Wisconsin Administrative Code › Office of the Commissioner of Insurance › Chapter Ins 6 - General › Section Ins 6.31 - Interpretations of the instructions for uniform classifications of expenses of fire and marine and casualty and surety insurers

Current through June 24, 2024
(1)
			 PURPOSE
.
(a) This rule is
			 intended to implement and interpret uniform accounting instructions in s.
			 Ins
			 6.30.
1. The
			 following kinds of expense shall be allocated to indicated operating expense
			 classifications.
Kind of Expense
Allocation to Operating Expense
							 Classification
a.
Payments, based on a percentage of premiums or
							 losses, to independent claim adjusters where none of the activities of the
							 payees are concerned with the production of business ----------
Claim Adjustment Services
b.
Payments, based on a percentage of premiums or
							 losses, to independent attorneys-at-law for investigation, adjustment and
							 settlement of claims where none of the activities of the payees are concerned
							 with the production of business ----------
-----------------------
Claim Adjustment Services
c.
Cost of cafeteria equipment
-----------------------
Equipment
d.
Salaries paid in connection with the operation of a
							 company cafeteria -----------
Salaries
e.
Cost of food used in company cafeteria
							 -----------
-----------------------
-----------------------
Employee Relations and Welfare
f.
Cost of food license fees in connection with the
							 operation of a company cafeteria -----
-----------------------
-----------------------
Employee Relations and Welfare
g.
Cost of telephone directory listings
							 ------------
Postage, Telephone and Telegraph, Exchange and
							 Express
h.
Fees paid in connection with stockholders' meetings,
							 such as fees to tellers and inspectors of elections -----------
Legal and Auditing
i.
Payment to an independent efficiency engineer for an
							 inside on-the-job analysis of a company's operations and procedures
							 ---------
-----------------------
Legal and Auditing
j.
Cost of credit reports on agents
							 --------------
Surveys and Underwriting Reports
k.
Payment made in settlement of damage suit brought by
							 an agent because of the termination of contract ------------
-----------------------
Miscellaneous
L.
Premium for group life insurance coverage of janitor,
							 in connection with company owned real estate ----------
Real Estate Expenses
m.
Cost of pensions, in connection with company owned
							 real estate ------------
-----------------------
Real Estate Expenses
n.
Service fees for servicing real estate owned
							 ----------
---------------------------
---------------------------
Real Estate Expenses
o.
Service fees for servicing of mortgages held
							 --------
---------------------------
---------------------------
Legal and Auditing
p.
Cost of policy typing service, when such service is
							 rendered by outside personnel (contract typists) -------
---------------------------
Miscellaneous
q.
Cost of "outside" special assistance employed by a
							 company for the purpose of changing its filing system from a numerical
							 arrangement to a digit system --------
Legal and Auditing
2.
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.
b. Company-owned
			 automobiles and equipment may be depreciated on a 100% basis.
c. A company may carry company-owned
			 automobiles and equipment as an asset (non-admitted) and deduct depreciation
			 each year.
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."
3. The following kind of expense shall be
			 allocated to the indicated expense group:
Kind of Expense
Allocation to Expense Group
All expenses includable in Taxes, Licenses and
							 Fees
Taxes, licenses and fees applicable solely to
							 investments should be allocated to the expense group, Investment Expenses. All
							 other taxes, licenses and fees should be allocated to the expense group,
							 Taxes.
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.
Note:
To make clear the meaning of "sliding scale"
				and "guaranteed profits" the following is submitted:
SLIDING SCALE CONTRACTS
Most 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.
For 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%.
Some 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
The 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.
Guaranteed 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:
Commissions ------------
45%
-------------------
-------------------
Fee for reinsurer ----------
3%
-------------------
-------------------
Loss ratio "breaking point" ----------
52%
-------------------
Total original premium --
100%
-------------------
In 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.)
5. Salvage and subrogation may be allocated
			 as follows:
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.
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.
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.
d. Cost
			 of recovering stolen goods incurred by and billed to the company will be
			 treated as salvage expense.
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.
f. It is understood that the classification
			 of expenses as salvage expense is not dependent upon any salvage recovery.
6.
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.
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.
