding company pays to the reinsurer the gross reinsurance premiums less 45% commissions, or a net 55%. As losses are determined they are paid by the reinsurer until the ceding company has received back from the reinsurer losses recovered in an aggregate amount equal to 52% of the original premiums ceded (55% less 3%). Any additional losses are immediately charged back to the ceding company as “return commissions” on a “1 for 1” basis. On the other hand, any saving under 52% is returned to the ceding company in the form of additional commissions. The ultimate effect on the ceding company is the loss of 3% of its ceded premiums. The ceding company actually carries its own full risk throughout the entire period with respect to its gross business.)
Ins 6.31(1)(a)5.a.a. Where attention is given to salvage or subrogation matters at the same time as the adjustment of the loss is proceeding, no attempt will be made to allocate any portion of the adjuster’s time to salvage (or subrogation) expense. Ins 6.31(1)(a)5.b.b. Where the salvage or subrogation activity follows the adjustment of the loss such additional time as may be required will be treated as salvage expense. Ins 6.31(1)(a)5.c.c. Any items of outside service such as advertising, expenses of outside organizations or rewards where paid by and billed to the company will be treated as salvage expense. Ins 6.31(1)(a)5.d.d. Cost of recovering stolen goods incurred by and billed to the company will be treated as salvage expense. Ins 6.31(1)(a)5.e.e. Where salvage is handled by outside agencies and their billing is made directly to the company, sufficient information should be given for proper classification of the related expenses. Ins 6.31(1)(a)5.f.f. It is understood that the classification of expenses as salvage expense is not dependent upon any salvage recovery. Ins 6.31(1)(a)6.a.a. The following employee activities should be allocated to expense groups on the basis of the purposes for which the tabulating, listing, filing or other jobs were performed: Cutting and verifying punched cards, sorting and tabulating punched cards, maintaining punched card files, and supervision thereof. Ins 6.31(1)(a)6.b.b. The salaries of the employees in service units, such as the following, providing services to other employees may be allocated to expense groups as overhead on the salaries of employees in all other departments except executive officers: Mailroom, Personnel, First aid, Telephone operation, Office maintenance and Receptionists. Ins 6.31(1)(a)6.c.c. If an appreciable part of the time of employees handling purchases and supplies is devoted to furnishing supplies to agents, such salaries may be allocated to expense groups on the basis of a time estimate. Allocate to General Expenses that part of the time spent in working on supplies for agents; allocate remainder as Overhead on Salaries of employees in all other departments except executives.
