Actuarial Notes

Best Estimate Assumptions for Expenses

By Canadian Institute of Actuaries · 2006 · Document 206134

Study guide: Exam CP-321

An educational note of the Canadian Institute of Actuaries' Committee on Life Insurance Financial Reporting, dated November 2006, on the considerations in determining the best estimate assumption for expenses used in valuing the policy liabilities of life insurers. It sets out how an actuary assesses existing expenses through an expense study and translates them into unit expenses, and how prior experience can guide future experience. The CIA archived the note on March 11, 2025.

On the syllabus

  • Exam CP-321 — Outcomes 2c; pages 19-39 (Appendix A, Conducting an Expense Study); the course strategy guide notes that the CIA has designated the note "Archived" but it is the current version candidates should study.

100 Introduction

  • 110 Purpose and Scope
  • 120 Determining the Best Estimate Assumption for Expenses
    • The steps for completing an expense study: determine the scope; collect the expense data; check the consistency of the data with internal and external reports; determine the expenses to exclude, the expense categories and the unit expense bases; classify and allocate expenses; determine the unit expenses; and perform reasonability checks on the results.

200 Methodology

  • 210 Expenses Included in the valuation
  • 220 Expenses Excluded From the Valuation
  • 230 Capitalized Expenses and Depreciation
  • 240 Scenario-Dependent Expense Cash Flows
  • 250 Productivity
  • 260 Non-Recurring Expenses
  • 270 Inflation
  • 280 Unit Expense Bases

300 Special Situations

  • 310 Background
  • 320 Start-Up Operations and Expense Overruns
  • 330 Mergers/Acquisitions/Divestitures
  • 340 Market Conduct/Litigation
  • 350 Wind-Down Operations
  • 360 Expense Guarantees
  • 370 Outsourcing

400 Acquisition and Similar Expenses

  • 410 Purpose
  • 420 Deferrable Acquisition Expenses
  • 430 Expenses Considered Acquisition for Section 2320

Appendix A Conducting an Expense Study

  • A.100 Scope of Expense Study
  • A.200 Collecting the Expense Data
    • The major data source for expenses is the company's general ledger or data warehouse, which rarely has all expense information; other sources include agent/broker payment and payroll systems, staff payroll, policyholder payment systems, budget and financial reports, and transfer pricing analyses.
  • A.300 Reconciliation of Expense Data
  • A.400 Expenses Included/Excluded from the valuation
  • A.500 Categorization of Expenses
  • A.600 Unit Measurements
  • A.700 Classification of Expenses
    • A.710 Acquisition Related
    • A.720 Administration Related
    • A.730 Benefit Related
    • A.740 Investment Related
    • A.750 Taxes other than Income Tax
    • A.760 Corporate and Overhead Expenses
  • A.800 Allocation of Expenses
    • A.810 Transaction-Based
    • A.820 Activity-Based
    • A.830 Time Study-Based
    • A.840 Expense-Based
    • A.850 In Force-Based
    • A.860 Staff-Based
  • A.900 Unit Expenses
    • A.910 Considerations in Determining a Base for Unit Expenses
  • A.1000 Testing and Reconciliation
    • Unit expenses from the study may be compared to those in available external studies or actuarial models, to those from past expense studies, and the trend line reviewed to identify and investigate unusual results.

Appendix B Treatment of Capitalized Expenses and Depreciation

  • B.100 Purchase of PCs
  • B.200 Purchase of Furniture

Appendix C Treatment of Productivity

Sources