The series of Exhibits is an example of how to convert current base rates
which cover all expenses into base rates which cover variable expenses
only. The procedure for developing the expense fee which covers fixed
expenses only is also demonstrated.
The $75 represents the current base rate that treats all expenses (both
fixed and variable) as a percent of the premium dollar.
What this exhibit demonstrates is how to split fixed expenses out of the
rate so that you are left with a "variable base rate" - a base rate that
covers losses and the variable expenses only. That is the $68.
One way to think about this part is that you are taking the rate loaded for
all expenses ($75) and backing out all the expenses ($75 * 0.645). Then,
you want to gross this up for variable expenses only - divide by the CVEPR
($75 * 0.645 / 0.709). This gives you the variable base rate ($68).
The next sheet shows the calculation of an expense fee that will be added
to the variable base rate in order to cover the company's fixed expenses.