Costing of Insurance Companies - Activity Based Costing

# Costing of Insurance Companies

## Cost Object in Insurance

A cost object is whatever we want to determine the cost of. In insurance, cost objects can be:

• A product (type of policy — life, health, motor)
• A policy (individual contract)
• A department or region
• An agent or delivery channel

## Why Activity-Based Costing (ABC) for Insurance?

Insurance operations involve many diverse activities consuming resources differently. Traditional volume-based allocation distorts costs.

ABC enables:

• Direct Product Profitability (DPP) — profitability by policy type
• Customer Profitability Analysis — profitability by individual policyholder

## Steps in ABC for Insurance

Step 1: Identify Costs and Activities

Associate every cost with the activity that caused it.

Step 2: Reassign Costs to Cost Objects

Allocate activity costs to: policies, contracts, customers, or delivery channels.

> Accurate activity identification is the most critical step in ABC implementation.

## Types of Activities

### Pre-Product Development Activities

(Occur before the policy product exists)

• Market research
• Product development
• Defining coverage specifications and premium amounts
• Designing policy contracts and forms
• Planning sales channels

### Post-Product Development Activities

(Occur after product launch)

Selling of Policy:

• Appointing and distributing sales channels (direct or through agents)
• Soliciting policies
• Processing applications

Processing of Claims:

• Claim inception (registration)
• Estimating claim value
• Settling claims
• Handling legal actions

## Cost Drivers in Insurance