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.
d. When files are
			 maintained and serviced in a separate department or at a central location, the
			 salaries of employees engaged in this activity may be allocated to expense
			 groups on the basis of a time estimate. That portion of time spent on policy
			 files (daily reports, applications, endorsements, etc.) and that portion of
			 time spent on general correspondence files may be allocated to General
			 Expenses; that portion of time spent on active claim files may be allocated to
			 Loss Adjustment Expenses; that portion of time on inactive claim files (dead
			 files) may be allocated to General Expenses.
e. When a central abstract department is
			 maintained for the mechanical reproduction of premium abstracts and claim
			 abstracts for use by other departments, the salaries of these employees may be
			 charged on the basis of a time estimate. That portion of time spent on claim
			 abstracts may be allocated to Loss Adjustment Expenses and that portion of time
			 spent on premium abstracts to General Expenses.
f. If a company maintains a general
			 accounting unit and a cashier's unit (the duties of which include keeping the
			 general ledger, general journal and general cash books) and no apportionment to
			 Investment Expenses, to Loss Adjustment Expenses, or to Acquisition, Field
			 Supervision and Collection Expenses is possible, except by using a rough
			 estimation which is little better than a guess, the company may allocate the
			 total expenses of these units to General Expenses in view of the impossibility
			 of making reasonably accurate apportionments to expense
			 groups.
7. If the salary
			 of a non-supervisory employee predominantly pertains to the activities of one
			 expense group, the whole of such salary may be allocated to that expense group.
(
Note:
By this interpretation, many salaries may
				be allocated directly and without fractional apportionment. As examples: a
				branch office or home office employee who is primarily concerned with the
				collection of premiums may be allocated wholly to Acquisition, Field
				Supervision and Collection Expenses, even though a lesser part of the
				activities may pertain to General Expenses; a branch office or home office
				underwriter who is primarily concerned with the acceptability of risks, net
				retentions, quoting of rates, etc., may be allocated wholly to General
				Expenses, although he or she may also engage, in a lesser extent, in production
				work, pertaining to Acquisition. Field Supervision and Collection Expenses; a
				special agent working on the development and maintenance of the sales field may
				be allocated wholly to Acquisition, Field Supervision and Collection Expenses,
				although he or she may also be concerned, to a lesser extent, in the adjustment
				of losses; key punch and tabulating machine operators, whose work is primarily
				statistical, may be allocated wholly to General Expenses, although the cards
				and tabulations may be used to some extent in collection and loss adjustment
				activities.)
8. The
			 following describes an acceptable method of allocating to expense groups and
			 lines of business the salaries of employees engaged in administrative and/or
			 supervisor activities:
a. Salaries of
			 executive heads, such as the president of a company, the chairperson of a
			 company's board, and their secretaries, ordinarily should be distributed to
			 expense groups and lines of business as an Overhead on Salaries of supervised
			 personnel, after an apportionment to Investment Expenses. If any other methods
			 are used, the allocations must be supported by detailed analyses of
			 activities.
b. Salaries of other
			 executive officers, department heads and supervisors ordinarily should be
			 allocated on the basis of a study of time spent on the affairs of each of the
			 departments or units supervised and then these salaries should be allocated to
			 expense groups and lines of business as Overhead on Salaries of the employees
			 in the respective departments or units. If any other methods are used, the
			 allocations must be supported by detailed analyses of activities.
9. Includable in the operating
			 expense classification, Boards, Bureaus and Associations, are the following:
			 "Dues, assessments, fees and charges of:...underwriting syndicates, pools and
			 associations such as Factory Insurance Association, Oil Insurance Association,
			 assigned risk plans (except Commission and Brokerage; Claim Adjustment
			 Services; and Taxes, Licenses and Fees);..."
The foregoing instruction is applicable to all assigned risk
				plans and to the following syndicates, pools and associations:
American Cargo War Risk Reinsurance Exchange
American Foreign Insurance Association
American Marine Hull Syndicate
American Marine Insurance Syndicate of Insurance of Builders
				Risks
American Negative Film Syndicate
American Reinsurance Exchange
Associated Aviation Underwriters
Burlap Reinsurance Exchange
Coastwise, Great Lakes & Inland Hull Assn.
The Cotton Insurance Association
Cotton Marine Reinsurance Agreement
Eastern Intercoastal Cargo Reinsurance
Exchange Excess of Loss Association
Excise Bond Underwriters
Export Automobile Reinsurance Exchange
Factory Insurance Association
Furriers Customers' Reinsurance Syndicate
General Cover Underwriters Assn.
The Great Lakes Underwriting Syndicate
Inland Marine Reinsurance Assn.
Inland Marine Syndicate, Inc.
Inland Waterways Insurance Assn.
Lake P. & I. Reinsurance Agreement
Livestock Insurance Office
Logging Underwriting & Inspection Association
Multiple Location Service Office
Mutual Corporation Inter-Reinsurance Fund
Oil Insurance Association
Railroad Insurance Association
Railway Underwriters
Registered Mail Central Bureau
Reinsurance Clearing House
Reinsurance Exchange
Southern Reinsurance Exchange
Stock Companies Association
The Tugboat Underwriting Syndicate
Underwriters Grain Association
Underwriters Service Association
10. Dues or assessments of organizations
			 includable in Boards, Bureaus and Associations, or in Surveys and Underwriting
			 Reports, directly related to loss work are properly chargeable to the expense
			 group, Loss Adjustment Expenses.