The effects of the application to each operating expense classification of all bases of allocation shall be shown on records kept in clear and legible form. Such records shall be readily available for examination.
Ins 6.30(4)(a)(a) Instruction relating to allocation to lines of business.
The lines of business for allocation of expenses shall be the following:
Fire and Allied Lines:
Fire
Extended Coverage
Other
Homeowners Multiple Peril
Commercial Multiple Peril
Ocean Marine
Inland Marine
Automobile Liability:
Bodily Injury (including medical payments coverage)
Property Damage
Automobile Physical Damage:
Fire, Theft and Comprehensive
Collision
Worker's Compensation
Liability Other than Automobile:
Bodily Injury
Property Damage
Fidelity
Surety
Glass
Burglary and Theft
Individual Accident and Health:
Accident only
Accident and Health
Hospital and Medical Expense
Group Accident and Health Boiler and Machinery
Ins 6.30(4)(a)2.a.
a. The allocation of expenses to lines of business shall be by expense groups. Each classification of expense within each expense group shall be allocated separately to lines of business on the bases of allocation prescribed as follows.
All bases employed in such allocations shall be applicable and appropriate to the expense group of which such expense is a part.
Example — Expenses which are allocated to lines of business as an Overhead on Salaries shall be calculated in relation only to the salaries included in the same expense group.
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The term Actual means that the expenses are susceptible of direct and accurate allocation, and companies shall allocate directly to lines of business and shall not employ any apportionments or estimations.
For definitions of the terms Special Studies, Premiums, and Overhead on Salaries, see s.
Ins 6.30 (2) (a) 1. b.
For those expense classifications permitting the basis Overhead on Salaries or Premiums, any other basis of allocation may be adopted which yields more accurate results. The bases Overhead on Salaries and Premiums shall not be used if clearly inappropriate.
In making any allocations to lines of business, companies shall observe the General Instructions Regarding Allocation Bases (see s.
Ins 6.30 (5) (a) 2.).
The methods followed in allocating to lines of business shall be described, kept and supported as set forth under Detail of Allocation Bases (see s.
Ins 6.30 (5) (a) 3. c.).
The effects of the application to each operating expense classification of all bases of allocation shall be shown on records kept in clear and legible form. Such records shall be readily available for examination.
Ins 6.30(5)(a)(a) Special instructions relating to the allocation of salaries and other expenses.
Wherever possible, salaries of individuals or similarly employed groups shall be allocated direct to companies, expense groups, and lines of business. In other words, salaries of employees whose work is solely in connection with a specific company, expense group or line of business shall be allocated thereto.
When a direct allocation is not made, salaries, with certain exceptions hereinafter noted, shall be allocated on whichever of the following bases, or combinations thereof, are appropriate: Number of Items or Units, Time Studies, Overhead on Other Allocations, Premiums, Dollar Volume of Losses, and Other Special Studies.
All bases of allocation, and the application thereof, shall be subject to restrictions, modifications and exceptions in the General Instructions Regarding Allocation Bases which follow.
Item and unit counts may include Number of Premium Entries, Number of Policies, Number of Loss Entries, Number of Accidents, Number of Employees, and any other unit or item counts which aid in the allocation of expenses. To the greatest practical extent, such unit or item counts shall be applied only to expenses incurred in activities having a direct relationship to the bases.
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 Note
Note: 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 Note
The 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.
Note: Totals in Col. 5 for each similarly employed unit must equal amount in Col. 2.
